India approves US$13b pay increase for government employees

[NEW DELHI] Prime Minister Narendra Modi's cabinet approved an increase in salaries for federal government employees, a move that risks pressuring Asia's widest budget deficit.

A payout of roughly 849 billion rupees (S$16.83 billion) - including arrears - will be made to 4.7 million workers and 5.2 million pensioners in the year through March 2017. This could rise to at least 1 trillion rupees if other allowances are approved, Finance Minister Arun Jaitley said in a briefing in New Delhi on Wednesday.

The federal budget accounted for only part of this amount, leading to concern the government may miss its deficit target in case of a full rollout this year. While it stands to boost demand - the key driver of the world's fastest-growing big economy - more cash in the hands of consumers also risks spurring inflation.

The move will have a "mixed bag" of effects, Mr Jaitley said. "Government salaries have to come at a respectable level so the government can attract the best talent, therefore inevitable consequence of this will be pressure on the budget."

Higher salaries will boost consumption by as much as 1.5 percentage point in the year through March 2017 and contribute about 0.35 percentage point to gross domestic product, according to PhillipCapital Ltd. The savings rate is seen rising to about 30.4 per cent of GDP from about 30 per cent.

However a 139 per cent jump in housing allowances, if implemented, will spur inflation, "largely ruling out scope for further rate reduction," economist Anjali Verma wrote in a report on Wednesday. She predicts the government will cut expenditure to ensure it meets its target of narrowing the budget deficit to a nine-year-low of 3.5 per cent of GDP in the current fiscal year.

India spent a net 221 billion rupees when it last raised salaries following the 2008 recommendation for a raise of as much as 40 per cent.

BLOOMBERG