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7th Pay Commission Latest News – Pay hike may be on the lower side

7th Pay Commission Latest News – Pay hike may be on the lower side – Analyst report on the basis of present economic scenario of the Country

Partial allocation of funds in budget may lead to lower increase in pay out of 7th pay commissionAnalysis of funds allocated in Budget 2016 by DNA reveals that Govt has made provisions for only about 65% of expected expenditure on account of implementation of 7th Pay Commission and One Rank One Pension Scheme. DNA infers that partial provisioning for 7th Pay Commission outgo would lead to lower 7th CPC pay increase. Alternatively, revised 7th Pay Commission pay and allowances may be implementation over the period of two years.

Lately, sentiment has been downbeat on India with concerns around banks’ stressed assets, slow pace of reforms, growth concerns, among others. In this backdrop, the Budget has delivered a long overdue shot in the arm. The government chose macro stability over growth, delivering a positive surprise by sticking to its fiscal consolidation roadmap.

There are a number of reasons why fiscal consolidation is important. First, the fiscal is already India’s Achilles’ heel. According to rating agency Fitch, India’s general government (centre and states), fiscal deficit of 6.7% of GDP in FY16 is already more than double the ‘BBB’ peer median of 2.8%. With states expected to slip on the fiscal front due to the Uday (Ujwal Discom Assurance Yojana) scheme in FY17, consolidation at the central level was critical.

Second, despite abysmally weak private demand, there are risks of crowding out due to large borrowing by the central and states government. Unless borrowing costs for the risk-free borrower (government) reduces, transmission to rest of the economy will get challenging. A lower central government borrowing should partly help address the supply concerns.

Third, by sticking to the pre-set fiscal targets, the government has reinstated its credibility and its commitment to fiscal consolidation in the medium term. This is a strong message and should not be under-estimated.

The government has managed to stick to the lower fiscal deficit target partly by provisioning for a lower outgo on account of the Seventh Pay Commission and the one-rank-one-pension scheme. As per the government, around Rs 70,000-75,000 crore has been provided for in fiscal 2017. This is only about 65% of the total amount, in our view, and suggests that the government will either accept a lower increase (relative to the recommendations) or will stagger the pay hikes over two years.

Meanwhile, the assumptions on the Budget are largely credible. Nominal GDP growth at 11% year on year, asset sales target of Rs 56,500 crore, gross tax revenue growth of 11.7% yoy are achievable. The only hurdle could be the revenue budgeted from telecom spectrum, which may be difficult to achieve given limited financial capacity for the existing operators.

Given the fiscal constraints, the government has also gone slow on its budgetary capital expenditure. Total capex (% of GDP) is set to slow to 1.6% of GDP in fiscal 2017 from 1.8% in fiscal 2016. This suggests that much of the public investment in infrastructure is likely to rely on off-budgetary sources. The one disappointment in the Budget is the limited allocation towards bank recapitalisation (at Rs 25,000 crore). Given the size of stressed asset problem, this implies that more recap will be necessary through supplementary grants.

The other focus areas in the budget include agriculture, rural infrastructure and employment, health, education and skill creation and infrastructure – all of which are in line with the medium-term requirements of the economy.

Overall, the commitment to adhere to the stated fiscal deficit targets is a big positive. Given the government’s commitment to fiscal consolidation, more room should now open up for monetary policy accommodation. Fiscal and monetary policy co-ordination is indeed the way forward for the economy.

Source: DNA

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