NEW DELHI (Reuters) - The government unveiled a fire-fighting budget on Monday that seeks to win back support among rural voters for Prime Minister Narendra Modi's government and sustain growth against a grim global backdrop - all without borrowing more.
Finance Minister Arun Jaitley's third budget marked a strategic shift by addressing rural distress in a country of 1.3 billion, where two-fifths of families rely on farming and are reeling from two years of drought.
At the same time it hiked public investment in India's woeful infrastructure by 22.5 percent, while taking further steps to revive corporate investment that Modi needs to create new jobs for India's burgeoning workforce.
"We have a shared responsibility to spend prudently and wisely for the people, especially for the poor and downtrodden," the 63-year-old finance minister told lawmakers in his 100-minute address.
India holds several state elections this year, including in the farming state of West Bengal, with the country's most populous state, Uttar Pradesh, going to the polls in 2017. A strong showing will be vital to Modi's chances of a second term.
Despite commanding a large majority in parliament's lower house, Modi's government has failed to pass several key measures since sweeping to power almost two years ago, raising doubts over the impact of its reform agenda.
Jaitley called Asia's third-largest economy a bright spot in a gloomy global landscape, and reiterated a forecast that it would grow by 7.6 percent in the fiscal year that is drawing to a close.
But, despite hefty commitments on rural welfare and health, Jaitley managed to stick to his fiscal deficit target of 3.5 percent of gross domestic product for the 2016/17 fiscal year that starts on April 1 - a pledge that may open the way for an early interest rate cut by the Reserve Bank of India.
"At first sight, it's a good budget, a fire-fighting budget," said Amitabh Dubey, director of India research at Trusted Sources.
"Rural demand is weak, private investment is dead in the water and, of course, we have a banking crisis," he added. "They've announced some ease-of-doing-business-measures that are positive. But, in other ways, it's a classic tax-and-spend budget."
Modi's change of course seeks to prevent a repeat of the fate of the last government led by his nationalist Bharatiya Janata Party (BJP), whose relentless optimism - summed up by its "India Shining" slogan - grated with voters who dispatched it after one term in 2004.
Jaitley reeled off a list of $16 billion in measures targeted at the countryside, including spending on a job creation scheme, farmers' welfare and building of rural roads.
He also targeted a total of $130 billion in credit to farmers.
"These steps will help our millions of farmers recover from the rough patch they have been going through," said Yoginder K. Alagh, a farm expert and former planning official.
The government will also allocate $32 billion for infrastructure development in 2016/17, an increase of 22.5 percent from last year, building 10,000 km of new national highways and upgrading another 50,000 km.
Those spending pledges leave scant cash over to recapitalise a state banking sector weighed down with bad loans to a corporate sector that itself is struggling under a heavy debt burden.
Jaitley announced a capital injection of just $3.6 billion into public sector banks in the coming fiscal year - a fraction of total needs that his economic adviser, Arvind Subramanian, estimated at $26 billion in his pre-budget report.
"The banking sector has a major role to play in spurring private investment, which is lacking and without which an all-round economic revival is not a possibility," said Milind Kothari, head of direct tax at BDO India in Mumbai.
Jaitley promised a one-time disputes resolution process for back-tax claims that have hit foreign investors like Vodafone (VOD.L). But he also hiked taxes on new cars and tobacco products, and imposed a new tax on large dividend payments - all measures that will hit India's growing middle class.
"Despite our disappointment on the tax on cars, I see no reason for the mayhem in the market," Anand Mahindra, chairman of Mahindra Group (MMFS.NS) said on Twitter.
"The call for a shift to investment in general infrastructure such as highways has also been answered. And fiscal targets have been maintained."
Financial investors gave Jaitley's budget a cautious thumbs up, with the rupee, bonds and stocks buoyant. Ratings agencies also gave their cautious backing to a spending package that produced no nasty surprises on the borrowing side.
"What we've heard is largely in line with the current rating and the current outlook," said Atsi Sheth, Associate Managing Director, Sovereign Risk Group, Moody's Investors Service, which rates India at "Baa3", its lowest investment grade rating.
($1 = 68.5050 Indian rupees)
Reporting by New Delhi and Mumbai teams; Writing by Douglas Busvine; Editing by Paritosh Bansal and Simon Cameron-Moore