India's government pay hike threatens budget target

New Delhi: A steep pay rise for millions of civil servants could derail moves to tidy up India's public finances, but it may prove fortuitous if it boosts softening demand and puts a floor under slowing industrial growth.

The recommendation, yet to be approved by government, includes a pay rise for more than three million federal workers that would cost $3.1 billion in the 2008-09 fiscal year, plus $4.5 billion to backdate it to January 2006.

Analysts say the total fiscal cost could be anywhere between Rs250-Rs300 billion ($6.25-$7.5 billion) for the year starting April 1, if it is taken as a benchmark for pay awards for state and quasi-government employees across the country.

The government wants to cut the fiscal deficit to 2.5 per cent of GDP in 2008-09, down from 3.1 per cent in 2007-08, but that may prove difficult if the wage rise goes through.

"It seems to us ... that the government will have to give a much smaller pay rise than has been recommended and-or accept a sizable budget overshoot," HSBC economist Robert Prior-Wandesforde said in a research note. "We expect a bit of both and our own budget deficit forecast for 2008-09 is 3.5 per cent of GDP."

The pay round, which comes roughly once a decade, is expected to spark higher wage demands from millions of state government employees and state-run firms, which could in turn undo fiscal reforms undertaken to mend the results of the last round in 1997.

T.K. Bhaumik, chief economist at Reliance Industries Ltd, India's largest listed firm, felt the pay round would not have much impact on inflation, but he said it could provide a spark to consumer spending.

"It could have a positive impact on the recovery of the manufacturing sector as demand for goods may go up," he said.