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7th Pay Commission and Budget 2016: Raising pay for 10 million government employees would not destabilize prices, the Economic Survey said, while low inflation has taken hold, leaving room for the Reserve Bank of India (RBI) to cut interest rates further if needed. Inflation is expected to decline to a range of 4.5 percent to 5.0 percent in the 2016/17 fiscal year, within the RBI's target, while the current account deficit would stay low at 1.0 percent to 1.5 percent of gross domestic product. 

With the government tapped out on the spending side, there will be scant cash for capital projects through which it can achieve the growth rates of 8-10 percent needed to create jobs for the 1 million Indians joining the workforce every month. This "does not augur well for the government capex - the major support to investment today, as private investment sentiment continues to stay weak," said Rupa Rege-Nitsure, group chief economist at L&T Finance Holdings in Mumbai.

The report flagged steps to broaden India's narrow tax base, arguing that 20 percent of individuals should pay tax on their earnings compared to just 5.5 percent now. The easiest way to do so would be not to raise thresholds on tax breaks and to review and phase out such exemptions. 

India needs to gird itself for the possibility of turmoil on international currency markets and contend with "an unusually weak external environment. India must plan for a major currency re-adjustment in Asia in the wake of a similar adjustment in China," it cautioned.

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