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* Jaitley favourite for finance minister, despite setback
* Shortage of experience means fresh faces more likely
* Less ministries mulled for smaller government
By Shyamantha Asokan and Aditya Kalra
NEW DELHI, May 18 (Reuters) - India's prime minister-to-be Narendra Modi was huddled in discussions with close aides and advisers on Sunday, finalising the names of people to join his cabinet and grappling with the crucial decision of who will be his finance minister.
Two days after he won a thumping victory in the general election, there was little clarity about who Modi would include in his team, even in other key portfolios like defence, interior and external affairs.
The alliance led by Modi's Bharatiya Janata Party (BJP) won 336 of the 543 seats in India's lower house of parliament, making it the first time in a quarter of a century that the country will not be led by a coalition government.
One of his most important decisions will be whether to name front-runner Arun Jaitley to the finance minister's post. Jaitley is eminently suited, sources in the BJP said, but he was defeated in his race for a parliamentary seat and that is a minus point.
Yet Jaitley is a former commerce minister, is regarded as a capable administrator, and is one of the few people in the party who has experience but is not too old at 61.
Modi and his inner circle have played their cards close to their chests and are unlikely to reveal who will take senior cabinet posts until a meeting of the BJP parliamentary leadership on Tuesday, one senior party leader said. Modi was considering merging some ministries to streamline government, other sources said.
The meeting is expected to confirm Modi as the party's parliamentary leader, after which he will meet President Pranab Mukherjee to formally start the process of forming the government. He is likely to be sworn in as prime minister this week.
The BJP was last in power 10 years ago, and some of the ministers who served then are now past their sell by date, leaving Modi a relatively small pool of experience at his disposal. On the plus side, the party's runaway success in the election has brought a lot of new faces into the decision-making lower house of parliament.
All government ministers have to be members of parliament, either the upper or lower house, although they have six months to comply. Jaitley remains a member of the upper house.
Like outgoing finance minister P. Chidambaram, Jaitley is a corporate lawyer and a suave English-speaking politician seen as a moderate in the Hindu nationalist BJP. He would be a popular choice with investors.
"It doesn't change the situation all that much," said a senior figure in the party, referring to Jaitley's defeat in the city of Amritsar. "He's already a member of parliament and he is a trusted person for Modi-ji. It's still a strong possibility. Whether he lost is not a big issue."
Another party source concurred he remained the front-runner for finance.
"If you look very carefully we don't have too many options," the source said.
Other sources close to Modi's campaign say the final decision on who will become finance minister has not yet been taken, with other names being mentioned that include Deepak Parekh, the chairman of the Housing Development Finance Corporation Limited, and K. V. Kamath, a former chairman of Infosys and CEO of ICICI, a bank.
Neither has political experience but sources have said Modi may look to competent leaders in the states, or even try to bring professionals into his cabinet.
On Saturday, Jaitley himself was asked about the shortage of experienced hands available and seemed to hint that Modi might draw on younger blood.
"I think you know, politics abhors a vacuum, and when people are given a responsibility they fill in that space that is required, it is only then that people occupy that space," Jaitley told television network CNN-IBN.
Modi, 63, is entering New Delhi's power circle for the first time after running the western state of Gujarat for 13 years. He was named the BJP's prime ministerial candidate last year and ran a stunning election campaign with a tight group of trusted aides, sidelining many senior party leaders.
A stream of BJP dignitaries called on Modi at the Gujarat government's Delhi office on Sunday, and the prime minister elect was due to discuss the cabinet with the head of the Rashtriya Swayamsevak Sangh (RSS), a Hindu nationalist organization that is an ideological parent to the BJP.
Like many of the BJP's top brass, Modi was a fulltime volunteer in the RSS before joining mainstream politics, but his free-market economic vision at times clashes with the organization's India-first leanings.
During a religious ceremony on the banks of the Ganges river in the holy city of Varanasi on Saturday, Modi sat flanked by his closest lieutenants, party president Rajnath Singh and long-term aide Amit Shah.
After Modi, the person who emerged with the most glory in the election was Shah, who ran the BJP's campaign in Uttar Pradesh, where the party won an unprecedented 71 seats out of 80 in the country's politically most important state.
Shah, who served as home minister in Modi's home state of Gujarat, is the new prime minister's most trusted aide and would be an obvious choice for a top job if it were not for one thing - he has three charges of murder against him.
Almost every other major post seems to still be up for grabs, with no clarity yet on who will take over defence, foreign affairs, trade and the home (interior) ministry.
Expectations are that these top jobs will go to seniors in the party, including party president Singh, who is being considered to run the powerful home ministry or defence ministry but may be unwilling to leave his current job.
Sushma Swaraj, who led the opposition in the lower house of parliament for the past five years but is not close to Modi, is also likely to get a top post as is party treasurer, businessman Piyush Goyal.
Modi, who campaigned on promises of "smaller government, more governance," may look at restructuring and merging some ministries, in particular those that deal with energy, BJP sources said. India currently has separate ministries for petroleum, power, coal and renewable energy.
"There will be less number of ministries...that decision should come when the cabinet is decided," said Gopal Agarwal, a member of BJP's executive committee who was until recently the head of its economic cell. (Additional reporting by Nigam Prusty; Writing by Frank Jack Daniel; Editing by Raju Gopalakrishnan)