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Wage hike: Key points

The Sixth Pay Commission, recommended salary increases for central Govt workers costing 125.61 billion rupees ($2.9 billion) for the fiscal year 2008/09, plus 180.60 billion rupees in backpay to January 2006.

india Updated: Aug 14, 2008 17:04 IST

Pay panel, known as the Sixth Pay Commission, recommended salary increases for central government workers costing 125.61 billion rupees ($2.9 billion) for the fiscal year 2008/09, plus 180.60 billion rupees in backpay to January 2006.
A cabinet spokesman said there would be an extra burden of 110 billion rupees for the pay increase over and above the recommendations of the pay panel and that 40 percent of the backlog wages would be paid this fiscal year.
Finance Minister said pay increase was factored into this year's budget and deficit target for the year would be met.

Commentary:

Rupa Rege Nitsure, Chief Economist, Bank of Baroda, Mumbai:

"If one takes into account various revenue expenditure and expenditure on account of off-budget liabilities, I agree with Prime Minister's Economic Advisory Council's report that the fiscal deficit could be 5 per cent of GDP instead of targeted 2.5 per cent of GDP.

"That certainly means that India's sovereign risk rating will be under strain and also this will have liquidity enhancement effect because the RBI is on the one hand trying to control growth of consumption expenditure. This combined with this year's softer tax regime would add to liquidity overhang in the months to come and that means in the remaining part of the year again aggressive monetary tightening cannot be ruled out.

"I feel that another 50 bp hike in CRR (cash reserve ratio) and 50 bps hike in repo rate is my expectation until March 2009."

Sonal Varma, Economist, Lehman Brothers, Mumbai:

"Details are still coming in, but from the looks of it the pay and arrear hikes are in line with what we were estimating. Taking into account the pay hikes, farm loan waiver and higher subsidies, we expect the centre's fiscal deficit at 4.3 per cent of GDP versus the government's target of 2.5 per cent of GDP. This news does not change our policy call that the RBI is done with hiking repo rates, but we still expect another 25 bp CRR (cash reserve ratio) hike before September 2008."

Shubhada Rao, Chief Economist, Yes Bank, Mumbai: "We had looked at on- and off-budget items to go to 7 per cent including pay commission, farm debt waiver and oil package. Additional fertiliser subsidy may put pressure on this number of 7 per cent.

"Given this, there will be a wider fiscal gap and we may see it being bridged through small savings. The RBI may continue to issue more of 91-day treasury bills to bridge the fiscal gap but additional issuance of dated securities is not clear at this moment."

Han-Sia Yeo, Strategist, Bank of America, Singapore:

"The wage adjustment is expected. In tightening monetary policy in July, the RBI has flagged the wage hike as one of the factors justifying a tighter policy stance. The fiscal deficit target will be under pressure but I don't expect the outlays to have a significant impact on inflation."

NR Bhanumurthy, Economist at Institute of Economic Growth, New Delhi:

"There is no doubt about the fiscal impact on government finances and on the deficit. The government will have to resort to extra borrowing or undertake stake sales in state run companies otherwise it is very difficult to bridge the gap."

Abheek Barua, Chief Economist, HDFC Bank, Delhi: "This is just a net addition to the fiscal deficit. So one has to see what kind of additional resources the government gets can get."

"Prima facie, this would put an upward pressure on interest rates because it translates into higher borrowing. People had sort of factored in a pay commission related transfer, so I don't see rates going up sharply."

Market Reaction:

10-year benchmark bond yield <IN082418G=CC> briefly rose 2 basis points to 9.16 per cent but then retreated to 9.11 per cent.
Benchmark stock index <.BSESN> extended losses slightly to -2.2 per cent on day but now back at -1.3 per cent on day.

Links: Output: Ministry of Statistics and Programme Implementation website http://www.mospi.nic.in

Background:

Analysts have said the wage increases could derail efforts to tidy up public finances and could widen federal fiscal deficit, which the government aims to limit to 2.5 per cent of gross domestic product in 2008/09, down from 3.1 per cent in 2007/08.
A government panel said on Wednesday the budget deficit target for 2008/09 would be exceeded and serious fiscal risks were arising from growing off-budget liabilities estimated at 5 per cent of GDP.
The pay round comes roughly once a decade and the previous one in 1997 raised salaries for federal employees by nearly 40 per cent, prompting many state governments to follow suit and blowing the combined state and federal deficit to nearly 10 per cent of GDP.
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