Though the government is confident it will be able to bear the full cost of the Seventh Pay Commission (SPC), the maths looks daunting. The 0.46% of FY17 GDP that will to be borne by the central government – the rest will be part of the railway budget – does not include the arrears for January to March 2016, so the total cost will be 0.58% of GDP. There is an additional cost of higher salaries to teachers, for instance – while this is not a part of the formal government salary structure and so does not reflect in the SPC numbers, it will be seen in the form of higher outgoes for the education budget; it is difficult to estimate this number, nor is it clear whether the adjustment will take place in FY17 or FY18. Add to this the 0.16% needed for bank recapitalization and we’re talking of an additional expenditure of 0.74% of GDP. Once you add the costs of pay commissions of various state governments, the final cost to the economy could be 2% of GDP – credit rating agencies will factor in that while rating the country.
Unlike in FY16, finance minister Arun Jaitley may not have the luxury of higher taxes afforded to him because of sharply reducing crude oil prices – he could, due to this, levy higher taxes on petrol and diesel while allowing consumer prices to fall. Taken together with the petroleum duties, hiking duties on the automobile sector to earlier levels netted Jaitley around Rs 45,000 crore or 0.3% of GDP. In normal circumstances, curbing growth in government expenditure would be the way out, but given weak private investment, that would not be prudent. Telecom auctions have been seen as a way out in the past, but there is just that much they can give, plus with a shortfall in disinvestment targets this year, there is a possibility that auctions may be held before March, limiting the scope for another round. That means Jaitley has to do very aggressive disinvestment along with cuts on wasteful expenditure on subsidies – that is, Aadhar-based cash transfers have to be rolled out by early FY17 to eliminate the waste in food subsidies. Otherwise one of Jaitley’s impossible trinity – lowering the deficit, hiking government salaries and maintaining a high capex – will have to give.