Meeting fiscal deficit not impossible post govt pay hikes: RBI

Stressing on the need to protect the quality of fiscal deficit, RBI Governor Raghuram Rajan today said implementing the recommendations of the 7th pay commission is a hard task but not impossible.
He said the hike in pay of central government employees will not upset the fiscal maths as additional expenditure will be offset by either surplus revenues or cut in spending.
Budgetary tightening from next fiscal onward will ensure that the government stays on the fiscal consolidation road- map, under which it has promised to reduce the deficit to 3.5 per cent in 2016-17 from 3.9 per cent this fiscal, he said.

"It is a difficult task the government has ahead of it, but by no means it is impossible," Rajan told analysts on the customary post-policy review call.
As the government gears up to meet the fiscal deficit target, which has already touched 74 per cent of the full year target as of end October according to government data released yesterday, Rajan warned that the quality of the deficit should not be compromised and greater focus should be laid on capital expenditure rather than meeting current expenses like wages.
"One is the quantity of the deficit which the government tries to keep within in the fiscal consolidation path and the second is quality, which typically would mean that if we spend, we try to emphasise the capital investment part of spending rather than the current expenses... I think the government is intent to protect the capital spending that it has taken up," he said.

In the policy statement issued earlier in the day, RBI said the 23.55 per cent hike in government workers salaries which will drill a hole of Rs 1.02 trillion or 0.65 per cent of GDP will not upset the fiscal math.

"...Its direct effect on aggregate demand is likely to be offset by appropriate budgetary tightening as the government stays on the fiscal consolidation path," it said.
RBI Deputy Governor Urjit Patel, who is in-charge of the
monetary policy department, said the increase in house rent allowance of the 42 lakh Central government employees post-pay panel award would get reflected in the retail inflation data but the RBI would look through it.

Several rating agencies and brokerages have said the proposed 23.55 per cent hike in salaries and pensions of government employees could hurt the Central finances.
Meanwhile, reacting to GDP growth numbers for the second quarter made public yesterday, Patel said 7.4 per cent growth validates that we are on a recovery path.
"The growth number indicates that...Broadly we are on a recovery path which looks to be sustainable and should pick-up pace going forward as more of the capex that the government has programmed in the budget for this year comes in to play," Patel said.
The economy is on track to achieving up to 7.5 per cent growth this fiscal, he added.

"Yesterday's GDP numbers were good news and it establishes a certain confidence in the way the macro economy is evolving this year and likely so also in the next year," he said.