US firm Fitch Ratings on Friday said the 24 percent hike in salaries and pensions for current and former government employees recommended by the 7th Pay Commission could hurt India's finances and efforts to control the fiscal deficit.
"A recommended 23.55 percent increase in remuneration for India's central government employees, if fully implemented, would have a significant impact on the government's wage bill, and add to challenges the government faces in achieving fiscal consolidation targets," the ratings agency said in a release.
Fitch said the pay hike could challenge the government's goal of achieving a fiscal deficit of 3.5 percent in the year ending in March 2017, unless it can reduce spending or raise revenues.
"The planned wage increase is sufficient to add substantive challenges to achieving the planned medium-term consolidation targets," Fitch said in a statement.
"Delaying an improvement in India's fiscal position would underscore a longstanding weakness for the sovereign credit profile," it added.
Fitch said the Indian government's debt burden of nearly 65 percent of its GDP was the highest among its "BBB-" rated countries, which have a median of 43 percent of the GDP.
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The wage increase recommended on Thursday by the Pay Commission would come into effect from January 1, 2016.
Describing the wage hike recommendations as being higher than expected, HSBC said past experience showed that such pay revisions "typically boost consumption, overstretch fiscal accounts and stoke inflation."
"If it (government) can absorb wage hikes without compromising on its fiscal consolidation or capex targets, Thursday's wage increase recommendation could indeed be a net positive for sustainable growth," HSBC said in a statement here.
"However, if a compromise is made, then the consumption boost could eventually translate to higher inflation," it added.
Finance Minister Arun Jaitley, in his February budget, had extended the target deadline for controlling fiscal deficit to three percent, reasoning that insistence on a timetable to contain the deficit would harm growth prospects.
The targets for the next three years have been set at 3.9 percent for 2015-16, 3.5 percent for 2016-17, and 3.0 percent for 2017-18.