Politically, the Budget has to be popular, respectful of the mandate which worked in UPA's favour in the 2009 elections, as well as forward-looking, taking a few moderate steps down the road of reform and laying down a roadmap for eventual restoration of fiscal discipline, which could be a five-year exercise at the minimum. States would have to fall in line and a workable restructuring of Centre-State fiscal relations could hopefully emerge out of the 13th Finance Commission report later in the year.

India Inc. which is seeing “green shoots” everywhere and signs of slowdown bottoming out, would not be satisfied with anything less than what it has been strenuously arguing for - lowering costs for manufacturing through positive (downward) adjustments in the structure of direct and indirect taxes and accelerating the reform process to make investments attractive, domestic and foreign and restore growth momentum. Banks have already been coaxed to reduce the lending rates, and some have already begun doing it.

Slowed down, but not stagnating, the economies of China and India are viewed as growth poles in an otherwise dark world of downturn. China's projected 7.2 per cent and India's at 5.1 per cent in 2009, according to the World Bank, would help the rest of the developing to grow 1.2 per cent this year and avoid a deeper plunge. While the Bank hopes for a modest turnaround in the world economy in 2010 after output and trade contractions by 2.9 per cent and 10 per cent respectively this year, it expects the recovery to be subdued till 2011 and even beyond.

Of more consequence to India is the sharp decline in net capital flows to developing countries in 2009 projected by the World Bank, from 707 billion dollars in 2008 to 363 billion dollars. India's growth slowing to 6.7 per cent in 2008/09 from 9 per cent in the previous year was attributed to the limited access to international capital markets and risk-averse foreign investors pulling back from several emerging markets in search of safety. New Delhi is currently not bothered with the post-recession structural sifts in the world economy. 'The worst is over' for the policy-makers who expect India to get back to 9 per cent in a couple of years.

No doubt there is renewal of investor interest in Indian market with portfolio flows of some four billion dollars in recent months. Electoral events leading to the formation of a stronger government with the headroom to take decisions unencumbered has boosted market sentiment. It has also, as the World Bank notes, underpinned expectations of “an accelerated reform programme and greater openness to foreign investors”. So, Mr Mukherjee's budget would evoke interest abroad.

The prime focus of the budget, as the Prime Minister has said, would be to reflect the priorities outlined in the President's address to Parliament, one of which is to provide food security to people below poverty line by supplying 25 kg of rice or wheat at Rs. three a kilogram. Whether this promise to voters gets implemented immediately or not, the Finance Minister is squarely faced with the problem of acute resource stringency and there is little scope for driving down expenditure, plan or non-plan, already stretched to the fullest before the elections. Fiscal deficit was 6.2 per cent of GDP in 2008-09, a part of it due to duty cuts and other stimulus measures. The new budget would have at least a similar gap.

The budget has to honour the commitment to raise allocations for all flagship and other programmes designed for the “aam aadmi”, and so expectations of raising tax exemption limits or lowering taxes must be given up. In making the allocations, Mr Mukherjee cannot accommodate all priorities and some might stand deferred for the next year. Even then, he cannot avoid a higher revenue and fiscal deficit, given the growth slowdown affecting revenues. As an old hand in Finance, he would make a practical approach that limits the totality of tax and indirect tax incentives and reductions to the minimum possible.

On the tax side, there may be room to raise some additional revenue in the form of a surtax on billionaires whose numbers seem to be growing out of proportion to the status of the miserable millions. Several tax exemptions can be re-visited and one proposal mooted is to set a fairly reasonable limit on exemption for dividends in the hands of recipients. On the indirect taxes, Mr Mukherjee may make slight upward adjustments under Excise and Service tax, even if concessions to labour-intensive sectors are not touched.

Non-tax revenues must get greater attention. The Finance Minister may come up with some new incentives for investors. That apart, disinvestment is the obvious route to garner resources for public investments, especially for infrastructure, and while proposals for 5 to 10 per cent sales of stakes in steel, coal and BHEL and other undertakings are in the air, a firm policy is yet to be unveiled by Government which would like to be looked upon as more decisive than in its earlier term. The auction of 3G spectrum, for which the reserve price has been fixed, is expected to yield about Rs.32,000 crore to the kitty.

There are other policy decisions awaited such as de-regulation of oil prices, which would have a beneficial impact on the budget even if reduction of subsidies in general would have to await a broader political consensus. The budget can kick-start the financial sector reforms with pensions first and also raising the FDI cap in insurance. The Finance Minister will announce the mechanism for recapitalisation of some of the pubic sector banks. He had earlier said the budget would provide a vision of approach over the medium term both for regaining dynamic growth and for accomplishing fiscal consolidation with sustainable deficits.

Meanwhile, there is growing anxiety not only among farmers but also in Government over the failure of monsoon to make headway over large parts of the country after its timely debut toward the end of May. The long pause in the monsoon is affecting kharif sowings, which account for nearly 60 per cent of total foodgrain production.

Inflation looms on the horizon. The negative wholesale price index-based annual rate of inflation in the first week of June does not correspond to market reality for the consumer with the food index at 8 to 9 per cent. Oil prices are again rising and are volatile, moving up recently to 72 dollars a barrel from 50 dollars at the turn of the year. The emerging situation would need Reserve Bank to plan a gradual roll-back of the monetary easing, as any inflationary upsurge, as seems likely, in the latter part of the fiscal year, would impair prospects of growth even at 6 to 7 per cent. (IPA Service)