To begin with the overall macroeconomic environment, the domestic growth and inflationary situation, while still relatively benign, is beginning to reflect global tendencies.

The Advance Estimates for 2007-08 clearly indicate that a slowdown is on the cards. While the finance minister himself asserted that the growth rate was likely to be an underestimate, particularly on the agricultural front, there are indications that the manufacturing sector will show low growth rates in the fourth quarter and carry this pattern into the first half of next year.

If this does materialise, the growth in revenue collections will moderate as a consequence, which makes a populist Budget an even more risky proposition from the fiscal viewpoint.

This cyclical downturn in revenues may be aggravated by several expenditure commitments that are either currently being suppressed or will emerge in the year ahead.

In the former category, the reluctance to revise petroleum product prices upwards is causing the government's liabilities to the oil-marketing companies to build up.

While the budgetary implications are only in terms of interest payments, everybody knows that expanding liabilities without matching assets being created will come back to haunt the government at some point in time.

Let's not forget that rising petroleum prices are also translating into higher global fertiliser prices, thus contributing to a mounting subsidy bill on that front as well.

The parallel build-up of the market stabilisation bonds used to sterilise mounting foreign exchange reserves on which the government bears the interest costs, raises similar concerns.

In the latter category, the recommendations of the Sixth Pay Commission are likely to make a significant dent in the comfortable fiscal situation the government finds itself in today. All in all, it would be a highly risky move to either increase spending or cut tax rates in anticipation of revenue growth.

With particular regard to indirect taxes, the temptation to tinker with rates immediately must be resisted in favour of the broad realignment of rates as the system transits to the Goods and Services Tax (GST), which is this government's stated ambition over the next couple of years.

However, there is one change in the indirect tax regime that the government must initiate. Some of the reluctance to raise domestic prices of petroleum products stems from the cascading effect of ad valorem taxes on retail prices.

There have been several recommendations to move from ad valorem to specific duties on petroleum, at a rate which remains fixed in the face of volatile global prices. This will immediately dampen the impact of global price increases on consumers.

The exact magnitude of the tax can be set based on a reasonable forecast of crude prices and the need to collect a reasonable amount of revenues from this source.

Moving on to the larger compulsions of a pre-election Budget, the finance minister clearly needs to project his government's successes on inclusiveness, which is the most important component of its agenda.

In this context, the success, or lack of it, of the National Rural Employment Guarantee Scheme, will provide the most significant yardstick of performance.

There has been a lot of controversy about this scheme in recent weeks. The government's own progress report on it, released in December, indicates great success, with over 20 million beneficiaries and 640 million person-days of employment created. That sounds like a pretty significant vote bank.

However, the Comptroller and Auditor General has raised questions about the commitments on the number of days of work as well as the effective daily wage being met and other sources report on significant variations across states in effectiveness of implementation. It is up to the finance minister to put the best possible spin on this record, while laying out a plan to quickly improve the efficiency of the delivery mechanisms.

Of course, while this may be considered the flagship scheme of this government, a number of other programmes that were initiated under the inclusiveness agenda may well not stand up to scrutiny.

For example, a merit-cum-means scholarship scheme for students from Standards 9-12, which would widen  access and affordability, announced in the 2007 Budget, had yet to be put in place until last month. 

A list of well-intentioned schemes that are yet to get off the ground because of administrative ineptitude will undermine whatever successes there are to trumpet. The finance minister will need to give the coalition partners enough to persuade their voters that things are beginning to move on these fronts.

One thing that could well spoil the electoral party is the inflation threat, which the Reserve Bank of India [Get Quote] emphasised in its quarterly monetary policy announcement of January 29.

This is largely the consequence of global oil and food prices. While domestic food prices are relatively moderate just now, an indifferent rabi harvest or a weak monsoon could very quickly trigger of a spiral later in the year, which the government would have very little power to counteract in the midst of tight global supply conditions.

It is important for the government, and not just from the perspective of elections, to anticipate potentially adverse outcomes and offer some credible contingency plans in the budget.

To put it in a nutshell, this Budget is going to be all about finding a balance between political objectives and economic uncertainties, between instant fiscal gratification and consolidation of the very real gains that have been achieved over the past few years.

How the finance minister deals with these issues, and some others, will determine both how the Budget is received as economic policy and its effectiveness as a political instrument.

The writer is Chief Economist, Standard & Poor's Asia-Pacific. The views are personal.