India's 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, central bank Governor Yaga Venugopal Reddy said on Sunday.
"There are certain risks for the fiscal consolidation process such as the expected increase in expenditure from the revision of payscales or the implementation of the recommendation of sixth pay commission," Reddy said, speaking at a seminar in the southern Indian city.
"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 federal 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 expected 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.
Reddy also said state governments should take initiatives to publish a calendar for market borrowings, on the lines issued by the central government to make the process more transparent and reduce uncertainty for market participants.