Prime Minister Manmohan Singh said on Saturday in his New Year's message to the nation that controlling the government's budget deficit was a priority for 2012 to avert another crisis.
In a lengthy address from the beleaguered premier, whose cabinet has suffered from corruption scandals and policy setbacks this year, Singh laid out his vision for the next 12 months.
"I am concerned about fiscal stability in the future because our fiscal deficit has worsened in the past three years," Singh said.
After heavy borrowings over the last three years to fund a stimulus package to counter the effects of the 2008 global financial crisis, he accepted the budget now needed to be rebalanced with new taxes and cuts to subsidies.
"We have run out of fiscal space and must once again begin the process of fiscal consolidation," he said.
Recalling the country's financial crisis in the 1990s, he added: "This is important to ensure that our growth process is not jeopardised and, equally important, our national sovereignty and self respect are not endangered."
He said the government "must ensure that the country does not go down that road once again", referring to the 1991 bailout of the country by the International Monetary Fund.
The economy has hit headwinds in the last six months, with high inflation coupled with sharply lower growth forecast to be 7.0 percent by economists for this financial year -- low by recent standards.
The rupee has also fallen sharply this year and is at record lows against the dollar.
Singh also stressed the importance of the expensive task of modernising India's defence forces, something he described as "my most important task as prime minister.
"India's economic and energy security require this," he said.