July 7 (Bloomberg) -- India’s Finance Minister Pranab Mukherjee will seek to convince investors that yesterday’s budget will help turn around the economy after stocks plunged the most in six months.

The finance minister is due to meet industry groups in New Delhi today after the stock index dropped 5.8 percent yesterday and the rupee suffered its worst fall in almost six weeks. Markets tumbled as Mukherjee unveiled the widest budget deficit in 16 years and failed to lay out firm plans to sell state-run assets and ease foreign investment rules.

Mukherjee, who presented his first budget in 1982 when India was a closed economy allied to the Soviet Union, yesterday pledged to spend more on food subsidies and rural jobs to help aid the poor. The 73-year-old politician now needs to convince investors that corporate India will also benefit from the rural growth, tax relief and increased outlays on roads and power.

The budget “will lead to faster economic growth, but it wasn’t packaged and sold well,” said Vikram Kotak, who helps manage the equivalent of $2.4 billion in Indian stocks and bonds at Birla Sun Life Insurance Co. in Mumbai. “His intentions in the budget were good. He now needs to convey them.”

The Sensitive stock index’s rebounded from yesterday’s drop, the worst in six months, rising 0.8 percent to 14,145.06 at 10:47 a.m. on the Bombay Stock Exchange. The rupee gained 0.4 percent to 48.3345 against the dollar.

‘Overreacted’

Macquarie Group Ltd. raised its April 2010 target for the stock index by 20 percent saying markets “overreacted” yesterday. It expects the index at 18,000 by April.

The benchmark five-year bond yield climbed 7 basis points to 6.51 percent, extending yesterday’s 22 basis-point advance yesterday after the government announced a bigger-than-expected budget deficit.

Investor expectations for the budget were high after Prime Minister Manmohan Singh won a resounding re-election in May, reducing his dependence on allies such as the communist parties who opposed asset sales and looser foreign investment policies during his first term.

Morgan Stanley, for example, expected Mukherjee to announce a target of between $4 billion and $5 billion from selling shares in state-run companies this year. Mukherjee provided for only 11.2 billion rupees ($227 million) in the budget.

Some analysts say the budget is about streamlining tax structures and allocating resources.

Short-Term Goal

“The budget is a fiscal document and we think the short- term policy objective of stimulating demand will likely be achieved,” said Tushar Poddar, a Mumbai-based economist at Goldman Sachs Group Inc.

Mukherjee lowered the income-tax burden on companies and individuals by scrapping the fringe-benefit tax and the 10 percent surcharge on personal-income tax respectively. He also announced spending of 1.79 trillion rupees on roads, telecommunication and power, where capacity constraints are estimated by the finance ministry to shave two percentage points off the nation’s annual economic growth.

The minister ended a plan to tax trading of commodity futures in India, the world’s biggest user of gold and second- biggest grower of rice and wheat, aiming to lure more investors to a market that’s doubled to $1 trillion in the past three years.

To support consumption in rural India, where more than three-fifths of India’s 1.2 billion people live, Mukherjee allocated 391 billion rupees for a rural jobs program, which benefited 45 million households last year. The amount earmarked is 144 percent more than the previous year, the minister said.

Rice, Wheat

Mukherjee said the government will provide rice and wheat at a subsidized rate of 3 rupees a kilogram to the rural poor.

Higher spending will see the budget deficit widen to 6.8 percent of GDP in the year ending March 31, from 6 percent, forcing the government to borrow a record 4.51 trillion rupees.

Mukherjee said he plans to overhaul subsidies and is relying on growth picking up to 9 percent in the next two years to boost tax revenue and cut the deficit to 5.5 percent of GDP by March 2011 and to 4 percent in the following 12 months.

India’s record growth of close to 9 percent in the five years ended March 31 helped tax revenue more than double since 2004. The $1.2 trillion economy expanded 6.7 percent last year, the slowest pace since 2003.

Debt-Management

Reserve Bank of India Deputy Governor Shyamala Gopinath said yesterday that the central bank has enough debt-management tools to help the government successfully complete its record bond-sale plan for the current fiscal year.

Mukherjee’s first budget in a quarter century received mixed reviews from credit rating companies. The minister served in the foreign and defense portfolios in the bulk of Singh’s first term.

While Standard & Poor’s said the fiscal deficit was “within the boundary” of their expectation, Fitch Ratings said the budget doesn’t “alleviate” pressure on India’s ratings.

S&P ranks India’s long-term local-currency rating at BBB-, their lowest investment grade. Fitch has a BBB- long-term rating on India, also their lowest investment-grade level.

Political analysts such as Mahesh Rangarajan, a Delhi University history professor, said the budget indicates that the Congress party-led government is looking to extend its support in upcoming state polls. Two of India’s three most populous states, Maharashtra and Bihar, hold elections within 16 months.

“It’s the first socialist budget of the reform era that started in 1991 -- not in terms of squeezing the rich, but in terms of really increasing outlays for welfare programs and public investment in infrastructure,” Rangarajan said. “The politics has been absolutely central to the economics.”

To contact the reporter on this story: Cherian Thomas in New Delhi at Cthomas1@bloomberg.net.

Last Updated: July 7, 2009 01:22 EDT