India's annual inflation rate hit 4.89 percent in mid-February, the highest in more than eight months and just below the Reserve Bank of India's target of 5 percent for the fiscal year ending March 31.

"One of the reasons why inflation is still a threat is because of food price inflation," Chidambaram told businessmen three days after he unveiled the 2008/09 budget.

"If we grow enough food to feed our people, we are insulated from world prices, but if we are dependent on imports we are subject to world prices."

He said world prices of wheat had increased by 88 percent since April 2007 and those of rice by 15 percent.

India's food output has failed to keep pace with the demands of its 1.1 billion population, most of whom rely on the land for all or part of their livelihoods.

Stagnant farm growth has widened an already yawning wealth gap between city and village.

At the same time, a jump in global prices of farm commodities has made importing staples a costly and politically damaging exercise and contributed to a spike in local food prices.

"Taking all this into account, we came to the conclusion that the distress of the farmers calls for an unorthodox response. And the response was the farm loan waiver," Chidambaram said.

The finance minister announced in Friday's budget a controversial plan to write off $15 billion of small farmers' debts to banks in a move analysts say is aimed at wooing voters ahead of elections due by May 2009.

Chidambaram added the government would step in if there were signs that growth in some sectors of the economy was flagging.

The Indian economy is the third largest in Asia and the fastest growing major one in the world after China.

Gross domestic product grew at 9.6 percent in the fiscal year 2006/07 and is on course to slow slightly to an estimated 8.7 percent in the year which ends on March 31.