The 7th Pay Commission proposals have stoked fears of fiscal slippages for a cash-strapped government. In an interview to Bloomberg TV India, Standard & Poor’s Director Kyran Curry says India’s rating upgrade could be delayed considering the extra spending on wages.

The 7th Pay Panel advocates a wage hike which will put further fiscal pressure on government finances. What does that mean to the potential rating upgrade of the country?

We observe that the government is already running fairly sizeable fiscal deficits. Over the course of many years it has led to relatively high level of borrowings, much higher than what we see amongst many of India's peers. From our viewpoint, it is not proper to comment directly on individual fiscal policy initiatives. But in terms of salaries and raising subsidies in other areas, and especially on very heavy capital expenditure programme related to expenses, it just adds to the overall weak set of the fiscal credit metrics. In many respects, it is one of the key constraints on India’s sovereign ratings. To be fair, there are many strengths. The economic growth story is very good. India’s external position is also very good. But its fiscal settings remain weak. Until such time we believe that the government moves further to consolidate its fiscal position and get its debts brought down, the time when India’s ratings will go high will be further delayed.

Is the combined fiscal deficit of Centre and States the main factor for ratings outlook?

Yes, that is correct. It is one of the largest things that weigh on the rating or in effect likely delay.

The other thing that weighs on India is the relatively low GDP per capita, which in our mind creates pressure on the government to spend on infrastructure and at the same time it weakens its revenue performance. It means basically the tax pool that is available to the government is not as extensive as what we might see in a country with high per capita GDP numbers.

Are the growth numbers in India not looking encouraging at this point to you?

It’s actually the reverse. We think that India is the fastest growing large economy and we have our growth numbers accelerating in India over the next few years. So we expect growth above 8 per cent both next year and the year after. The fact that India has a very strong level of domestically-driven growth is a good thing.

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