NEW DELHI (Reuters) - Politicians should treat India's economic growth as a national security issue, Indian Prime Minister Manmohan Singh said on Wednesday, warning a lack of consensus is holding back Asia's third-largest economy as it tries to drag millions from poverty.

Singh was more optimistic on the economy than many private economists, predicting growth of more than 6.5 percent this year, but he said more was needed to improve livelihoods.

"If we do not increase the pace of the country's economic growth...it most certainly affects our national security," he said in a speech to mark 65 years of India independence from Britain.

Singh did not give details, but some analysts warn of social unrest if India's fails to meet growing aspirations. The 79-year-old economist credited with liberalizing India's economy in the 1990s has been blocked by allies from implementing more free market reforms.

India remains one of the world's fastest growing large economies despite a sharp slowdown over the past year, but economists say it needs to expand even faster to create jobs for millions of people who will reach working age in the next few years.

"As far as creating an environment within the country for rapid economic growth is concerned, I believe that we are not being able to achieve this because of a lack of political consensus," Singh said in his annual Independence Day speech.

Singh said stagnation in European economies was also hurting India, which exports to the euro zone.

Last year, lack of support from coalition partners and members of his own party forced Singh to suspend a flagship policy allowing foreign supermarkets to open in India. Other policies such as cutting fuel subsidies are also held up.

India is struggling with a slump in foreign investment and industrial output, gaping fiscal and current account deficits, high inflation and weakness in the rupee currency. These problems have been made worse by a drought.

Several research organizations including Moody's Analytics have recently cut their outlook for Indian growth to around 5.5 percent, which would be the country's lowest rate in a decade.

SHORT SLUMP?

Despite his concerns, Singh said India's current economic downturn would be short-lived.

"I believe that this period of difficulties will not last long," Singh said amid tight security at New Delhi's Red Fort. He said faster infrastructure development would boost growth.

"Recently we have taken new measures to accelerate infrastructure development. Ambitious targets have been fixed in roads, airports, railways, electricity generation and coal production," he said in his speech from the 17th century former seat of the Mughal Empire.

In an allusion to tax measures that scared foreign investors earlier this year, Singh promised "to leave no stone unturned" to bring in fresh money. In recent weeks the government has moved to clarify the tax rules.

"To attract foreign capital, we will have to create confidence at the international level that there are no barriers to investment in India," he said.

Fear of a political backlash has stopped the government cutting subsidies on diesel despite its contribution to a fiscal deficit that touched 5.8 percent last year. Drought makes it harder to raise the price of a fuel farmers use for irrigation.

(Reporting by Manoj Kumar and Rajesh Kumar Singh; Writing by Frank Jack Daniel; Editing by John Chalmers and Nick Macfie)