Tax payers will be looking forward to some relief from Finance Minister Pranab Mukherjee who is expected to raise the income tax exemption limit to at least Rs 2 lakh in his budget proposals to be unveiled in the Lok Sabha on Friday.

The Minister may also marginally raise the slabs in other tax brackets of 10 per cent, 20 per cent and 30 per cent. The Direct Taxes Code (DTC) Bill has also made a mention of it.

The DTC, which will replace the Income Tax 1961, however, will only come into force from 2013-14 and the Minister may make a formal announcement on it in his budget speech.

The Standing Committee of Parliament that has scrutinised the DTC Bill has already submitted its report to the Lok Sabha Speaker.

Although the Committee had suggested raising the tax exemption limit to Rs 3 lakh, it is unlikely that Mukherjee will agree to it in view of the need to contain fiscal deficit.

With limited space for give aways, the Budget is likely to balance populism with some tough measures to check tax evasion and generation of black money.

However, in view of reverses in the recently concluded state assembly elections, Mukherjee may go slow on economic reforms like FDI in multi-brand retail and further opening of the insurance sector to foreign investment.

There could be some bad news for prospective car buyers as government may hike duties on luxury items to raise resources.

The biggest challenge before Mukherjee would be to arrest decline in economic growth which is expected to touch a three year low of 6.9 per cent in the current fiscal, down from 8.4 per cent in the two previous years.

Further, the government is likely to set disinvestment target for the next fiscal at Rs 30,000 crore.

Persistent inflationary pressures despite hawkish monetary policies, high fiscal deficit and rising oil prices are also straining the country's economic parameters.

Friday's Budget, that would set the ball rolling for initiatives in the 12th Five-Year Plan period (2012-17), comes against the backdrop of slowing economic growth projected to be 6.9 per cent in the current fiscal.

"With agriculture and services continuing to perform well, India's slowdown can be attributed almost entirely to weakening industrial growth," according to the Economic Survey tabled in the Parliament today.

Further, the government is facing the challenge of reining in fiscal deficit. The target of 4.6 per cent deficit for the current financial year would not be met, mainly on account of rise in subsidies and lower realisation from disinvestments.

Overall inflation inched up to 6.95 per cent in February compared to 6.55 per cent in the previous month. However, the government is optimistic it would come down to about 6.5 per cent by March end.

The Reserve Bank of India (RBI) today left the key rates unchanged while asserting that future policy action would be determined by the movement in inflation.

Last week, the RBI reduced Cash Reserve Ratio (CRR) -- the percentage of deposits banks have to keep with the apex bank -- to 4.75 per cent from 5.5 per cent.

On the other hand, the government's efforts to raise money through disinvestments this fiscal has not met with much success.

So far, only about Rs 14,000 crore has been mopped up by way of divestments in public sector undertakings (PSUs) as against the target of Rs 40,000 crore.

While Rs 1,145 crore was raised through an follow-on public offer (FPO) of PFC, Rs 12,767 crore came from 5 per cent stake auction in ONGC.