An employee poses with the bundles of Indian rupee notes inside a bank in Agartala, India, Aug. 22, 2013. Reuters/Jayanta Dey/Files

(Reuters) - India should increase public spending to boost economic growth in the medium term as there have been no signs of private investment picking up, chief government economic adviser Arvind Subramanian said on Friday.

India has had two successive years of below 5 percent economic growth and is still recovering from its worst slowdown since the 1980s, despite Prime Minister Narendra Modi's vows to put the country back on a high growth path.

"To revive growth going forward, public investment may have to play a greater role to complement and crowd-in private investment," Subramanian said.

"Consideration should be given to... finding the fiscal space to finance such investment."

Subramanian, a former U.S.-based economist who joined the finance ministry in October, will help Finance Minister Arun Jaitley design the first full-year budget of the new government that swept to power in May.

Economic growth expanded by 5.3 percent in the September quarter from a year earlier, and India is expected to grow 5.5 percent in the current financial year that ends in March, a finance ministry report said on Friday.

Still, weak consumer sentiment, high interest rates and lack of investment have dampened sentiment in Asia's third largest-economy.


Subramanian said India will have to review all revenue and spending estimates for a growth revival that is supported by higher public spending.

After the finance ministry's mid-year economic review was released, Subramanian said India needs to re-evaluate its private sector-led infrastructure model.

The report also said that India faces a "major challenge" in achieving its 2014/15 fiscal deficit target of 4.1 percent of gross domestic product.

However, Subramanian said the government is committed to achieving its fiscal deficit target and will have to consider all measures including spending cuts.

Recent economic data has built a case for an interest rate cut. Industrial output contracted in October in its worst performance in three years, while retail inflation has continued to decline.

However, the finance ministry report said interest rates are expected to remain unchanged until the end of March.