Rating agencies and brokerages have said that the proposed 23.6 per cent hike in salaries and pensions of government employees could hurt India's finances even as the Centre expressed confidence that the fiscal deficit targets will not be breached.
However, rating agencies such as Fitch and S&P as well as brokerages like Citi warned that implementation of 7th Pay Commission's recommendations will impact the deficit.
Fitch Ratings said the Rs 1.02 lakh crore additional burden on the Centre, if the recommendation are implemented in toto, could challenge the government's goal of achieving a fiscal deficit of 3.5 per cent in 2016-17 unless expenditure is cut or revenues raised.
Standard & Poor's said the implementation of Pay panel recommendations will "put pressure on the fiscal position of the government and would act as a constraint to stick to the roadmap for fiscal consolidation".
Citigroup too sounded the warning that if the fiscal deficit target is achieved through a cut in public investments, it could offset the gains on economic activity somewhat.
Expressing confidence that the fiscal deficit target will be met, Economic Affairs Secretary Shaktikanta Das said the Commission's report was expected and the government knew it will take effect from January 1, 2016.
"So this was something which was expected. Now the content of the report obviously the government was not aware.
But government always has broad estimation of what is going to be the impact of a new pay commission recommendation and accordingly internally a kind of risk matrix is prepared," he said.
Most of the expenditure because of implementation of the report would come in next financial year, 2016-17, he added.
"So, government will deal with the situation. We will work out our numbers," he told CNBC TV18. "So far as fiscal consolidation roadmap, fiscal roadmap is concerned, that will be maintained."
The recommendations that will benefit 47 lakh central government employees and 52 lakh pensioners, will lead to an additional outgo of Rs 73,650 crore from the Union Budget and Rs 28,450 crore from Railway Budget.
Das said the government had in the current financial year undertaken a slight expansion in fiscal deficit mainly for infrastructure projects.
"Next year we will work on our numbers as part of the budget. I am quite confident that the government will be able to maintain the fiscal deficit target for the next year," he said. .