"The acceptance of the recommendations will have a significant impact on the government's wage bill," Fitch Ratings said in a statement. The suggested wage increase by the 7th Pay Commission, if accepted, will come into effect from January 1, 2016.
The hike is less than the 40 percent that was implemented after the last Pay commission in 2008.
"On its own, the pay rises would increase the central government's wage bill by around 0.5 percent of GDP," Fitch said. "It is important to note that this would also likely affect state government finances as they would be inclined to follow suit”, it added.
The government has earlier set a target of bringing down fiscal deficit to 3.5 percent of GDP in 2016-17, from 3.9 percent in 2015-16.
"As such, the planned wage increase is sufficient to add substantive challenges to achieving the planned medium-term consolidation targets," it said.
The government, Fitch said, could seek to cut expenditure in other areas. There may be some room to rein in the subsidy bill, it added.
"But the government may find cuts in capital expenditure undesirable as investments are planned to play a key role in its efforts to stimulate the economy," it said.
The realisation of medium-term consolidation targets may depend on the government mobilising higher revenues. Fitch said an expected pick-up in real GDP growth will help, and increasing government employee wages should stimulate consumption.


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