Govt pay hike may impact fiscal deficit target for FY18: SBI

Government's decision to clear 7th Pay Commission recommendations will give a boost to the economy, but it may impact fiscal deficit target for fiscal 2017-18, says an SBI research report.

According to SBI's Economic Research Department report, the recommendations are estimated to put an additional burden of Rs 1.02 lakh crore or nearly 0.7 percent of the GDP on government's exchequer, although the provisions made by the Union Budget 2016-17 were at Rs 53,844 crore.

"We believe the government may not able to provide the additional Rs 38,200 crore in fiscal 2016-17, which may be provisioned for the Budget 2017-18. This may impact the fiscal deficit target for 2017-18," the SBI report said.

It also said that the impact of the move on inflation could be temporary.

The Cabinet today cleared all recommendations made by 7th Pay Commission that will result in about 23.55 percent overall increase in salaries, allowances and pension for more than one crore government employees and pensioners.

Since the 7th Pay Commission report will be effective from January 2016, the government will decide if the arrears for the six months have to be paid in one go or in instalments.

The report said the recommendations are positive for the economy as they will boost consumption as well as savings through a concomitant increase in bank deposits, pension and provident funds.

"This is welcome in a year when bank deposits have touched a 53-year-low and there is every possibility of deposit outflow in September because of FCNR (B) outflows," it said.

"No doubt consumption increases with increase in income, nonetheless our study indicates that higher income on account of pay commission translates more into higher household savings than consumption," the report added.