The 23.5% average hike in central government employees’ salaries could push up the government’s wage bill, including arrears, by an estimated Rs 1.14 lakh crore in 2016-17, experts said on Wednesday.
But the Centre is confident of containing the fiscal deficit -- a measure of how much the government borrows to fund its expenses -- within the budgeted 3.5% of gross domestic product (GDP).
Keeping the fiscal deficit within budgeted limits is crucial to keeping interest rates under check.
Higher government borrowing can potentially affect the funds available for banks to lend to companies and individuals. This, in turn, can prompt banks to raise interest rates.
“The fiscal impact will not be much as it (the money) has been provisioned for in the budget…this will be positive for the economy as it will support domestic consumption and with Brexit and overall global uncertainty, this could spell good news,” said DK Joshi, chief economist at Crisil.
Finance minister Arun Jaitley said that excluding payment on allowances, the total outgo during this year including arrears from January 1, 2016, will be Rs 84,933 crore in 2016-17.
The government will take a call on the commission’s decision on allowances after a secretaries’ panel submits its report.
The Centre’s total salary and allowances bill for 2016-17 is Rs 1.84 lakh crore, 55% higher than last year. The higher bill partly factors in the anticipated increase in employee remuneration.
In recent years, India’s precarious public finances have attracted unsparing criticism from global credit rating agencies amid a looming risk of downgrade of sovereign ratings.
Analysts are watching how the government manages its public finances in the wake of off-budget expenses such as those relating to one-rank-one-pension (OROP) scheme for defence personnel and expected pay commission payouts.
“We believe impact on inflation could be temporary…past data suggests inflation tends to rise following pay commission recommendations and then declines,” said Soumya Kanti Ghosh, chief economic adviser, State Bank of India.
Unlike previous years, the commission-recommended salary hikes this time will not carry a major “arrears” burden as it will be implemented on a “current” basis and not retrospectively. The new salaries will come into effect from January 1, 2016.
Previous such comprehensive pay hikes had worsened the government’s finances.
The sixth pay commission recommended salaries, which was notified 2008-09 but kicked in retrospectively from January 1, 2006, saw pay cheques get bigger by an average 35%, costing the government an extra R17,000 crore annually.
The employees also got one-off arrear payments of about R27,000 crore.
“There will be no significant impact as it is mostly been provided for in the budget, so only an incremental amount is required and that should easily come from taxes and sale of spectrum among other things,” Saugata Bhattacharya, chief economist, Axis Bank said.