The government said on Wednesday it was raising spending on health and education in its annual budget and focusing on boosting the flagging agricultural economy in a drive to ensure growth included hundreds of millions of poor.
Fresh from defeat in two state elections on Tuesday which reflected voter anger about rising prices, the ruling Congress party promised to take more measures to control inflation, now hovering just below its highest level in more than two years.
With one eye on more state elections later this year and the other on national polls due in 2009, Finance Minister Palaniappan Chidambaram lifted spending on education by 34.2 per cent in the coming fiscal year, raised health and family welfare spending by 21.9 per cent and expanded a rural job guarantee scheme.
"Revenues were buoyant for the third year in succession. I have put the revenues to good use to promote inclusive growth, equity and social justice," he told parliament.
"The economy is in a stronger position than ever before. It therefore behoves us to set higher goals."
The Indian economy, Asia's fourth largest, is expanding at its fastest pace in 18 years and is estimated to grow at a cracking 9.2 per cent in the fiscal year ending on March 31.
The communist-backed government has made high growth the centre-piece of its agenda to lift a quarter of its billion-plus population out of extreme poverty.
But the consequence has been an accceleration in inflation as supplies fail to keep pace with demand and infrastructure like ports and power have proved unequal to the increase in activity.
Wholesale price inflation touched 6.73 per cent in early February, fuelled partly by higher food prices, and consumer prices have been rising even faster.
Chidambaram said a country with such a large population must be almost self-sufficient in basic food items.
"Otherwise supply constraints could upset macroeconomic stability and growth prospects. Hence agriculture must top the agenda of the policymakers," he said.
Nervous about prices, the government already halted the launch of new futures contracts for wheat and rice on the commodity exchanges on Wednesday.
The main stock market index fell 5 per cent to its lowest since October as pre-budget nerves and a general sell-off in major Asian markets and Wall Street hit sentiment but it recovered to a 2.8 per cent fall by 0610 GMT.
The partially convertible rupee fell in early trade as investors worried about an emerging market sell-off but pulled off its low to reach 44.29 per dollar later in the session.