Chidambaram: Rahul next Congress leader

"I am glad you acknowledge prime minister Rahul Gandhi, but that is a question you should put to him," Chidambaram said in an interview with Reuters, when asked if he would serve again in a government led by the party's heir apparent if Congress wins a third straight term in office. "The time has come for the torch to be passed on to a new and younger generation."

Chidambaram dismissed the dazzling emergence of opposition figurehead and candidate for prime minister Narendra Modi on the national political stage as "largely media created".

He conceded that the Hindu nationalist leader had united the rank and file of the Bharatiya Janata Party and "gained some traction among urban youths", but said his party's challenger was someone with a "very, very chequered track record".

Modi was chief minister of the state of Gujarat when deadly communal riots raged there in 2002. He has always vehemently denied charges that he turned a blind eye to the violence, and a Supreme Court inquiry found no evidence to prosecute him.

Chidambaram said the economic downturn is no reason to think that the Congress party, which has been weakened by years of fractious coalition rule and a string of corruption scandals, would be ousted in a national election that must be held by May.

"Don't write us off so easily," he said.

Austerity measures

Chidambaram said the government will have to rein in spending and cut subsidies to meet its fiscal deficit target, the country's finance minister said, underlining that an austerity drive will not be blown off course by an election due next year.

Companies are struggling and bank asset quality is worsening. But Chidambaram shrugged off the risk of a cut in India's sovereign credit rating, which is one precarious notch above junk status.

Chidambaram told Reuters ahead of a trip to the United States - where one stop will be to woo investors on the West Coast - that he will not allow the deficit to cross a "red line" set at 4.8 percent of gross domestic product this fiscal year.

"We've issued austerity instructions, it will bring us some savings," he said.

The finance minister's vow to contain the deficit means there will be little room ahead of a tough election to spur growth, which has slumped from a double-digit pace in early 2010 to below 5.0 percent, its lowest in a decade.

The government recently introduced a plan to distribute cheap food for two-thirds of the population, a step widely seen as wooing voters ahead of the election. But -without giving details - Chidambaram pointed to food subsidies as one area where spending would need to be addressed in coming months.

Companies are struggling and bank asset quality is worsening. But Chidambaram shrugged off the risk of a cut in India's sovereign credit rating, which is one precarious notch above junk status.

"There is no case for a downgrade," he said in an interview at North Block, the sandstone colonial building that houses the finance ministry in New Delhi. "If any rating agency is looking for candidates to downgrade there are half a dozen other countries."

The Indian rupee was one of the hardest-hit emerging-market currencies recently amid alarm in financial markets about an imminent "tapering" of the U.S. Federal Reserve's monetary stimulus, falling by about 20 percent at one point from May.

It has recovered somewhat recently, and Chidambaram said the central bank may now be able to consider reversing some of the liquidity tightening steps it took to shore the currency up.

"If the volatility of the rupee has been contained and speculation has come to an end, the central bank may want to unwind some of the measures it took earlier, he said.

"We think we have sent a message to everyone - don't speculate on the rupee," he said.