By Swati Bhat and Manoj Kumar
MUMBAI/NEW DELHI (Reuters) - India's rupee hit a record low and posted its biggest percentage fall in 18 years on Tuesday as parliament's approval of a $20 billion plan to provide cheap grain to the poor renewed doubts about government resolve to control spending ahead of elections due next year.
The alarm over India's fiscal deficit eclipsed an announcement by Finance Minister P. Chidambaram that the government had approved infrastructure projects worth 1.83 trillion rupees ($28.4 billion), a step aimed at reviving economic growth and shoring up investor confidence.
Instead, the rupee plumbed new depths while shares plunged after Chidambaram spoke due to investor anxiety about a country also facing other challenges, including a record current account deficit and the weakest economic growth in a decade.
Despite measures to address these concerns, including a slew of steps to attract dollar inflows and curb gold imports, Indian policymakers are struggling to instill confidence and end the climate of fear that traders say is gripping currency markets.
In an appearance in parliament in the afternoon, Chidambaram acknowledged the government's need to do more.
"What we need now is not less reforms but more reforms. What we need now is not more restrictions but less restrictions. What we need now is not a closed economy but a more open economy," Chidambaram told lawmakers.
The rupee has lost 17 percent against the dollar so far this year - making it the worst performer by far among Asian emerging market currencies tracked by Reuters - despite frantic attempts by the government and central bank to support it and repeated comments by the finance minister that the rupee is oversold.
The partially convertible rupee slumped to a record low of 66.30 to the dollar, despite central bank intervention to ease the pace of the decline, surpassing its previous all-time low of 65.56 hit last Thursday.
The currency fell 2.9 percent on the day to close at 66.24/25, its biggest single-day percentage fall since October 1995 according to Thomson Reuters data and its biggest fall ever in absolute terms.
Shares also slumped, sending the benchmark BSE index <.BSESN> down more than 3 percent and benchmark 10-year bond yields up 44 basis points.
Indian markets have been caught in a downward spiral since May as the prospect for a tapering off in the Federal Reserve's period of cheap money exposes India's vulnerability among emerging markets
"The trinity of the fiscal deficit, slowing growth and an unstable currency is hitting us badly. In addition to these, the government has passed the food security bill which may put fear in the mind of rating agencies," said G. Chokkalingam, managing director and chief investment officer of Centrum Wealth Management in Mumbai.
India's oil minister Veerappa Moily said on Tuesday the country was looking to save $25 billion on oil imports in the current fiscal year, citing a request from the prime minister.
Oil is India's biggest import, with the import bill rising 9.2 percent to $169.25 billion in the year that ended in March.
Worries are growing that Prime Minister Manmohan Singh's coalition government will be tempted into a populist spending splurge ahead of the general elections due by May and so will struggle to meet the fiscal deficit target.
The 1.35 trillion rupees ($20.94 billion) Food Security Bill is a key part of the ruling Congress party's strategy to win re-election, with its focus on selling subsidized wheat and rice to 67 percent of India's population of 1.2 billion.
Kotak Institutional Equities said there would be "no free lunch", estimating India's subsidy burden would reach 827 billion rupees from the budgeted 606 billion rupees, citing the costs of procurement, logistics and identifying beneficiaries.
Chidambaram on Tuesday pledged the bill would not lead the government to meet its fiscal deficit target.
"I have already said that 4.8 percent of GDP and the absolute number that was indicated in the budget is a red line. The red line will not be breached," Chidambaram told a morning news conference.
The food bill comes at a time when the government is showing signs of having increased spending since the start of the fiscal year in April, reversing an earlier tight grip, while tax revenues could stagnate amidst a slowing economy.
That is raising concerns about a potential ratings downgrade, although Standard & Poor's is the only one of the three major credit agencies to have a negative outlook on India's BBB-minus sovereign credit rating.
Chidambaram also sought to address concerns about the economic slowdown by pledging to kickstart 36 stalled projects in sectors ranging from oil and gas to roads and railways.
However, analysts say these projects will not take off quickly, while the government has little to show from recent economic reforms.
Its move last year to allow foreign investment in the retail sector has yet to attract a proposal, though its liberalization of the aviation industry has yielded investment plans from Malaysia's AirAsia <AIRA.KL> and Abu Dhabi's Etihad Airways.
"I don't think these announcements in particular will incrementally have any impact on sentiment until we see visible impact of implementation and execution of these projects," said HDFC Bank chief economist Abheek Barua, referring to the government's drive to energize the infrastructure sector.
(Writing by Rafael Nam; Additional reporting by Abhishek Vishnoi and Archana Narayanan in MUMBAI; Editing by John Chalmers and Neil Fullick)