"The economy is in a stronger position than ever before," Finance Minister P. Chidambaram told parliament as he presented the left-leaning Congress coalition's budget for the fiscal year to March 2008.

The government, which has pledged to put the "common man" at the top of its agenda, will use tax revenues up nearly 17 percent "to promote inclusive growth, equity and social justice," said Chidambaram.

But quoting India's first prime minister Jawaharlal Nehru, he said: "The main challenge is agriculture -- everything else can wait."

He outlined plans to hike farm output and rural incomes and pledged to wrestle down inflation hovering near two-year highs of 6.6 percent that has badly hit India's poor masses who propelled the government to power in 2004.

Both agricultural production and inflation have become urgent issues with polls looming in India's politically pivotal and most populous state Uttar Pradesh in two months and federal elections most two years away.

The pro-poor tilt of the budget disappointed the share market which like other markets was already reeling from forecasts of a US slowdown. The 30-share Mumbai stock exchange Sensex index plunged 540.74 points or 4.01 percent to 12,938.09, its lowest level in over two months.

Chidambaram displeased some in the business community by taxing stock options and raising the dividend tax.

"The budget is essentially populist, aimed at catching votes," said Surinder Choudhari, head of auto components maker Krishna Fabrications. But India's powerful Confederation of Indian Industry hailed its focus on education and agriculture as "most appropriate."

Chidambaram announced more spending on irrigation, fertiliser subsidies, seed development and cheaper farm credit along with duty cuts on a host of goods including cooking oils to combat inflation.

"There is no death of (agriculture) schemes, no dearth of funds. What needs to be done is achieve the intended outcome," Chidambaram said.

With over half of the 1.1 billion population dependent on the farm sector, low agriculture output has cast a shadow over "the India story" with critics saying the rural poor have yet to reap the fruits of strong economic growth.

In parts of India, the fight for greater economic and social rights has turned violent with leftist rebels staging deadly raids on government targets.

Weaker farm growth was cited as a key factor in data released Wednesday showing that Asia's fourth-largest economy grew by a lower-than-expected 8.6 percent in the third quarter, down from 9.3 percent a year earlier.

Farming is expected to grow just 2.7 percent this year, down from six percent a year earlier. That contrasts with manufacturing growth of 11.3 percent which has become the main driver of expansion.

Chidambaram still forecast, however, that economic growth would hit an earlier estimate of 9.2 percent for the full year.

The government hiked infrastructure spending by 40 percent in a bid to remove transport bottlenecks and improve erratic power supply.

The government is aiming to achieve a "sustainable growth trajectory" of around 10 per cent by 2012, the magic double-digit number economists say is necessary to make a significant dent in poverty.

"Faster growth is essential for faster poverty reduction. There is no other trick to it," Chidambaram said.

Chidambaram hiked education spending by 34 percent, announcing programmes to raise school attendance, build more schools and hire 200,000 more teachers.

India would only be able to benefit from "its demographic dividend" of a young population if they are educated, he said.

It set a target of 3.3 percent for the next financial year, down from 3.7 percent in the current year, slightly better that the 3.8 percent forecast.