Why is "Infinite Pikmin" even a problem. Peach's Turnips were never infinite in Mario 2, and she can pull out as many as she wants in SSBM, so why should Oli's Pikmin have to run out. I think he should just be able to pull pikmin out of the ground anywhere he goes, as long as he's on the ground and as long as not too many pikmin are already on the field (I still go by my steadfast 20 Pikmin maximum, with a 100 Pikmin super move.)
Also, about the balance issues.
The only reason it wouldn't be balanced is if the devs said, "Hey, lets make this unbalanced." I happen to think that because Pikmin are so fragile, and because a good portion of Olimar's game is going to be spent picking new ones, it's only fair that they be so damaging in large swarms. This makes the objective of Olimar's opponent very clear, and actually leaves Olimar at a severe disadvantage against players and characters who can abuse his weakness(Pikmin die too quickly), like Cap. Falcon, Sheik, Ganondorf, or Fox, or anyone else with a long-range, low to the ground move.
Also, if you couple that with the fact that hes bound to have some pretty weak-sauce A moves (Owing to his small frame, and the effectiveness of the "Olimar punch" in the Pikmin games), his Pikmin skills would be almost a necessity, because of his reliance on the attack bonuses and B-moves.
I do like tossing Items (I play Peach f'Crissake, it's all I ever do) but I think it would be more interesting and indeed, truer to the original game to have the Pikmin as an army whose size is directly preportional to it's power, but is utterly fragile to balance it out. It would be utterly unique to the Smash experience, and make Olimar very fun to play.