Rudyard Kipling, the author of The Jungle Book, likely invented the name. It's possible he chose it for its sound and rhythm, as it fits well with the playful and carefree nature of the character.
Some speculate that the name might be derived from the Hindi word "balu," meaning "sand," which could relate to Baloo's laid-back and relaxed nature. However, this connection is not confirmed by Kipling or any other reliable source.