BBC correspondent Andrew Whitehead reports from Delhi

The move by the Hindu-nationalist led government comes three weeks after India staged controversial nuclear weapons tests, fuelling fears of a regional arms race with Pakistan.

Delivering the government's first budget, Yashwant Sinha said defence spending is to go up by 14% and that it could rise further if necessary during the course of the year.

Finance Minister Yashwant Sinha

The finance minister spoke of the rise in defence expenditure as substantial.

He said there could be no compromise in India's defence preparedness.

The BBC South Asia correspondent says that sentiment was cheered by many members of parliament, but much of the rise in defence expenditure is accounted for by a pay award to the armed forces.

Confident on sanctions

Mr Sinha maintained that sanctions imposed by the United States and other countries after its nuclear bomb tests last month would not have any significant impact.

Yashwant Sinha: Making India "strong and self-reliant"

He said he was confident that they would be moderated once India's position on the tests was better understood.

Mr Sinha said the budget was driven by the philosophy of economic self-reliance, "swadeshi", which had been a major plank of the BJP's election campaign. But he also said this did not mean isolation.

Hard task

Defence spending increases may not stop at 14%

The government, which took power last month, has acknowledged that sanctions will put further pressure on the rupee, already at record lows, and widen India's trade deficit.

India's annual economic growth-rate is down from 7% to 5%, agricultural output is falling, and the budget deficit is uncomfortably high.

Mr Sinha said he hoped to reduce the fiscal deficit to 5.6% or $22.2bn, adding: "It will be our objective to create conditions in which foreign investors will find India an attractive investment destination."

He also said the government hoped to double the inflow of foreign investment within two years.

The budget also focused on reviving agriculture, which employs 64% of India's workforce, and pledged to restore the momentum of industrial growth and revive capital markets.

Parliament was told there would be no increase in taxes to pay for its plans although the tax net would be widened to increase revenues.

Salman Haider says spending rise does not mean India will increase nuclear testing

Salman Haider, India's high commissioner in Britain, said he expected the people of India to "warmly welcome" the budget.