The 7th Pay Commission (SPC) said the government’s size vis-à-vis the GDP will “stay roughly constant over the medium term” but an analysis by FE showed the pay, allowances and pension (PAP) of government staff (Centre plus states) could rise to10.3% of GDP in FY17 from 7.88% budgeted for FY16 if all states follow the award promptly. Though this includes the business-as-usual rise (the budget projections are usually underestimates), the total PAP increase for government staff over a year would be a whopping R5 lakh crore if the FY16 budget estimate is compared with the SPC prediction for FY17.
The 6th Pay Commission had also inflicted similar financial pain (see chart) and resulted in the combined fiscal deficit of the Centre and states jumping from a benign 4% of the GDP in FY08 to 8.3% in FY09 and 9.3% in FY10.
The SPC, which had estimated a Rs 1-lakh-crore increase in the Centre’s PAP expenditure in FY17, had seen the Centre’s budget projections for FY16 PAP bill turning underestimates. While the commission said the states, which have successfully maintained fiscal consolidation, will be able to absorb the impact of additional expenditure on PAP, it had cautioned “the states to calibrate the speed and the extent of their own awards”.
Though most states are in a relatively better fiscal condition than the Centre, the states’ PAP bill is more than double the Centre’s — FE has estimated that the states’ PAP expenditure, assuming salary and pension increases similar to the SPC award are announced by all states, could be over Rs 10 lakh crore in FY17, up from a likely Rs 7.6 lakh crore in the current year. The Centre’s PAP spending could be Rs 3.5 lakh crore in FY16 and Rs 5.35 lakh crore in FY17.
Analysts were concerned about the impact of the SPC award on India’s government finances and that the award would act as a constraint for the government to stick to the fiscal consolidation road ma. Standard & Poor’s Rating Services India sovereign analyst Kyran Curry told PTI that the award “in isolation, will not impact India’s rating”. The US-based S&P assigns the lowest investment grade rating of ‘BBB’ to India with a stable outlook. As per the latest fiscal consolidation roadmap for the Centre, its fiscal deficit is to be brought down to 3.9% of GDP in FY16, 3.5% in FY17 and 3% in FY18.
Fitch ratings said, “Despite the challenges, there is no indication that the government will not achieve its short-term FY16 fiscal deficit target. However, the government could yet amend its medium-term targets and further delay achieving a deficit of 3% of GDP, currently targeted for FY18… Delaying an improvement in India’s fiscal position would underscore a longstanding weakness for the sovereign credit profile. The general government deficit that includes the budgets of the central and state governments is above 6% of GDP while the general government debt burden of close to 65% of GDP is the highest of all ‘BBB-‘ rated countries. The ‘BBB’ category median is 43% of GDP.”
According to the finance ministry’s medium-term expenditure framework statement tabled in Parliament in August, the Centre’s salary and pension expenditure will rise by 15.8% and 16%, respectively, in FY17 and FY18.
From the pre-sixth pay panel (FY08) level of Rs 74,647 crore, the pay and allowances of the central government staff would have increased nearly five times to Rs 3.6 lakh crore in FY17 with the impacts of the sixth and seventh commissions. The pension, roughly half of the pay and allowances now, too would have risen more than five times from the pre-sixth panel level of Rs 33,735 crore to Rs 1.76 lakh crore.