India's new government has pledged billions of dollars for the poor while promising sustained economic growth.
Mr Chidambaram has a balancing act to perform
The first budget from new Finance Minister Palaniappan Chidambaram also increases military spending by nearly 18% to 770bn rupees ($16.73bn).
He also unveiled an across-the-board 2% tax boost to raise money for education.
Economists are watching the Congress-led government closely for shifts in economic policy since poor, rural voters swept the BJP from power.
The new budget had to juggle populism and prudence, shrinking the deficit while spending on public services.
Shares on India's benchmark Bombay Stock Exchange fell by more than 50 points in its first reaction.
Mr Chidambaram unveiled several programmes to boost education and health services and provide more clean drinking water. There are also special plans aimed at farmers.
"Our economic strategy is to empower the people, especially the poor,
with access to education and health," he said.
The budget highlights include:
- Promising to maintain economic growth of between 7% and 8%
- Spending an extra 100bn rupees ($2.2bn) but cutting the budget deficit to 4.4% of gross domestic product
- A 2% tax surcharge to fund education
- Increased defence expenditure to fund purchases of military equipment
- Raising the income tax exemption bar to over 100,000 rupees ($2,185)
- Allowing foreign firms to hold up to 74% of telecoms firms, 49% of civil aviation firms and 49% of insurance companies
The increase in the defence budget is to help fund a long-planned modernisation of the Indian armed forces.
India is due to buy a Russian-build aircraft carrier, British Hawk trainer jet aircraft and the Israeli Phalcon radar system - purchases which were all cleared by the previous government.
The key to growth, Mr Chidambaram said, is "investment. Public and private. Domestic and foreign."
The government is bound by a new law to cut the budget deficit, which was running at 4.6% of gross domestic product in March, down from 5.4% a year earlier.
Mr Chidambaram promised to eliminate the deficit by the 2008-09 fiscal year and set the next deficit target at 4.4%.
Economists say that improving infrastructure, as well as cutting the deficit, is the key to sustaining India's strong economic growth.
The finance minister said it was his goal to "make the environment in India attractive to investors".
The economy is growing - but the poor are not benefiting
But the government, under pressure from Communist parties, is opposed to privatising profit-making state run firms.
The previous BJP government's policy of privatisation was highly unpopular amongst workers who feared job losses, and led to repeated protests.
The budget also aims to protect farmers and agricultural workers, who felt their problems were not sufficiently addressed under the BJP.
The improvement of the country's tax take is another central part of Mr Chidambaram's plans.
He revealed proposals to increase the state coffers by improving tax collection and introducing a new value added tax, saying "excise collections are stuck, rather stubbornly".
Many people feel the time has come for an overhaul of India's tax system but the finance minister said it would take time.
Instead, he increased the minimum income tax exemption bar to include those earning 100,000 rupees ($2,185) a year, a move that will benefit more than 10 million people.
India has enjoyed strong economic growth over recent years, and on Wednesday the finance ministry reported healthy growth of 8.2% last year.
However, many of India's poorer people voted against the BJP because they felt they had not benefited from that growth.
BJP leader Atal Behari Vajpayee was critical of Thursday's budget. He said it made many promises but there were no resources to meet them.
He also said the budget did nothing to tackle the crisis in agriculture.
And he accused Mr Chidambaram of repackaging several programmes originally launched by the previous government.
The Shiv Sena party, an ally of the BJP, termed the budget as populist and said it seemed the government was gearing up for another general election soon.
There was a more positive response from left-wing parties supporting the government.
The Communist Party of India Marxist said it appreciated Mr Chidambaram's concern for agricultural development, employment generation, health and education.
However, it said it would protest against the government's decision to allow more foreign investment in the critical telecom, insurance and civil aviation sectors.