Pay hike: Experts warn on deficit; govt confident of targets

Rating agencies and brokerages today said the proposed 23.6 per cent hike in salaries and pensions of government employees could hurt India's finances even as the Centre expressed confidence that the fiscal deficit targets will not be breached.
Minister of State for Finance Jayant Sinha said he was confident that the government will stick to fiscal consolidation laid out in the Budget.
However, rating agencies such as Fitch and S&P as well as brokerages like Citi warned that implementation of 7th Pay Commission's recommendations will impact the deficit.
Fitch Ratings said the Rs 1.02 lakh crore additional burden on the Centre, if the recommendation are implemented in toto, could challenge the government's goal of achieving a fiscal deficit of 3.5 per cent in 2016-17 unless expenditure is cut or revenues raised.

Standard & Poor's said the implementation of Pay panel recommendations will "put pressure on the fiscal position of the government and would act as a constraint to stick to the roadmap for fiscal consolidation".
Citigroup too sounded the warning that if the fiscal deficit target is achieved through a cut in public investments, it could offset the gains on economic activity somewhat.

Expressing confidence that the fiscal deficit target will be met, Economic Affairs Secretary Shaktikanta Das said the Commission's report was expected and the government knew it will take effect from January 1, 2016.
"So this was something which was expected. Now the content of the report obviously the government was not aware. But government always has broad estimation of what is going to be the impact of a new pay commission recommendation and accordingly internally a kind of risk matrix is prepared," he said.

Most of the expenditure because of implementation of the report would come in next financial year, 2016-17, he added.
"So, government will deal with the situation. We will work out our numbers," he told CNBC TV18. "So far as fiscal consolidation roadmap, fiscal roadmap is concerned, that will be maintained."
The recommendations that will benefit 47 lakh central government employees and 52 lakh pensioners, will lead to an additional outgo of Rs 73,650 crore from the Union Budget and Rs 28,450 crore from Railway Budget.
Das said the government had in the current financial year undertaken a slight expansion in fiscal deficit mainly for infrastructure projects.

The government, Das said, "will not like to have any
fiscal slippages just because that has got several consequences which government is very much aware of".
India Ratings said the Pay Commission award will be a demand booster to the economy, but may pose serious challenge to the government's fiscal consolidation path.
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"The proposed pay rise poses a risk to fiscal health ... If the recommendations are adopted, they are likely to have a significant negative fiscal impact," economists at the foreign brokerage Standard Chartered said.
They said the 23.6 per cent hike in 47-lakh strong Government employees' wages and a massive rise in pension for another 52 lakh are negative for sovereign risk profile but ruled out an immediate negative rating action by agencies.

Singaporean brokerage DBS described the pay panel report as a "fiscal headwind" because of almost 0.5 per cent impact on fiscal math which it poses. In absolute terms, the recommendations, if implemented, will lead to an extra burden of over Rs 1 trillion on the already stretched exchequer.
British brokerage HSBC said the recommendations are higher-than-expected and come at a time when the Government has affirmed its commitment to gradually reduce fiscal deficit to 3 per cent of GDP. It said fiscal impact of the wage hike can be absorbed by upping divestments, initiating food subsidy reforms and streamlining expenditure.

"The Government can still make possible the 'impossible trinity' of meeting three fiscal objectives simultaneously -- higher wage payout, fiscal consolidation and strong capex," HSBC said in a note.
The alternatives available to meet the trinity before the Government require hard work, it said, elaborating that reforms in food subsidy can potentially help save 0.2 per cent of GDP, expenditure management can help with another 0.2 per cent while higher divestments can help with 0.2 per cent.
"If Government compromises on capex or leaves its fiscal stance too loose, the gains in growth could quickly translate into inflation," it said, stressing that the house rent allowance, which is set to be increased, has a weight of 10.1 per cent in the retail inflation basket.