Finance Minister Pranab Mukherjee faces a tough job July 6 as he rises to present the first budget of the newly-elected United Progressive Alliance (UPA) government, during which he will have to try and keep fiscal deficit under check while meeting the many promises made by the Congress party and its coalition partners during the elections.

The exercise will also be a complex mix of populism and pragmatism since it comes at a time when the global economy is still in the throes of a recession. Mukherjee's task has been rendered more difficult with international crude prices climbing once again.

Crude prices are ruling at nearly $70 a barrel, putting pressure on the government to raise fuel prices. Even though the new government would not like to start its tenure by hiking prices of petrol, diesel or cooking gas, history could repeat itself.

When the previous UPA government took office in 2004, it began its tenure by jacking up rates of these key fuels. The then petroleum minister, Mani Shankar Aiyar, had proposed a band mechanism to reduce price volatility but this could not be implemented owing to world prices shooting up.

This time, oil prices have soared at an even worse time when the world is in the midst of a recession. The finance minister thus has to deal with several factors linked to the external environment. Rising fuel prices, for instance, means the oil import bill is going to shoot up this fiscal.

In addition, exports have slumped owing to declining global demand for goods. The dip in exports has in turn affected employment in many sectors such as gems and jewellery, handicraft and textiles - all labour-intensive areas where thousands of artisans have been left jobless.

Finally, he has to tackle the slowdown in the economy across all sectors as a result of global recessionary trends hitting India's shores from last September.

From a high-growth economy rising at nine percent annually, the country's gross domestic product (GDP) expansion rate dipped to 6.7 percent last fiscal, although a comforting factor is that India remains one of the fastest growing economies in the world.

One of the fallouts of lower growth is that customs and excise revenues have dipped, making it more difficult for the government to balance the budget.

On the plus side, Mukherjee will be helped by the fact that economic growth in the January-March quarter was 5.8 percent, the same level as in the previous quarter. This was much higher than had been expected by most experts.

So a glimmer of light does appear on the horizon.

Industrial output has stopped falling. Farm output has also been rising though there are fears about production levels this year owing to the less than normal rainfall predictions made by the Met Department.

Even so, output in the country's granary states of Punjab and Haryana may still not be much affected if the rains come by early July. Agriculture still remains critical for the Indian economy as rural demand provides the big push for growth.

Stock markets also have been buoyant ever since the new government came to power. The bullish trend is largely due to expectations that it no longer has to rely on support from the Left to survive and can therefore go ahead with more economic reforms.

Unfortunately, these expectations may not be met once the budget is presented because Mukherjee has to take into account the needs of average citizens while formulating his proposals.

But progress is definitely expected in one area that had been completely stalled during the past five years: Divestment of equity in state-run enterprises.

This had been kept in cold storage in the previous regime because of staunch opposition by the Left. Now, however, several public sector companies are preparing to go ahead with public issues to mop up funds from the market.

It has already been clarified that 51 percent equity will remain with the government but even this gives considerable leeway to a large number of public sector companies.

This will help the government to not only raise more funds to bridge the budget deficit but also meet its stated goal of enabling the public to have a greater stake in public sector enterprises.

The budget is likely to present a road map for divestment though the implementation may take place only gradually over the next year.

Yet, resources from this count alone will not be sufficient for the kind of spending that will be required for the social sectors in the coming year. There is tremendous pressure on the finance minister from newly elected members of parliament to ensure that a development agenda for the poorest of the poor is given priority.

In addition, it is felt that some middle class sops like tax concessions also need to be handed out to the electorate. While the focus of employment will remain the much vaunted rural job scheme, the National Rural Employment Guarantee programme, industries which have faced large layoffs will also have to be given special attention.

Education and health are expected to be given substantial increases in outlays in a bid to improve the quality of life. Funds will be required for all these schemes and the tax net is expected to be cast over a wide range of commodities to boost sagging revenues.

One of the most eagerly anticipated elements of the budget proposals by industry is a stimulus package to boost investment. The UPA can already take credit for the impact of the stimulus packages that were unveiled earlier in the year.

Yet another stimulus package, however, seems to be in the works to perk up investment especially in the key area of infrastructure. This is inevitable given the continuing recession in the economy, though there are signs that an upswing is under way.

Thus the finance minister has to deliver the most difficult of tasks - a budget that taxes widely enough to raise resources for a huge spending programme and at the same time look appealing to the average citizen.

This is a tall order indeed. But Mukherjee is not a novice in the game of budget making. He began his stint in the finance ministry as minister of state for revenue and banking in Indira Gandhi's government in 1975 and later became finance minister in the Rajiv Gandhi government.

A veteran, astute politician, he will have to rely on all his experience to literally pull a rabbit out of the hat this time. He has little choice as all his colleagues in the government are banking on his ability to work some magic in the budget.


* The author is an economic and corporate analyst
* The views expressed by the author in this feature are entirely his/ her own and do not necessarily reflect the views of SME Times.