Finance Minister Jaswant Singh unveiled a populist Budget on Friday with a slew of measures to make life easier for the poor and the middle classes.
But he also promised to maintain Budget discipline, saying that fiscal consolidation was essential for economic growth.
Economists had expected a voter-friendly Budget ahead of a string of state elections this year, which are seen as a dress rehearsal for a national election due by 2004.
The Budget measures included, for example, tax breaks for parents paying school fees for their children, to a new drive to provide healthcare cover to India's poor, to higher tax exemptions for senior citizens.
Singh also unveiled a new drive to build roads, scrapped capital gains taxes on shares and dividend taxes and pledged overall savings from better management of national and state government debt to take advantage of falling interest rates.
Singh also pledged a new drive to improve the country's infrastructure, promising to build 48 new roads in partnership with private sector companies.
In a sop to stock markets, he also scrapped capital gains taxes on shares and dividend taxes.
Savings would come from better management of national and state government debt to take advantage of lower interest rates and from a 100 basis point cut in interest rates paid on government-administered small savings schemes.
Singh also cut a range of customs duties and promised continued liberalisation of the economy through privatisation and deregulation of state-protected sectors.
"Clearly there is a thrust towards infrastructure, a welcome reduction in the small savings rate by 100 basis points and a major restructuring of the import tax regime," said Sanjeev Sanyal, economist at Deutsche Bank in Singapore.
"All these moves look positive so far, but it is a little early to make an overall comment," he added.
India, Asia's third-largest economy, is under pressure to roll back state controls to attract foreign investment and compete with China.
Indian growth is estimated at just 4.4 per cent in the financial year ending in March, compared to eight per cent in China in the last calendar year.
Reuters