Deficit rains and resultant fall in agricultural output has forced the government lower the GDP growth forecast for the current financial year to 7-7.5%.

The latest GDP forecast, given in the Mid-Year economic review of the economy tabled in parliament on Friday, is broadly in line with 7.4% growth projected by the Reserve Bank of India.  The growth rate was previously predicted at 8.1-8.5% and revised after the economy grew at 7.2% in the first half of the 2015/16 fiscal year.

The report, authored by chief economic adviser Arvind Subramanian, said retail inflation was likely to be within the target of about 6%.

It also said the government faces a challenge in meeting its budgeted fiscal deficit target of 3.9% because of the decline in nominal GDP.

“Slower than anticipated nominal GDP growth will itself raise the deficit target by 0.2% of GDP,” the report said, adding that “the anticipated shortfall in disinvestment receipts, owing to adverse market conditions for a portfolio that largely comprises commodity stocks, will add to the challenge.”

The government has a fiscal deficit target of 3.9% of GDP in the current fiscal and 3.5% in FY17. There will be also pressure on the finances because of the Seventh Pay Commission recommendations and One-Rank-One-Pension for defence personnel.

The mid-year review does not suggest relaxing fiscal targets but raises red flag over demand and the role monetary and fiscal policy in dealing with the situation.

Decline in nominal GDP growth will impact revenue collection going ahead, chief economic advisor Arvind Subramanian said making while calling for an assessment of the fiscal and monetary policy.

The review calls for special emphasis on agriculture given the stress in the sector because of two successive poor monsoons. It does not expect a consumption boost similar to the current year in the year ahead because of declining crude prices.