Pay revision risk to state finances: RBI

Chennai, Sept 24

State governments should guard against slippage in their fiscal consolidation process due to any increase in salaries for the government workforce by making their budgets more robust, Reserve Bank of India Governor Yaga Venugopal Reddy said.

"There are certain risks for the fiscal consolidation process such as the expected increase in expenditure from the revision of pay scales or the implementation of the recommendation of sixth pay commission," Reddy said, speaking at a seminar in Chennai.

"In this connection, state governments would need to make their budgets robust enough to enable them to steadfastly adhere to the provisions of their fiscal responsibility legislations," he said. The Congress party-led coalition set up a panel, known as the pay commission, to review the salaries of Central government employees in July 2006 and the report is to be submitted by early 2008.

Analysts expect about 30 percent increases in salaries of Central government civil servants, which could trigger demand for a similar raise from state government workers. The last pay commission in 1997 had severely damaged public finances and widened the combined state and Central deficit to nearly 10 percent of GDP for several years.

"Fiscal empowerment through revenue augmentation holds the key to address such fiscal risks," Reddy said. Reddy noted that state governments have since consolidated their positions after allowing their finances in the aftermath of the last pay commission revisions. The fiscal deficit of state`s was expected to be brought down to 2.4 percent of gross domestic product in the current fiscal year ending in March, from more than 4 percent in the first half of the present decade, he said.