* Top Indian-born economists may advise new government
* Bhagwati calls for more foreign investment, trade
* Says spending must be cut if Modi comes to power
* Says Modi should stand by central banker Rajan
An eminent Indian-born economist positioning himself to advise Narendra Modi if the opposition leader becomes India's next prime minister would urge him to allow more foreign investment and trade to spur slow growth and curtail government spending.
Modi is favourite to become prime minister for the Hindu nationalist Bharatiya Janata Party (BJP), which has a strong lead in opinion polls. He is running on a platform of reviving an economy going through its worst slowdown since the 1980s.
For the first time addressing his potential role in a Modi government, Jagdish Bhagwati, known as the most famous living economist never to win a Nobel prize, told Reuters he saw himself on an external council advising the prime minister.
"I'd be glad to chair something like that, and I think that's what they might do," Bhagwati said.
In a possible sign of the influence of Bhagwati's brand of free-market thinking, he said his pro-growth protege Arvind Panagariya was a strong candidate for the more hands-on role of chief economist to the prime minister, if Modi is elected.
"The kind of person they would want, and I think correctly, as a chief economist would be my co-author, who is about 60 compared to my 80. I don't have that kind of energy any more," Bhagwati said, adding that people close to Modi had approached him to ask about Panagariya's suitability for the role.
A BJP spokeswoman said she was not aware of any plans to invite Bhagwati and Panagariya to advise.
If the two Columbia University economists did end up working for Modi, it could put them at odds with more protectionist factions in the party and its allies.
"To enhance growth, he will need to promise that India will open more to trade and FDI (foreign direct investment)," said Bhagwati.
Foreign Retailers Hampered
Bhagwati urged the next government to position India as a trading power, seeking to enter, on its own terms, regional pacts such as the Trans-Pacific Partnership being negotiated between the United States and East Asian nations.
He also expected Modi to move decisively to attract foreign investment, and that he would eventually implement a policy opposed by his party - to allow foreign retailers like Wal-Mart and Tesco free access to Indian markets.
"He will do it, but he can't do it right away, because you can't go against your party. It's impossible, he is not a stupid man," he said, adding that Modi's room for manoeuvre would depend on the size of a potential victory.
The BJP spokeswoman said the party had made its position on the issue clear in its election manifesto, which said that it welcomed FDI, but not in retail.
Restrictions introduced by the Congress party government include tough local sourcing rules that have put most foreign companies off taking the plunge into India's retail sector.
Bhagwati's most urgent policy prescription, however, is to slow government spending, which he blames for high inflation.
"At the beginning he (Modi) has got to say 'look, we're going to bring inflation under control' ... There is no escape from turning off the spigot."
Bhagwati said he expected Modi to keep Reserve Bank of India governor Raghuram Rajan, whose hawkish use of monetary policy to target stubbornly high inflation has led some in the BJP to call for his ouster.
"On the financial side his best bet is to stick with Raghu Rajan," Bhagwati said. "We really need to 'brake' the economy, try to put a stop to its fiscal profligacy."
Bhagwati's close friend, current Prime Minister Manmohan Singh, ushered in India's first round of economic reforms in 1991, based in part on ideas they had discussed as students together at Britain's Cambridge University in the 1950s.
But Bhagwati said that as prime minister over the past decade Singh had failed to put his ideas into practice - something he expected to change if Modi wins.
Congress used public spending to steer the economy through the 2009 crisis, but critics say it was slow to rein it in, leading to high inflation and a large fiscal deficit.
Bhagwati had a public academic spat over India's welfare policies with Nobel laureate Amartya Sen, who was influential in the current government.
While both men agree on the need for social spending and economic growth to fight poverty, Bhagwati accuses Sen of not backing reforms needed to stimulate growth, including in tax, labour, privatisation and foreign investment.
"This time I have a much greater sense of excitement. This time I know that these ideas that correspond to mine are to be implemented, as they have been implemented over the years in Gujarat," said Bhagwati, born to a Gujarati family in British India.
Gujarat has been governed by Modi since 2001. Modi's record of overseeing fast growth, new infrastructure and job creation there is a key part of his appeal to voters.