Fiscal impact of the seventh pay commission under watch: DBS Group Research

Progress on the FY15/16 fiscal balance was on track between Apr-Jun15 but lost some ground in Jul. Apr-Jul fiscal deficit rose sharply to 70% of the full-year target, up from 61% in the same period last year. Total spending rose 13% YoY in the four months, while revenues were propped by an 35% rise in indirect tax collections. Direct tax revenues were modestly lower than the same time last year. Divestment efforts have been jumpstarted with the recent stake sale in Indian Oil Corporation notwithstanding volatile market conditions. While it still looks likely that the full-year divestment target might be missed, gradual progress is underway.

Other favourable tailwinds by way of significant savings on the subsidies front (year-to-date negligible fuel subsidy disbursements) and higher dividends from the central bank will help. There have also been calls to front-load spending to 1H, implying that deficits might briefly deteriorate over the coming months, before seasonally strong revenues help to bridge the gap.

Beyond this year, the government is likely to face another fiscal challenge. The Seventh pay commission is due to table its recommendations by end-2015, under which salaries/remuneration of government employees are reviewed once every ten years. If adopted, bulk of the impact will be absorbed by the FY16/17 Budget. Historically, the pay commission's rollout has been negative for fiscal balances.

Source : Equity Bulls

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