India has announced a huge rise in defence spending in its budget for the new financial year.

Finance Minister Yashwant Sinha told the lower house of parliament that defence spending for the year would rise by 28.2%.

It would rise to 585.87bn Rupees ($13.62bn) up around $3bn from last year's 456.94bn Rupees.

"This represents the largest-ever increase in defence budget in a single year," Mr Sinha said in his budget speech.

The announcement was met with concern in neighbouring Pakistan.

A foreign office spokesman in Islamabad said the rise in defence spending was further proof of India's "hegemonic deisgns."

"New Delhi has already amassed a huge arsenal of nuclear and conventional weapons far beyond its legitimate defence needs," he said.

Defence spending had been expected to go up because the fighting last summer in Kashmir with Pakistan-backed forces underlined the need for all manner of new military equipment, from winter boots to spy satellites.

Mr Sinha said Indian troops had demonstrated they were "second to none in the world" during that conflict.

"We shall not shrink from making any sacrifice to guard and protect every inch of our beloved motherland," he said.

Foreign investment limit raised

Mr Sinha also announced that the cap on equity holdings in domestic companies by foreign portfolio investors would be raised from 30% to 40%.

"I propose to raise this limit to 40% to allow Indian companies to take advantage of foreign capital," he said.

Mr Sinha said the fiscal deficit for the year ending 31 March was expected to increase to 5.6% of gross domestic product, exceeding the government target of four percent.

"This year has been marked by expenditure overruns and deficit in revenue collections," he said.

"We must put our fiscal house in order. This means hard decisions and sacrifices," Mr Sinha warned.

To curb public spending, Mr Sinha said the level of state subsidies had to be reviewed and government downsized.

Task of banishing poverty

The Finance Minister pledged to pursue the strengthening of agriculture and to nurture what he called the revolutionary potential of information technology.

He was attempting, he said, to put India on a path of annual growth of 7% to 8% to help in the task of banishing poverty in a decade.

For all the challenges that he'd acknowledged, Mr Sinha also maintained that many aspects of the economy had already seen improvement, including the holding down of inflation, the turn-around in exports, improved reserves and investor confidence.

The budget has not been well received on the markets.

The main Bombay Stock Exchange (BSE) index plunged more than five per cent.

The BBC's Sanjeev Srivastava in Bombay says sentiment has been affected by a lack of action to cut back subsidies, and the imposition of tax on firms paying dividends, a rise in personal income tax and a tax on export earnings.