NEW DELHI - India said its fiscal deficit would widen as it outlined increased spending on infrastructure, farmers and the poor in the first budget since Prime Minister Manmohan Singh's government was reelected by a resounding margin.

Stocks tumbled 5 percent and bond yields rose after Finance Minister Pranab Mukherjee, sticking to the theme of "inclusive growth" espoused by the ruling Congress party, said the fiscal deficit for the year that ends in March 2010 would increase to 6.8 percent of GDP, from 6.2 percent in the previous year.

Investors had expected the fiscal deficit to increase to up to 6.5 percent, and were disappointed by an absence of sweeping reforms or pro-market measures.

"The real concern emerging from the budget is that it has not given confidence as to how the government will go about the fiscal consolidation process, after hiking the fiscal deficit target," said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.

"While the thrust on agriculture, infrastructure, etc. augurs well from a long-term growth perspective, the fiscal profligacy is quite obvious in the near term," she said.

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.

"The first challenge is to return the GDP growth rate of 9 percent per annum at the earliest," Mukherjee said in his address to parliament. "The second challenge is to deepen and broaden the agenda for inclusive development."

Mukherjee said overall spending would increase by 36 percent this year, but he also called for a return to fiscal responsibility targets "at the earliest."

He said states should remove bottlenecks for infrastructure projects, and outlined plans for more flexible financing for infrastructure and development of long-distance gas pipelines.

Inadequate power supplies and transport links have long been a bottleneck to India's growth.

Deficit woes

Unconstrained by its previous alliance with leftist parties, Singh's new government has a freer hand to implement economic liberalization measures to drive expansion but has also promised to support social programmes and rural development.

At the same time India is hobbled by a fiscal deficit that ballooned to 6.2 percent in the financial year that ended in March. The bond market had priced in expectations that the figure could creep higher this year to as much as 6.5 percent.

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 percent of GDP. That compares with below 3 percent of GDP for China and more than 12 percent for the United States in the latest fiscal years.

India's economy, Asia's third-largest, grew at 6.7 percent in the most recent fiscal year, held back by the global downturn, after expanding at least 9 percent for three straight years.

The finance ministry said on Thursday that growth could rise to 7 percent this year -- toward the high end of the range of private forecasts -- and subsequently increase to 8.5 to 9 percent 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 percent 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 fueled 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 percent 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.