Feb. 28 (Bloomberg) -- India's government said it will increase investment in power plants, roads and ports to help boost annual economic growth to 10 percent and challenge China as the world's fastest-growing major economy. Stocks rose to a record.

Spending will rise 11 percent to 5.64 trillion rupees ($127 billion) in the year starting April 1, Finance Minister Palaniappan Chidambaram said in his budget speech in New Delhi today. The increase is the biggest in three years and will be partly funded by a higher tax on services such as credit card bills and advertisements, which make up 51 percent of the economy.

India, where ships take 10 times longer to load than in Hong Kong, will raise spending on ports and roads by 20 percent. China draws 10 times more overseas investment than India, which suffers power shortages and transport bottlenecks that have restricted economic expansion to an average of 6 percent since 1980.

``The focus on infrastructure and power is absolutely right,'' said Ravi Sud, vice president in charge of finance at Hero Honda Motors Ltd., India's biggest motorcycle maker. ``India is laying the correct foundations for strong growth.''

The Mumbai Stock Exchange's Sensitive Index rose 88.15, or 0.9 percent, to close at a record 10,370.24. Bharat Heavy Electricals Ltd., India's biggest maker of power equipment, rose 5.9 percent.

The rupee rose to 44.3763 per dollar from 44.4912 yesterday, as overseas investors bought more local stocks.

Budget Deficit

The government's budget deficit will narrow more than expected to 4.1 percent of gross domestic product in the year ending March 31, Chidambaram, 60, said. He projected a 3.8 percent deficit for the next year, the lowest since at least 1990.

The yield on the 8.07 percent bond maturing in January 2017, the most frequently traded security, rose 2 basis points, or 0.02 percentage point, to close at 7.39 percent, according to data compiled by Bloomberg.

India's economy may grow 8.1 percent in the year ending March 31, after a 7.5 percent expansion a year earlier, Chidambaram said. China's economy, the world's fourth biggest, expanded about 10 percent a year in the past three years.

Chidambaram said prospects for the fiscal year starting April 1 are ``just as good, if not better,'' and the government is ``determined'' to achieve a 10 percent growth rate in coming years.

Prime Minister Manmohan Singh, a former finance minister who in 1991 started cutting import tariffs and allowed overseas companies including as Ford Motor Co. to set up factories in India, is targeting a greater contribution from manufacturing to accelerate growth in Asia's fourth-largest economy.

Manufacturing

That may help reduce poverty in a country where a third of the population of 1.1 billion people live on less than $1 a day.

India, which spends a seventh of China's $150 billion investment in infrastructure each year, according to Morgan Stanley, is stepping up spending to boost the share of manufacturing in the economy, currently at about 16 percent compared with China's 39 percent.

Roads are being built at a rate of 4.48 kilometers (2.78 miles) a day, compared with 1.86 kilometers before May 2004, and a 6,000-kilometer expansion project will be completed by June, the minister said. Investment in electricity will rise 39 percent in the year beginning April 1, budget documents show.

India will add 40,000 megawatts of power generation capacity over the next three years, Chidambaram said, a 60 percent increase over the 107,972 megawatts installed since independence in 1947.

Quarterly Growth

India's economy grew 7.6 percent in the three months to Dec. 31 from a year earlier, slowing from an 8 percent pace in the previous quarter, the Central Statistical Organisation said today in New Delhi. Growth slowed after a fire disrupted crude-oil production and natural gas shortages crimped power generation.

The increased spending will be funded from higher tax revenue generated by faster annual economic growth and through borrowing. India's government relies on tax collection and bond sales for additional resources because its communist coalition partners oppose cuts in food and fertilizer subsidies, which account for a tenth of overall spending.

The government today said it plans to sell 1.52 trillion rupees of debt in the year beginning April 1. It has sold 1.21 trillion rupees of bonds this year.

Chidambaram today increased a tax on some services to 12 percent from 10 percent and said more, such as bank cash machines, will attract the levy.

The minister left unchanged the tax rate for local companies at 30 percent and for overseas companies at 35 percent.

Taxation

Last year he cut the rate for local companies from 35 percent to encourage more businesses to pay taxes. Companies contribute a third of the government's tax revenue.

``Given the constraint on resources, the government can't afford another round of cuts in corporate tax rates,'' said D. H. Pai Panandiker, director general at RPG Foundation, an economic policy group in New Delhi.

The government on Jan. 13 scrapped a week-old plan to cut its subsidy bill by 10 percent following opposition from communists, whose support gives Singh's government a majority in parliament.

Chidambaram today said he wants a ``consensus'' from lawmakers on dealing with subsidies.

``It's difficult to balance the compulsions to spend aggressively and cut the budget deficit in the current political setting,'' said Sanjeet Singh, a fixed-income analyst at ICICI Securities Ltd. in Mumbai.

The government is required by law to cut the budget deficit each year by the equivalent of 0.3 percent of GDP, and to eliminate its revenue deficit by 2009, borrowing only to fund investments thereafter.

Standard & Poor's has a below-investment-grade BB+ rating on India's long-term local-currency debt on concern its debt burden is high. It rates China's local-currency debt A-, its seventh- highest investment grade.

``The budget should put the country's deficit reduction effort back on track,'' Chew Ping, New York-based S&P's director of financial services and sovereign ratings, said today. The company won't upgrade India's rating because its public debt burden remains one of the highest'' in the world, he said.

To contact the reporters on this story: Cherian Thomas in New Delhi at cthomas1@bloomberg.net; Anand Krishnamoorthy in New Delhi at anandk@bloomberg.net.

Last Updated: February 28, 2006 08:03 EST