(Adds details, comments from economists, context)

By Anant Vijay Kala, Mukesh Jagota and Prasanta Sahu

NEW DELHI--India's finance minister walked the tightrope Thursday, raising social welfare spending to please voters ahead of upcoming elections but reducing subsidies and increasing taxes -- especially for the rich -- to try and stave off downgrade threats from ratings agencies.

Presenting the federal budget for the year starting April 1, P. Chidambaram also tried to ease fears that the government would stray from its recent push to improve its finances, saying he intends to stick with the government's fiscal deficit aim of 4.8% of gross domestic product.

He added that he expects the deficit -- one of the main reasons cited by ratings agencies in repeated debt downgrade warnings -- to be 5.2% in this year through March, an improvement over his previous forecast of 5.3%.

The budget for the next fiscal year increased spending by 16% to 16.6 trillion rupees ($307 billion), with a focus on the education, health and other social sectors, as well as on defense.

It earmarked 100 billion rupees for its upcoming Food Security Bill, which aims to provide food grain at cheap rates to nearly 70% of India's 1.2 billion population.

The government is banking on revenue from higher taxes on the rich and from companies, money from the sale of stakes in state-run companies as well as the auction of telecom bandwidth to help fund the increased spending.

In another effort to raise revenue, the budget proposed raising a factory gate tax on sports utility vehicles sold to private individuals and increasing the import duty on high-end cars.

The budget imposed a 10% surcharge -- a tax levied on tax -- on nearly 43,000 people who have reported earnings of more than 10 million rupees($184,000) a year.

"I am confident that, when I ask the relatively prosperous to bear a small burden for one year, just one year, they will do so cheerfully," Mr. Chidambaram said in parliament.

He also increased an additional tax on companies with an annual taxable income of more than 100 million rupees ($1.83 million), doubling the rate to 10% for local companies and raising the rate for foreign firms to 5% from 2%.

Mr. Chidambaram estimated that the additional surcharges, and all other tax initiatives -- such as a withholding tax of 20% on profits distributed by unlisted companies to shareholders through a buyback of shares -- will help the government raise a total of 180 billion rupees ($3.3 billion).

Stock markets fell in response to the budget, with the Bombay Stock Exchange's benchmark S&P BSE Sensex ending 1.5% -- due mainly to the additional taxes on companies and wealthy individuals.

India's economic growth has slowed to its weakest in a decade, leading ratings agencies to warn that India's sovereign rating could be relegated to non-investment grade, or junk, status.

Flagging current account deficit as a major concern, Mr. Chidambaram said that attracting foreign investment - which is used to partially bridge the gap - is not a choice, but a must.

Since taking office in August, Mr. Chidambaram has fast-tracked reforms in an effort to boost economic growth back to about 8%, which observers say is necessary to create jobs in a country where 13 million people reach working age every year.

The measures include the easing of foreign investment rules in the aviation, retail and broadcasting sectors, as well as partially deregulating the discounted, state-controlled price of diesel.

Standard & Poor's, one of the agencies which has been warning India of a possible credit downgrade, Thursday termed the federal budget for the year beginning April 1 as "relatively prudent," but it said the government could exceed its budgeted expenditure.

It said that the budget has no rating impact.

Also Thursday, government data showed that India's GDP grew 4.5% in the October-December period -- far lower than the previous quarter's 5.3% growth.

Analysts Thursday welcomed the budget's commitment to fiscal targets, not all were convinced.

Economists say the pressure on the government to dole out populist incentives will rise with several state elections scheduled for later this year, and federal polls set for 2014.

"With a general election not more than a year away, political pressure from within the Congress Party [which leads the ruling federal alliance] may well have had an influence on the makeup of the finance minister's budget," said Robert Prior-Wandesforde, an economist at Credit Suisse.

The Associated Chambers of Commerce and Industry, an industry lobby group, lauded the budget for encouraging investments in manufacturing and infrastructure development while presenting a credible fiscal consolidation plan.

-Romit Guha and Saptarishi Dutta contributed to this article.

Write to Anant Vijay Kala at anant.kala@dowjones.com, Mukesh Jagota at mukesh.jagota@dowjones.com and Prasanta Sahu at prasanta.sahu@dowjones.com

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