The government on Monday outlined measures to speed infrastructure development and unveiled increased spending for farmers and the poor in its first budget since Prime Minister Manmohan Singh's government was reelected by a resounding margin in May.
Finance Minister Pranab Mukherjee, sticking to the theme of "inclusive growth" espoused by the Congress party-led government, unveiled breaks for exporters hard-hit by the global downturn and direct subsidies for farmers.
He also urged a return to fiscal responsibility targets as soon as possible.
"The first challenge is to return the GDP growth rate of 9 per cent per annum at the earliest," Mukherjee said. "The second challenge is to deepen and broaden the agenda for inclusive development."
Bond yields rose rose after the announcement of additional spending, while stocks were down by 1.37 per cent.
The first budget of Singh's new administration is seen as a roadmap for how he will govern for the next five years after his Congress party-led coalition was reelected by an unexpectedly decisive margin.
Mukherjee called on states to remove bottlenecks for infrastructure projects, and outlined plans for more flexible financing for infrastructure and development of long-distance gas pipelines.
Unconstrained by its previous alliance with leftist parties, Singh's new government has a freer hand to implement economic liberalisation measures to drive expansion but has also promised "inclusive growth" to support social programmes and rural development.
At the same time India is hobbled by a fiscal deficit that ballooned to 6.2 per cent in the financial year that ended in March, with the bond market pricing in expectations that the figure could creep higher this year to as much as 6.5 per cent.
Including off-balance sheet items like subsidies for fuel and food, as well as state-level shortfalls, India's overall fiscal deficit for the year that ended in March was about 10 per cent of GDP.
That compares with less than 3 per cent of GDP for China and more than 12 per cent of GDP for the United States in the latest fiscal years.
India's economy, Asia's third-largest, grew at 6.7 per cent in the most recent fiscal year, held back by the global downturn, after expanding at least 9 per cent for three straight years.
The finance ministry said on Thursday that growth could rise to 7 per cent this year -- towards the high end of the range of private forecasts -- and subsequently increase to 8.5 to 9 per cent if the government adopts sweeping reforms and speeds infrastructure development.
With the developed world mired in recession, big emerging economies led by China, which is on track for 8 per cent growth this year, and India account for a rising share of global output and are expected to help drive global recovery. Both economies have been fuelled by stimulus spending to spur domestic demand.
The run-up to India's annual budget announcement, always subject to fierce jockeying by ministries, industries and other interest groups, was especially frenzied this year given the ruling coalition's decisive electoral win.
Anticipation that the government would unleash sweeping market-oriented reforms sent Indian stocks surging 17 per cent on the first trading day after the election result in May.
But that has led market watchers to warn that expectations for the administration's first budget may be unrealistically high.
Indian stocks jumped by nearly half in the April-June quarter.
Last week, the government unexpectedly raised fuel prices by as much as 10 per cent, passing part of the recent surge in global oil prices on to consumers. Friday's railways budget, however, included improved services and fare cuts for the poor.