Fitch Ratings believes a proposed 23.6% hike in salaries and pensions for about 10 million current and former government employees in India could hurt the country's finances and underscore the weakness in its sovereign credit profile.
The pay hike proposed on Thursday, 19 November, by an Indian government panel is smaller than past increases as New Delhi faces pressure to curb its fiscal deficit.
It would add at least Rs. 1.02 trillion ($15.43 billion) to federal spending in 2016 - the first year of implementation, if accepted.
Fitch said the pay hike could challenge the government's goal of achieving a fiscal deficit of 3.5% in the year ending in March 2017, unless India can cut spending or raise revenues.
"The planned wage increase is sufficient to add substantive challenges to achieving the planned medium-term consolidation targets," Fitch said in a statement.
"Delaying an improvement in India's fiscal position would underscore a longstanding weakness for the sovereign credit profile," it added.
Fitch rates India "BBB-minus" with a "stable" outlook.
The credit agency said India's government debt burden of nearly 65% of gross domestic product was the highest among its "BBB-minus" rated countries, which have a median of 43% of GDP.
