"In my view, the government has taken this decision (of diesel price rise) after a lot of consideration. If the government rolls back diesel prices, then the government's credibility will be zero," Ahluwalia said at an event here.
The government's decision to raise price of diesel by over Rs 5 per litre last week evoked sharp reactions, leading to widespread demand for its roll back.
"From an economic point of view, our diesel prices are lower than our neighbouring nations. If we continue with this (subsidy on diesel), then either our oil companies would be bankrupt or our fiscal deficit will increase so much that we would have to cut plan expenditure on health and education," he said.
Aligning domestic fuel rates with global prices, he said, was also necessary to achieve rapid economic growth and ensure efficient use of energy sources. Adding, it was necessary to cut the diesel subsidy as it was not going to the needy, but to those "who are driving cars".
Ahluwalia said India has the largest fiscal deficit among emerging market economies. "I think it will be disastrous to follow that route. It is unfortunate in the political space, the issue is not being addressed."
Denying there was any "policy logjam" in the government, Ahluwalia said, "Last week, it (the government) took a number of steps. It was the people on the street who want the logjam because they don't want these policy decision to be taken. As far as we are concerned, we are trying to break the logjam."
India needs a series of reforms, he said, adding "maintaining fiscal credibility is extremely important and we should back the finance minister on the need for fiscal discipline".
Stressing on the need to cut subsidies, particularly on petroleum products, he said, "In the 12th Plan (2012-17), we have drawn attention to the need of massive expenditure in health and education. It is the poor who is not getting the education and health services."
On the scope for improvement in the perception of rating agencies after the host of reforms announced last week, he said, "If any sensible rating agency says, what does the Indian situation look like now compared to a month ago, they will say the fear the Government of India was incapable of acting was wrong, the lot of notion of policy logjam is wrong. Therefore, it would improve the assessment."
"If the rating agencies have decided, that irrespective of what the government does, they are going to do a downgrade, then they are welcome," he said.
About the swelling fiscal deficit, he said, "I don't expect fiscal deficit to be 5.1 per cent of the gross domestic product this year because this was calibrated around 7.5 per cent of the economic growth. Now we know that growth rate is going to be lower....May be around 6.5. So, for that reason alone, the fiscal deficit would widen."
Commenting on the financial system, he said, "Savings need to be channelised efficiently as it could further dip in the current fiscal." About the functioning of the government, he suggested decision making required improvement and should be in line with changing times.