Pay Commission recommendations not to upset fiscal roadmap: RBI Governor Raghuram Rajan

RBI Governor Raghuram Rajan on Tuesday said the Seventh Pay Commission recommendations will not upset fiscal maths as additional expenditures will be offset by either surplus revenues or expenditure cuts.

In the fifth bi-monthly monetary policy review for 2015-16, the Reserve Bank said the implementation of the Pay Commission proposals, and its effect on wages and rents, would be factored in by the RBI in its future deliberations.

“In the broad sense, yes there is going to be additional expenditure, but that will be offset presumably by either additional revenues raising or cuts elsewhere so that the fiscal consolidation path is maintained,” Rajan said while addressing reporters after the monetary policy statement.

The 7th Pay Commission has recommended increase in remuneration of about one crore government employees and pensioners which is estimated to impose an additional burden of Rs 1.02 lakh crore on the exchequer in 2016-17.

The new pay scales, subject to acceptance by government, will come into effect from January 1, 2016.

Rajan said the government had anticipated the consequences of Pay Commission recommendations and hence the fiscal path is expected to be maintained.

“We don’t feel there will be a significant effect on aggregate demand provided you maintain the fiscal path. Of course, investment in some ways may be (of) higher quality than certain kind of spending and therefore one would hope that you would uncover space elsewhere for the public investment which we really need,” Rajan added.

In the monetary policy statement, RBI said the direct effect of Pay Commission implementation and its “effect on aggregate demand is likely to be offset by appropriate budgetary tightening as the government stays on the fiscal consolidation path”.

The government had unveiled a fiscal consolidation roadmap in 2015-16 Budget under which fiscal deficit was to be brought down to 3.9% of GDP this fiscal, 3.5% in 2016-17 and 3% by 2017-18, respectively. Fiscal deficit in 2014-15 was 4% of GDP.

RBI Deputy Governor Urjit Patel said the increase in the House Rent Allowance of government employees post Pay panel award would get reflected in the retail inflation data.

“But that is a one time level change and unless there are wider externalities, we will most likely look through that… The impact will be felt from April onwards for 6-8 months. You will see an index change, but that will likely be looked through by RBI,” Patel said.

Several rating agencies and brokerages have said that a proposed 23.6% hike in salaries and pensions of government employees could hurt India’s finances.

Source: The Economic Times