Pay Commission recommendations; a major negative for fiscal position

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Mumbai, Mar 31 (UNI) The recommendations of the Sixth Pay Commission, if implemented by the Central government, could result in a major negative impact for the fiscal position of the country, though it could be positive for consumption, according to a leading investment banker.

In their latest review, however, Lehman Brothers India Principal analyst Sonal Verma said that the impelementation might not trigger a major deterioration in the fiscal finances with no obvious boost to the consumption following the implementation of the Fifth Pay Commission whose impact on ''India's economy was unambiguously negative''.

The review said assuming the Sixth Pay Commission's recommendations were implemented fully, ''we judge the impact on the economy should not be as negative this time round''.

Last week, the Sixth Pay Commission (SPC) recommended a 28 per cent hike in the employees' basic salaries and pensions (to be implemented retrospectively from January 1, 2006), and the near doubling of most allowances.

In 1997, the Fifth Pay Commission (FPC) recommended a 30 per cent hike, which was implemented fully.

As was the case with the previous Pay Commission, the hikes in the basic salary and pension for the Central Government employees was likely to result in hikes of similar magnitude for the 6.5 million State Government employees. The Commission estimated that the cost to the central government would be Rs 306 billion (0.6 per cent of GDP).'' ''If the states implemented similar hikes, we estimate that the combined state government's wage and pension bill could increase by Rs 480 billion (0.9 per cent of GDP). Combining the two costs, the general government's fiscal deficit could widen by 1.4 per cent of the GDP. In comparison, after the previous Commission's recommendations were implemented, the general government's fiscal deficit widened from 7.5 per cent of the GDP to 10.7 per cent, and stayed around 10 per cent for the next four years.

''This time, we are more optimistic on two counts. First, India has a better starting position, with a fiscal deficit of 5.4 per cent of the GDP. And second, with much higher GDP growth and lower government bond yields, revenue buoyancy and lower debt-servicing costs should reduce the risk of multi-year fiscal slippage,'' the report said.

It added, ''Consumption versus savings: The pay hike will work as a fiscal stimulus to the extent that it is consumed. However, the FPC pay hikes had no obvious impact on consumption, as government workers largely opted to save the windfall.'' UNI VK DB SBC AS1437

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