India's US$16b wage hike may eat into capital spending

New Delhi

A US$16 billion pay rise for India's public servants and costly food and farm programmes could force the country's finance minister to cut capital spending in its annual budget, officials and economists say.

The spending pressure on Finance Minister Arun Jaitley threatens to worsen imbalances in India's US$2 trillion economy as consumption outpaces investment, undermining Prime Minister Narendra Modi's promise of better jobs for its 1.3 billion people.

A populist budget, ahead of assembly elections in four states this year, could stoke inflation even as structural measures such as Mr Modi's proposed tax and labour reforms look less likely.

It could also eat into capital spending needed for railways, roads, ports and power projects, seen as vital to India's integration into the global economy. "It is not going to be a revolutionary or inspirational (budget) ... given the spending pressures," said Shilan Shah at Capital Economics. "It is most likely to lead to a sell-off in the bond …