The country's fiscal deficit for the current year is likely to hit 6.1 percent of GDP, 100 basis points higher than the budgeted target, if the government does not cut fuel subsidies, the Kelkar Committee said, according to CNBC-TV18.
According to the report, finance ministry officials have indicated that meeting the 5.1 percent target for full year is impossible.
The Vijay Kelkar Committee, which has been set up by the government to chart a roadmap to fiscal consolidation, has stressed that cutting fuel subsidy is key to any fiscal reform.
The suggestions come close on the heels of a spurt in the under-recoveries of oil marketing companies.
These firms' losses from sales of diesel stood at Rs 17 per litre, effective 1 September.
The same on kerosene and LPG are at Rs 32 per litre and Rs 347 per cylinder, according to data available on the website of Petroleum Planning and Analysis Cell.
The subsidised fuel sales are sure to burn a big hole in the government's finances.
The country's fiscal deficit-the gap between the government's revenue and expenditure-during April-July stood at Rs 2.64 lakh crore, which forms 51.5 percent of the budgeted target.
With crude prices bouncing back from the June lows, the government has lost a chance to act on diesel prices.
The Kelkar Committee recommendations suggest the government has been pushed to the wall and some action is a must.
With the gross annualised under-recovery falling to 1.4 percent of the GDP in July 2012 compared with 2.2 percent in April 2012, the government may have lost its motivation in raising retail fuel prices given the likely political backlash, Avendus said in a research note today.
"However, with under-recoveries beginning to rise again from August 2012, government action on cutting subsidies is likely in the near term, in our view," it said.
Oil firms now hope that the government will take a decision of fuel price hikes once Parliament session ends 7 September, a report in The Economic Times today said.
But a price increase will only cut the under-recovery. Only deregulation can do away with the losses completely.
On Monday, Stnadard & Poor's said on ET Now that a downgrade of the country's sovereign credit rating to junk is likely if the government fails to address the fiscal imbalances in the economy.
"India's fiscal and monetary policy needs coordination," Takahira Ogawa, director of sovereign ratings at S&P, said on the channel.
The warning has been sounded out time and again-by the Reserve Bank of India, various rating agencies and economists. All of them fell on deaf ears, as the government was preoccupied with the politics of vote bank.
It has to be seen whether it will make any difference since this one comes from an official panel.