Sixth Pay Commission: TEXT-Fitch - impact of the Sixth Pay Commission on Indian states

(The following statement was released by the ratings agency)

Aug 28 - Fitch Ratings has today commented that on the basis of present economic growth trends and the fiscal situations of Indian states, the likely impact of the Sixth Pay Commission (SPC) recommendations on the states' financial profile will not be as severe as it was at the time of the Fifth Pay Commission (FPC).

"In 1997, the fiscal situation was grimmer for Indian states when increased expenditure on wages and salaries resulted in increased borrowing, engulfing some states in a fiscal crisis and trapping them in a vicious cycle of debt," said Dr Devendra K. Pant, Associate Director with Fitch Ratings India. "Now, there is a marked difference in present growth and the states' fiscal situations. Even with a forecasted slowdown in FY09, economic growth is expected to be 7.7%, whereas economic growth in FY97 was a comparatively meagre 4.3%." At FYE98, Dr. Pant noted that only nine out of 26 states had a revenue surplus, and the revenue accounts for all states combined were INR163.33bn (1.1% of GDP) in deficit. However, in FY08 (budget estimates) only nine out of 30 states had revenue deficits, and the revenue account for all states combined was INR170.99bn (0.4% of GDP) in surplus.

"Fitch considers that buoyancy in VAT collection and continued tax buoyancy would help states manage the negative impact of the pay revision on their finances," added S. Nandakumar, Director with Fitch Ratings India. He notes that at the time of the FPC, there was a decline in central revenue. At present however, tax collections nationally are experiencing good growth, despite the expected slowdown in economic growth; gross tax collection during April-June 2008 increased by 28.4%.

In summary, the agency considers that the Indian states have enough resilience to absorb the impact of the proposed salary revision, although it also believes that the financial flexibility of the fiscally weaker states would be negatively affected, leaving them vulnerable and exposed to pressure on their budgets. It is likely that the states will be forced to consider budgetary measures that either increase revenue and/or reduce costs to maintain overall fiscal balance, in order to ensure that the financial performance of the last five years or so is not dissipated through reckless fiscal profligacy.

The overall rise in SPC is 40% over the wage levels set by the FPC; however, factoring in the cost of living allowance rise given in 2004, the effective increase is about 28%. Although the Central Pay Commission recommendations apply to central/federal government employees, it is an established practice for most state governments to adopt these recommendations when revising the salaries of their employees. After the approval of the SPC recommendations, five states have announced that they will follow the SPC recommendations for their employees, one state has formed a state-level committee to look into salary revision for its staff, and another state will implement the salary revision based on recommendations of this state-level committee.


Source: http://in.reuters.com/article/domesticNews/idINWLA870820080828