Allaying fears that the Seventh Central Pay Commission’s award will derail the Centre’s fiscal maths, an SBI Research report on Monday projected the fiscal deficit to be contained at the targeted level of 3.5% in FY17, thanks to incremental revenue gain that will nearly offset the Rs 1.02 lakh-crore fiscal impact due to the CPC.
Assuming a nominal GDP growth of 11.5% (as suggested by the 7th CPC), incremental revenue gain is around Rs 80,000 crore, according to the report. In projecting a 3.48% fiscal deficit for FY17, it factored in the Centre likely withdrawing tax incentives given to the corporates the next fiscal year as part of tax rate rationalisation programme, a 14% increase in revenue receipts and a 5.7% increase in total expenditure in FY17.
Also, it projected Rs 10,000 crore savings due to further rationalisation of fuel subsidy as crude prices will likely to remain at current low levels.The SBI Research report also factored in introduction of GST in the year which could boost service tax revenue.
The report said the overall 23.5% increase in the Centre’s salary bill in FY17 would lead to significant improvement in household savings, which will translate to more investment and economic growth.
Separately, India Ratings in a note said that it did not see any immediate threat to inflation due to the award of 7th CPC. Though retail inflation might inch up somewhat due to higher prices of services, impact on wholesale price inflation is likely to be muted due to the counter balance provided by the deflation in commodity prices and the availability of excess capacity in several manufacturing sectors, it said. “A rise in demand is likely to not only increase capacity utilisation but may also help revive the investment cycle earlier than expected,” India Ratings said.
However, Nomura in a report said the wage hike will put pressure on the plan to bring down the fiscal deficit to 3.5% in FY17 from projected 3.9% in FY16.