Rising Food Prices a concern | Inflation above 5% for february

India needs to be vigilant about rising food prices but achieving a goal of 9 percent economic growth on average over the next few years is feasible, Montek Singh Ahluwalia said in an interview.

Ahluwalia, the deputy head of India's planning commission, said India should consider setting up a sovereign wealth fund to make use of its swelling foreign exchange reserves, although any such move would take time.

Annual inflation accelerated in late February to 5.02 percent, the highest in nearly nine months and above the 5 percent level the central bank wants to contain it at for the fiscal year ending on March 31.

"I think that an inflation rate somewhere between 4.0-5.0 percent, nearer the lower end of that range, is what one can defend. However a lot depends on the composition of inflation," Ahluwalia said in the interview late last week

Prices such as food and fuel should also be kept under "a modest degree" of control, he said. Food prices overseas were rising but the government had taken measures to keep domestic prices under control and internal food stocks were satisfactory.

"So if we have a normal monsoon this year we should not be in difficulty. But constant vigilance is needed and the government gives high priority to this part of the agenda," he said.

The annual southwest monsoon lasts from June to September. Only about 40 percent of farmland is irrigated and the rains can determine spending and consumption patterns in rural areas.

Growth target

India's economy is forecast to grow 8.7 percent in the fiscal year ending March 31, down from an 18-year high of 9.6 percent in 2006/07. Growth in the October-December quarter slowed to an annual 8.4 percent from 8.9 percent in July-September.

The government has a five-year plan with a goal of average growth of 9 percent for the years to fiscal 2011/12, with a target of 10 percent for that last year.

Ahluwalia, one of the top economic advisers to Prime Minister Manmohan Singh, said the target was feasible.

"I agree the next two quarters don't look good for the international economy but I don't think we need to alter our medium-term prospects on that account," he said.

"There are a lot of underlying strengths in the Indian economy that are building up, which augur well for growth."

Ahluwalia supported creating a sovereign wealth fund to earn better returns on India's $300 billion foreign exchange reserves.

"You do want breathing space to manage short-term securities but our reserves greatly exceed what is needed for such management," he said.

"So quite frankly it makes a lot of sense to experiment with foreign wealth funds to earn better returns, but I doubt if we can do that very quickly," he said, adding there were restrictions on how the Reserve Bank of India (RBI) could deploy reserve assets.

Sovereign wealth funds in China, the Middle East and elsewhere have come into existence due to surging oil prices and large U.S. trade deficits. But some U.S. and European policy makers are concerned they could take investment decisions based on political rather than commercial grounds.

"India will probably be viewed much better than many others as a sovereign wealth investor and perhaps we should cash in on that. However, this is an area for the Finance Ministry and the RBI to take a view" Montek said.