Finance Minister Pranab Mukherjee on Wednesday said inflation in essential items is likely to decline further and forecast of a normal monsoon had brightened the prospects of the economy growing at 8.5% in the current financial year.

Indications of softening of food inflation are clearly visible...It is expected that this decline will continue in the coming months uninterruptedly, Mr Mukherjee told the Lok Sabha initiating a debate on the Finance Bill.

The assurance comes a week after the main opposition party BJP staged a huge rally in the capital to protest rising prices.

Food inflation has moderated slightly from the over 20% it reached in December 2009 but remains high and was placed at 17.7% in March 2010.

The government has rolled out every possible measure to curb rising food prices and is now looking to the skies for help. A good monsoon is now key to the stubborn food inflation moderating.

The finance minister was more sure of the growth prospects of the economy and expected the GDP to grow around 8.5% this fiscal and 9.0% in 2011-12.

He said though demand recovery is yet to attain the pre-2008 momentum other parameters in the economy such as industrial growth, investment, private consumption, capital markets and business confidence, corporate earnings had improved.

GDP growth had slowed down to 6.7% during 2008-09 following the global financial meltdown.

The favourable capital market conditions with improvement in capital flows and business sentiments are also encouraging...The outlook is further brightened by the fact that a normal monsoon is predicted this year, he added.

Mr Mukherjee also hinted at some changes in the budget provisions without elaborating what these could be. I shall cover the reliefs we propose to grant, the amendments that we seek in the Bill and our responses to the issues that are raised in the discussions, in my reply.

The government also reiterated the urgency it sees in reforming the tax regime. The finance minister said it will put out the revised discussion paper on the new direct taxes code in public domain next month.

I am happy to inform that in the case of DTC (direct taxes code), the process of consultation with the stakeholders for revising the first draft is almost over, Mr Mukherjee said. The draft legislation is likely to be tabled in Parliament in the monsoon session.

On the proposed goods and services tax Mr Mukherjee said the centre was willing to provide compensation to the states for the initial years when they have revenue loss on account of switchover to new regime.

But he made it conditional to the agreement on the broad framework for a common threshold, common exemption lists between the centre and the states, mechanism to check deviations and acceptable level of overall GST rates.

The design and modalities of providing this compensation would be worked out in discussion with the state governments and the Empowered Committee, he said.

The government intends to introduce GST, which will subsume all central and state indirect taxes, from April 1,2011.

The Lok Sabha also passed the Appropriation Bill allowing the government for the extra expenditure incurred during 2007-08.