India faces a tough feat of achieving its fiscal deficit target this year, but major banks have voiced their confidence in the government.
Asia's third-biggest economy recorded an $83 billion fiscal deficit, or 99 percent of its full-year target, during the first eight months of financial year 2014-2015 that began in April, data showed last week.
This would mark the worst performance since financial year 2008-2009 when India embarked on a path of stimulating its economy during the financial crisis. It also raises concerns that the government would miss its target to reduce fiscal deficit to 4.1 percent of gross domestic product (GDP) by March 2015, down from 4.5 percent in the previous year.
But a deeper dive into the figures revealed that rather than runaway expenditure that generally leads to the over-shooting of fiscal deficit, it's the dramatic slowdown in revenue collection that's taken a toll.
"We understand that the target is ambitious mainly due to lower tax revenue on account of the gradual recovery in economic activity and the slowdown in nominal growth with deceleration in inflation," Morgan Stanley stated in a note on Tuesday.
Tax collections were up 6.5 percent on a cumulative basis in the first seven months of the financial year, much lower than budgeted growth of 17.7 percent, according to data from Citi. Meanwhile, nominal growth is widely expected to miss government forecasts of 13.5 percent.
With tax revenue expected to improve in the coming months and no unfettered rise in expenditure, Morgan Stanley is confident India's fiscal targets will be met.