The move came a day after police removed security barricades from the U.S. embassy in New Delhi in reprisal against the arrest. Heavy machinery dragged away concrete barriers that restricted traffic movement around the embassy.
The dispute was triggered by the December 12 arrest of Devyani Khobragade, a deputy consul general at the Indian Consulate in New York, on charges of visa fraud and making false statements about how much she paid her housekeeper, an Indian national.
India has responded furiously to what it considers the degrading treatment of a senior diplomat by the United States, a country it considers a close friend.
"It is no longer about an individual, it is about our sense of self as a nation and our place in the world," Foreign Minister Salman Khurshid told parliament, whose usually fractious members showed rare unity on the issue ahead of elections due to be held by May next year.
Many Indians are outraged at what they see as heavy-handed treatment of diplomat Devyani Khobragade, who her lawyer says was handcuffed in the street. The U.S. Justice Department confirmed she was then strip searched and even worse, made to undergo a body cavity search.
An Indian source close to the case said the interrogation had included a cavity search.
Khurshid said work conditions of Indians employed in U.S. consulates in major Indian cities would be revised, to root out any violations of labour laws, and there would be a freeze on the duty free import of alcohol and food for consulate staff.
Several politicians argue that India provides too many unilateral perks to U.S. diplomatic staff. Khurshid reined in some of these on Wednesday, saying passes giving consulate staff access to airport lounges had to turned in by Thursday.
Supporters of a right-wing opposition party held a small protest close to the embassy in Delhi on Wednesday. Around 30 demonstrators, some wearing makeshift Obama masks and sarongs made from the American flag, demanded an apology.
"It was very good that the government removed the barriers yesterday. Until the U.S.A. says sorry, we should not give any security at all to the Americans," said protester Gaurav Khattar, 33.
The U.S. State Department said it had told the Indian government it expects New Delhi to protect its embassy and stressed it did not want the incident with the Indian diplomat to hurt ties.
The embassy did not respond to repeated requests for information about what action would be taken to replace the barriers. The compound has several other layers of security and is protected by a high wall.