Economy poised on edge of 'fiscal precipice' - govt panel

A labourer works at the construction site of a flyover on the outskirts of Ahmedabad September 28, 2012.

NEW DELHI (Reuters) - The Indian economy is on the edge of a "fiscal precipice" and should urgently slash subsidies in diesel and petrol to curb a budget deficit that could hit 6.1 percent of gross domestic product in this fiscal year, a government panel said on Friday.

The panel delivered its report amid continuing jitters over the state of Asia's third-largest economy, where growth has slowed sharply and a large deficit caused by a ballooning subsidy bill has sparked fears of a credit rating downgrade.

The panel, whose recommendations are not binding, warned that failing to curb subsidies would see a flight of foreign capital and a potential downgrade.

Failing to tackle the deficit means India could potentially face a worse situation than the balance-of-payments crisis in 1991, when the country was bailed out by the International Monetary Fund (IMF), the report warned.

"The Indian economy is presently poised on the edge of a fiscal precipice, making corrective measures aimed at speedy fiscal consolidation an imperative necessity if serious adverse consequences stemming from this situation are to be averted in an efficient and timely manner," the report said.

"We cannot overemphasize the need and urgency of fiscal consolidation. Growth is faltering and inflation seems to be embedded. The external payment situation is flashing red lights," it said.

Amid political wrangling over a long-pending economic reforms programme, India's economy slowed to 5.5 percent growth in the April-June quarter, far below the country's expectations of near double digit growth.

(Additional reporting by Arup Roychoudhury,; Writing by Matthias Williams, editing by Ross Colvin)