Sonia Gandhi, head of the ruling Congress party, backed the finance minister on Thursday, effectively signalling her support for a move to raise taxes on fuel, lawmakers said.
The budget move to raise fuel prices for the first time since July has met with anger from both the opposition and government allies, underlining the challenge in cutting the fiscal deficit from a 16-year-high of 6.9 per cent of GDP.
Gandhi, widely seen as running the government from behind the scenes, has a history of supporting populist measures, so her stand was being seen as a test of how far the government will push reforms to liberalise state-regulated sectors like fuel.
Gandhi spoke at a meeting of her party lawmakers, seeking to remove resentment among a section of the Congress party worried that a rise in fuel prices would worsen already high inflation and anger millions of voters.
"She congratulated the finance minister (Pranab Mukherjee) on his well-balanced budget and said growth is the engine of the budget," Sandeep Dixit, a Congress lawmaker who attended the party's closed door meeting, said.
Other lawmakers at the meeting told Reuters that it was clear from her statement she was giving support for fuel price rise.
There is no danger to the stability of the government on the issue, but a strong political opposition has fed speculation that the government may be forced to strike a messy compromise and partially roll back the hike, particularly on diesel.
Petrol prices rose about 6 per cent and diesel prices by 7.75 percent after the government proposed to increase factory-gate taxes and import duties on the fuels as part of last week's 2010/11 federal budgets, which has stressed fiscal prudence.