Salary hike: Rating agencies warn deficit

New Delhi : Rating agencies and brokerages on Friday said the proposed 23.6 per cent hike in salaries and pensions of government employees could hurt India's finances. Rating agencies such as Fitch and Standard & Poor's as well as brokerages like Citi warned that implementation of the Seventh 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. However, expressing confidence that the fiscal deficit target will be met, Economic Affairs Secretary Shaktikanta Das said the Seventh Pay 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.