The government said on Friday that meeting its fiscal targets would be a challenge in a slowing domestic economy and uncertain global environment, as it slashed its economic growth forecast for the fiscal year ending March 2012.

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In a mid-year economic review presented in parliament, the government said the economy is expected to grow around 7.5 percent, sharply lower than the original estimate of 9 percent.

The revision comes after the economy grew an annual 6.9 percent in the quarter ending September, its slowest pace in more than two years.

With less than four months of 2011/12 still remaining, economists say the full-year fiscal gap may be almost one percentage point higher than the budgeted target of 4.6 percent of GDP.

There can be no denial that meeting the target (of fiscal deficit) will not be easy this year, the finance ministry said in its review, without giving a revised forecast.

With policy inertia, stubbornly high inflation, rising interest rates and crisis-hit global capital markets taking a toll on investment and consumer demand, analysts are predicting a gloomy scenario for Asia's third largest economy.

The government also said that the 400 billion rupees stakes sale target in state-run companies would be hard to achieve this fiscal year, while tax receipts would suffer from the impact of the global slowdown.

HEADWINDS

Emerging economies are facing growth headwinds amid mounting risks of a recession in the United States and the euro zone, and they have begun to take steps to shield themselves.

The Reserve Bank of India (RBI) is widely expected to lower interest rates next year if inflation, which has been steadfast above 9 percent, slows below 7 percent.

The government said headline inflation would decline from December, expecting it to ease to 7 percent by March.

A slowing economy has hit New Delhi's tax revenue collections, making it tough to pay for its rising expenditure. Net tax revenues have grown at just 7.3 percent year on year in the first seven months of 2011/12, while expenditure has jumped by about an annual 10 percent.

With global commodity prices not moderating as much as was anticipated initially, the government's spending is set to rise by 1 trillion rupees this year.

The fiscal deficit has reached nearly 74 percent of the full-year target.

Any slippage on the fiscal front is expected to force a cash strapped government to borrow more from the market. It has already unveiled 528 billion rupees of extra borrowing for the remainder of this year.