NEW DELHI (Reuters) - Prime Minister Manmohan Singh met with members of UPA coalition government's biggest ally, Trinamool Congress party (TMC), on Tuesday to heal a rift last week over a fuel price hike, which is seen as crucial to shrink a widening budget deficit.
Mamata Banerjee, whose Trinamool Congress governs West Bengal, threatened to pull out of Singh's United Progressive Alliance (UPA) last week unless he reversed a rise in petrol prices.
Most observers expected the allies to broker a compromise that could carry a hefty price tag for an already burdened exchequer, but lawmakers leaving the meeting in the evening shared scant details of what might have been agreed.
"We have expressed our total concern," Sudip Bandyopadhyay, a TMC leader, told reporters. "The price hike of the petroleum products, or price hike of petrol, causes tremendous difficulties for the poor people of the country."
Banerjee has demanded a 190 billion rupee ($3.9 billion) package for her heavily indebted state, according to media reports. Party sources told Reuters on Tuesday that the exact details of a package were still being worked out.
"She wants to be populist, without thinking of the consequences," said D.H. Pai Panandiker, the head of the RPG Foundation, a New Delhi-based think-tank.
"She wants all the goodies, and she does not want to accept that everything has a price, that nothing comes for free."
Banerjee earned a reputation for populist splurges in her previous job as railway minister, overseeing a worsening of the network's finances. She slammed Friday's price hike as an anti-poor move on which her party was not consulted, thereby distancing herself from Singh's increasingly unpopular government.
The package could include a "credible economic recovery programme" to beef up West Bengal's manufacturing industry and infrastructure, Dipak Dasgupta, the principal economic adviser to the ministry of finance, told Reuters.
Banerjee was never likely to act on her threat to withdraw from the coalition, according to political analysts and a senior ruling Congress party source.
But her dissent is the latest in a long series of revolts by Singh's allies, dating back to the communists in his first term in office from 2004-09, which have hampered an agenda of economic reforms seen as key to sustaining India's growth.
Freeing up heavily subsidised fuel prices is viewed as a badly needed measure to help tame India's fiscal deficit, which swelled to nearly 71 percent of its full-year target in the first half of the year.
India granted autonomy to state-run firms last year to fix retail prices for petrol, but the government continues to control prices of diesel, cooking gas and kerosene. The coalition now may delay a planned diesel price hike for fear of risking further unpopularity.
Although it has presided over a sustained period of economic growth since coming to office, the ruling Congress party has struggled to balance the interests of corporate India with hundreds of millions of people living below the poverty line.
Rattled by street protests and facing major state elections next year, Congress party chief Sonia Gandhi may feel the need to shore up the government's centre-left credentials.
"The government is becoming hugely unpopular, particularly among the poor," said political analyst Paranjoy Guha Thakurta.
"The question is whether Sonia Gandhi can balance the interests of the gung-ho liberalisers and the socialists in the Congress party," he said.
(Additional reporting by Manoj Kumar and Nigam Prusty; Editing by Alistair Scrutton, Ed Lane and Jane Baird)