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(Repeats story sent late on Thursday)
* Budget to keep 2014/15 fiscal deficit to 4.1 pct of GDP
* Targets 7-8 pct economic growth in 3-4 years
* Aims for deal with states on services tax by December
* Lifts caps on FDI role in defence, insurance to 49 pct
* Ratings agency criticises lack of detail
By Manoj Kumar and Suvashree Dey Choudhury
NEW DELHI, July 10 (Reuters) - India's new government onThursday unveiled a first budget that seeks to revive growth andcurb borrowing, but left open questions on how it will reducethe fiscal deficit and restore investor confidence.
Expectations had been high that Prime Minister Narendra Modiwould use India's strongest election mandate in 30 years to takeradical steps comparable to the 1991 market reforms thatunleashed an era of high economic growth.
After two weak years, the government announced steps toboost capital spending in Asia's third-largest economy andreassure foreign investors that they will get fair treatment.
Yet Finance Minister Arun Jaitley stopped short of haltingretroactive tax claims against foreign investors. Britain'sVodafone said in response it will pursue its fightagainst a years-old $2.2 billion charge.
"We shall leave no stone unturned in creating a vibrant andstrong India," Jaitley said, promising to raise the pace ofeconomic growth to 7-8 percent in three to four years from lessthan 5 percent now.
Jaitley, 61, told lawmakers he would uphold the "daunting"fiscal deficit target for this year inherited from the lastgovernment - 4.1 percent of gross domestic product - butadmitted that this would be a challenge.
"The intent appears to be there, but the measures have notbeen really thought through," Atsi Sheth, Moody's sovereigncredit analyst for India, told Reuters.
Standard & Poor's, which has long warned India that it maylose its investment grade rating unless the government worksharder to balance its finances, said the budget did not changeits assessment.
"I have no authority to rate ratings agencies, but I'll onlytell them to be a little more realistic," Jaitley said, inreference to criticism that his "cautious" budget did not doenough to reduce subsidies.
Jaitley announced an 8 percent rise in spending, roughlyunchanged after taking inflation into account. The governmentwill also seek to raise a record $10.5 billion from asset sales- four times what the previous government collected fromprivatisation moves in the fiscal year that ended in March 2014.
Among the asset sales would be some holdings in state-runbanks, Jaitley said, but he added the government would keepmajority ownership.
In his two-and-a-quarter hour address, Jaitley raised theminimum income level at which people start paying tax and hikedlevies on cigarettes and soft drinks.
INVESTOR FRIENDLY?
Jaitley announced he would raise ceilings on foreigninvestment in the defence and insurance sectors and loosen rulesfor foreign e-commerce retailers and real estate investors, butstill bar non-residents from taking majority control in projectsto supply the world's largest arms buyer.
Limits on foreign investment in defence and insuranceventures will go up to 49 percent from 26 percent - less thansought by defence contractors to justify sharing technology whenthey locate operations in India.
In another signature initiative, he said the government willapprove a sales tax reform this year to unify India's federalstates into a common market, boosting revenue and making iteasier to do business.
Investors had piled into Indian stocks on hopes that Modi'sleadership and mandate would break a logjam thwarting reformsduring the 10-year tenure of his predecessor, Manmohan Singh,whose coalition government became increasingly divided.
However, the specific measures announced by Jaitley fellshort of bullish expectations and Indian stocks, bonds and thecurrency gave back gains late in the day as doubts aboutthe budget arithmetic emerged.
Andrew Colquhoun, head of the Asia-Pacific Sovereigns Groupat Fitch Ratings, said he was "currently unsure how this (fiscaldeficit target) can be met without further revenue-strengtheningor expenditure-saving measures". Both Moody's and Fitch rateIndia on the bottom rung of investment grade.
'BITTER MEDICINE'
Modi, 63, won election in May with a pledge to create jobsfor the 1 million people who enter India's workforce everymonth. Since taking office, he has warned that Indians shouldexpect "bitter medicine".
Jaitley said he would cut the fiscal deficit to 3.6 percentby 2015/16 and 3 percent the year after.
He found room in the budget for projects to upgrade India'sfood distribution infrastructure, raised subsidies onfertilisers and left diesel subsidies untouched - measures toaid farmers who face poor monsoon rains this year.
Jaitley sought to reassure investors by promising a stabletax regime and saying the government would not "ordinarily"create new liabilities retrospectively, but said several casesin the court will be pursued.
Vodafone and India have been locked in a standoff since thecompany acquired Hutchison Whampoa's Indian mobileassets in 2007.
India's Supreme Court dismissed the demand in 2012, but thegovernment at the time responded by announcing retrospectivelegislation to change the rules.
The British firm said it will "continue the process ofinternational arbitration". ($1 = 60 rupees) (Additional reporting by Kate Holton in London, and the NewDelhi and Mumbai newsrooms; Writing by Douglas Busvine and FrankJack Daniel; Editing by Richard Borsuk and Ruth Pitchford)
