By Abhijit Neogy and Manoj Kumar

NEW DELHI (Reuters) - The government should begin to lower its fiscal deficit in the budget set to be announced next week but should not cut capital spending on infrastructure, a top government panel said on Friday.

The panel also projected economic growth of at least 8.2 percent in 2010/11, from over 7.2 percent forecast for the current fiscal year. Other top officials have said the economy would grow at 8 percent in the year that ends March 2011.

The fiscal deficit, running at a 16-year high of 6.8 percent of GDP this year, threatens to push up long-term market interest rates and constrain the setting of monetary policy, the prime minister's economic advisory council said.

Market watchers say continued heavy government borrowing would crowd out credit to the private sector, drive up rates and add to the government interest burden.

The panel also warned about the spread of food price inflation to the broader economy.

India aims to cut its fiscal deficit to 5.5 percent of GDP for the year that begins April 1, and Finance Minister Pranab Mukherjee is expected to announce a partial roll-back of stimulus measures when he announces the budget for the next fiscal year on Feb. 26.

"Although the large deficits this year and the last year did have a counter-cyclical impact, it is necessary to initiate measures towards fiscal consolidation in the forthcoming budget," the council said in its review of the 2009/10 fiscal year.

The council said by keeping spending and subsidies at current levels, it was possible to cut the fiscal deficit by 1-1.5 percent for the year that ends in March 2011 without hurting economic growth. An improving economy and sales of state company stakes and 3G cellphone spectrum are expected to lift revenue.