The recommended 23.55 per cent hike in remuneration for central government employees, if fully implemented, will add to the challenges the government faces in achieving its fiscal consolidation target, Fitch Ratings said.
"The acceptance of the recommendations will have a significant impact on the government's wage bill," Fitch Ratings said in a statement. The suggested wage increase by the 7th Pay Commission, if accepted, will come into effect from January 1, 2016. The hike is less than the 40 per cent that was implemented after the last Pay commission in 2008.
"On its own, the pay rises would increase the central government's wage bill by around 0.5 per cent of GDP," Fitch said.
"It is important to note that this would also likely affect state government finances as they would be inclined to follow suit."
The government has earlier set a target of bringing down fiscal deficit to 3.5 per cent of GDP in 2016-17, from 3.9 per cent in 2015-16.
"As such, the planned wage increase is sufficient to add substantive challenges to achieving the planned medium-term consolidation targets," it said. The government, Fitch said, could seek to cut expenditure in other areas.
There may be some room to rein in the subsidy bill, it added. "But the government may find cuts in capital expenditure undesirable as investments are planned to play a key role in its efforts to stimulate the economy," it said.
The realisation of medium-term consolidation targets may depend on the government mobilising higher revenues. Fitch said an expected pick-up in real GDP growth will help, and increasing government employee wages should stimulate consumption.
"The government is also rolling out a number of reforms to improve business environment, but there has yet to be any reform or policy initiatives that Fitch expects would lead to a structural increase in government revenues," the statement said.
Despite the challenges, there is no indication that the government will not achieve its short-term 2015-16 fiscal deficit target.
"However, the government could yet amend its medium-term targets and further delay achieving a deficit of 3 per cent of GDP currently targeted for 2017-18," it said, adding that the fiscal consolidation plan was postponed by one year in the last Budget.
Delaying an improvement in India's fiscal position would underscore a longstanding weakness for the sovereign credit profile, it cautioned.
The general government deficit that includes the budgets of the central and state governments, is above 6 per cent of GDP while the general government debt burden of close to 65 per cent of GDP is the highest of all 'BBB-' rated countries. The 'BBB' category median is 43 per cent of GDP.
