The government is expected to present the Budget in mid-March for the fiscal year that begins on April 1, amid slowing economic growth and mounting concerns about public finances.

The government had budgeted a fiscal deficit of 4.6 per cent of GDP this fiscal year. But slippage on that target is near-certain as a result of sluggish tax receipts and high spending.

“It is quite clear that it will be very significantly worse. I can’t quantify,” Ahluwalia said in an interview. “The markets have to know that the government is not unconcerned about the fiscal deficit, and I am sure the finance minister will be aware that the credibility of our macro-stance next year depends upon both the extent and the quality of the fiscal correction.”

Subsidies that the Centre doles out on fuel, food and fertiliser to help the poor and marginal farmers have been the bane of its public finances. In a country where any talk of tinkering with subsidies raises a political storm, the government feels it has little option but to pay the increased bills. Ahluwalia conceded that reforming the petroleum subsidy would not be easy, but said the government needed to move forward on this after elections in five states over the next few months.

“The credibility on subsidies does not, in my view, depend on what happens on food subsidy because that is a limited capped subsidy. The danger about the petroleum subsidy is that it is an uncapped subsidy,” Ahluwalia said. “If you were to say, should the government give a credible signal? It is a very tough signal to give. But I agree it should give a credible signal.” The government deregulated petrol prices in June 2010. At the same time, it announced a plan in principle to free up diesel prices, saying the decision would be implemented over a period of time. But diesel, as well as kerosene and cooking gas, is still sold at state-fixed prices.