India's Finance Minister Palaniappan Chidambaram delivered his "common man's budget" on Tuesday, setting an ambitious annual growth target of 10%.
India's finance minister has set ambitious growth targets
He said India was on target to cut its fiscal deficit - the difference between what it spends and earns each year.
Many Indians still live on less than $1 a day and the budget focused on agriculture, healthcare and education for the masses.
Defence spending is to rise 7% for the next year, as the military is upgraded.
The allocation for defence will rise from 830bn ($18bn) rupees to 890bn rupees ($20bn) in 2006/07 Mr Chidambaram told parliament.
India's 1.3 million-strong armed forces is the fourth largest in the world, and Prime Minister Manmohan Singh said the hike would meet the "security needs" of the country.
Meanwhile, education spending is to rise by 31.5% and health spending by 22%.
Analysts welcomed the news that the Union Budget would seek to cut the fiscal deficit to 3.8% of gross domestic product (GDP) next year from a better-than-expected estimate of 4.1% this year - relying on the extra tax revenues from India's booming economy.
"For the first time, India has seen the government deliver on trying to keep fiscal deficit under control and that is the most positive aspect of this budget," said Hemen Kapadia, a technical analyst with investment advisors Morpheus Inc.
The minister also announced a series of infrastructure projects aimed at producing the power supply, roads, ports, railway stations and airports needed to sustain the rapid growth of Asia's third-biggest economy.
He allocated 187bn rupees ($4.1bn; £2.4bn) for rural infrastructure projects and said contracts to build five huge power projects would be awarded by December.
India will also build 1,300km of "access-controlled" highways linking key cities, including Mumbai and Baroda, Bangalore and Madras, and Delhi and Agra.
Some 96% of the Golden Quadrilateral, a major highway project connecting the four corners of India with the capital Delhi, will be completed by the end of 2006 and the entire project by 2008, he said.
The government expects 220bn rupees to be spent on oil refining over the next few years, and will encourage spending on refineries, pipelines and green fuel.
Mr Chidambaram said he wanted to double India's share of world exports to 1.5% by 2008/9, and the government would promote the textiles, automobile, leather and food processing industries as a means of doing this.
Lack of investment has hampered the growth of many Indian industries, and he asked banks to treat the food processing industry as a priority sector.
A massive road building plan is underway in India
Food processing could be a key driver of growth and employment in India's rural areas.
More than half of India's population are employed there - but they produce just 20% of the country's gross domestic product (GDP) and lack the resources to develop their farmland.
Farm sector output is expected to grow by 2.3% in the year to March 2006, way behind the growth levels seen in the industry and service sectors.
Although the budget contained no major changes in personal or corporate taxes, many analysts seemed to think that taxes would have to rise somewhere.
"The budgetary proposals on infrastructure and social sectors sound good, but one concern is how will the government find resources for funding these projects?", said Gurunath Mudlapur, managing director at the Atherstone Institute of Research in Mumbai.
"There could be fresh taxes to mobilise resources and that could be a concern."