India's top economic adviser has called on the government to open up the vast retail sector to foreign investors to cut supply bottlenecks and ease stubbornly high inflation.

Large retailers such as US-based Wal-Mart and France's Carrefour have been lobbying the government to open the consumer market to foreign chains as they seek to grow outside saturated Western markets.

"We recommend that foreign direct investment in multi-product retail should be allowed," the government's chief economic adviser Kaushik Basu said. "This can be an inflation-busting measure."

Foreign groups such as Wal-Mart can only operate as wholesalers and must partner with domestic firms to sell in India, amid fears that big Western retail chains could swamp small family-run stores.

However, Basu said opening up the sector posed no danger to small retailers. "The (retail) cake is so big and it will continue to grow." He was reporting recommendations of an inter-ministerial group set up in February to look at how to reduce inflation, now close to nine per cent, despite nine interest rate rises in 15 months.

The issue of fully liberalising the retail sector has been under debate for years but opinion in the left-leaning Congress government appears to be coalescing in favour of such a step as early as next year.

Tight foreign investment rules aim to protect small stores in the sector where less than 10pc consumers shop in big Western-style stores.