The Mid-Year Economic Review tabled in the Lok Sabha on Friday sees the Indian economy recording 5.5 per cent growth this fiscal.
There will be no changes to interest rates till March this fiscal.
Also, the report has highlighted that tax revenue collections are below expectations and budgeted growth assumptions.
FISCAL DEFICIT CHALLENGE
In the report, the Government has said that adhering to the fiscal deficit target of 4.1 per cent of GDP is a major challenge. The Finance Ministry is now betting big on a pick-up in economic activity in the second half of the year.
"This is critical to prevent a slippage and to meet the overall fiscal deficit target during 2014-15," the report said.
Later, Arvind Subramanian, Chief Economic Advisor in the Finance Ministry, told reporters the Government was committed to meeting the 4.1 per cent (percentage of GDP) fiscal deficit target.
However, this time round the Government is faced with "very unusual challenging circumstances" for meeting this fiscal deficit target.
Some of the challenges emanated from the fact that while economic growth was weakening, the optimism on revenues has not materialised, and India was trying fiscal consolidation when its economy was growing below potential.
INFLATION
Arvind Subramanian felt the disinflationary impulses would be persistent.
The trend of inflation decline is going to continue with strong potential of upside surprise, he said.
He also said India needs to consider the possibility of looking at public investment as an engine of growth.
BANKING SYSTEM
Although there are serious concerns about the deterioration of asset quality, yet some comfort is provided by the relatively strong capital adequacy of banks, the report has said.
This may ensure the banking system remains resilient even in the unlikely contingency of having to absorb the existing stock of NPAs, it added.
At the same time, the GNPA position of the Indian banking system compares favourably with other developed and developing economies.
For example, the GNPAs as a share of total advances in the US stood at 3.2 per cent, in Germany at 2.9 per cent, in Spain 8.2 per cent and in Italy 5.1 per cent.
Among emerging economies, in Brazil the Gross NPA was 2.9 per cent of its total assets and in Russia it was 6 per cent (of different time periods).
For India, the studies conducted by Reserve Bank of India suggest that under the baseline scenario, the GNPA ratio is expected to be around 4.1 per cent of total advances during fiscal 2014-15.
However, if the macroeconomic conditions deteriorate, the GNPA ratio may increase to around 4.5 per cent under a medium stress scenario and 5.1 per cent under a severe stress scenario by March 2015, the report has said.