July 6 (Bloomberg) -- India’s Finance Minister Pranab Mukherjee increased spending on roads, power and aid to the poor, setting the agenda for a government that in May won its biggest election victory in two decades.

Unveiling the budget for the year to March 2010, Mukherjee said India’s fiscal deficit is expected to widen to a 16-year high of 6.8 percent of gross domestic product from a revised 6 percent. Indirect taxes will be streamlined through a goods and services tax, he said in his speech in New Delhi today.

Prime Minister Manmohan Singh’s government is spending more to speed up economic growth and reduce poverty in a nation where malnutrition is worse than Sub-Saharan Africa. Stocks and the currency weakened on investor concerns that a ballooning budget deficit may lead to a downgrade in India’s credit rating.

“Growth is important, but fiscal profligacy will eventually undermine it,” said N. R. Bhanumurthy, an economist at the Institute of Economic Growth in New Delhi.

The Bombay Stock Exchange’s Sensitive Index fell the most in three months, declining 3.4 percent to 14,401.28 at 12:50 p.m. in Mumbai. The currency weakened 0.9 percent to 48.31 a dollar.

Prime Minister Singh’s Congress party was re-elected two months ago for a second five-year term with the most parliamentary seats since 1991, reducing the government’s dependence on communist supporters who had previously blocked the sale of state-run companies.

Asset Sales

Mukherjee, 73, said he aims to collect 11.2 billion rupees ($232 million) from asset sales this year by selling stakes in RITES Ltd. and other state-run companies. The government aims to reduce the budget deficit to 5.5 percent of GDP next year.

A goods and services tax will be introduced from April 1 next year, which will subsume all indirect taxes and will levy only value-added production so that manufacturers don’t pay taxes twice. The fringe benefits tax will be scrapped.

Mukherjee, who ran a closed economy as the finance minister in Indira Gandhi’s cabinet from 1982 to 1984, returned to the portfolio this year after serving as the defense and foreign minister during the bulk of Singh’s first five-year term.

Mukherjee also allocated more to ports, power, roads and other infrastructure, where inadequacies shaves about two percentage points off India’s growth rate, according to the finance ministry.

Child Malnutrition

Singh’s government wants to revive growth to a 9 percent pace to help reduce poverty. The World Bank estimates 76 percent of Indians live on less than $2 a day, compared with 72 percent in the Sub-Saharan African nations. According to India’s National Family Health Survey, the child malnutrition rate in India is 46 percent, double that in Sub-Saharan Africa.

“The first challenge is to revert the economy back to the high GDP growth rate of 9 percent per annum at the earliest,” Mukherjee told parliament today. “The second challenge is to deepen and broaden the agenda for inclusive development.”

The $1.2 trillion Indian economy expanded 6.7 percent in the year ended March 31, the slowest pace since 2003.

A report prepared by advisors to Mukherjee on July 2 said the government’s various programs can be sustained only if the economy accelerates and generates higher tax revenues.

Higher revenue is also important to improve government finances and avert a rating downgrade by Moody’s Investors Service and Standard & Poor’s. Moody’s places India’s long-term local currency rating at Ba2, two levels below investment grade. S&P and Fitch Ratings have a BBB- long-term rating on India, their lowest investment-grade level.

“Any downgrade would adversely affect the outlook for foreign investments into the country and hurt growth,” said Chetan Ahya, a regional economist at Morgan Stanley in Singapore.

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

Last Updated: July 6, 2009 03:42 EDT