A much-anticipated increase in salaries for government employees will threaten India's drive to consolidate its public finances and make a near-term cut in interest rates difficult, Morgan Stanley said on Monday.

The Sixth Pay Commission for federal government workers submitted its report to the finance minister on Monday but details are yet to be announced.

Morgan Stanley economists said in a research note they expected central government salaries and pension costs to rise by 300 billion rupees ($7.4 billion or 0.4 percent of gross domestic product) to 1.307 trillion rupees (2.5 percent of GDP) in the 2008/09 year.

Chetan Ahya, Tanvee Gupta and Sumeet Kariwala said this would be a 30 percent year-on-year increase in salary and pension costs for some 2.9 million central government workers.

They said the increase was likely to make state governments, with 7.2 million employees, and quasi-government agencies follow suit.

They estimated the combined wage and pension cost increase for central and state governments and quasi-government organisations would be 1.4-1.5 trillion rupees spread over the next three years.

"The combined effect of the pay hike and the recent farm loan relief spending of 600 billion rupees or 1.2 percent of GDP will decidedly reverse the six-year trend of reduction in government deficit," they said.

Such an expansionary fiscal policy would affect the central bank's ability to cut rates in the near term and a higher fiscal burden would come at a time when capital inflows may slow, potentially pushing up longer-term bond yields and steepening the yield curve.

On the positive side, the pay hike was likely to result in more discretionary and staple consumption, they wrote.

But discretionary spending was likely to face headwinds from tight monetary policy and public sector earnings could be negatively affected due to rising long bond yields and losses in treasury portfolios, they said.

Courtesy : THEFINANCIALEXPRESS.COM

JPMorgan Chase & Co raised its takeover offer for Bear Stearns Cos on Monday to about five times its original bid and struck a deal to buy nearly 40 percent of the bank, all but locking up the controversial acquisition.

Under the revised deal, JPMorgan will buy 95 million newly issued Bear Stearns shares and Bear's board agreed to vote in favor of the offer. With those shares, JPMorgan would own 39.5 percent of Bear Stearns and have secured the backing of Bear Chairman James Cayne, owner of a 3 percent stake in Bear.

"It looks like JPMorgan has this deal sewn up right now," said John Augustine, chief investment strategist with Fifth Third Investment Advisors.

The new offer valued Bear Stearns at about $2.1 billion, compared with $236 million under the original deal.

Additionally, JPMorgan would also be on the hook for the first $1 billion in losses stemming from Bear Stearns' less liquid assets, and would set aside $6 billion to cover severance, litigation and other transaction-related costs.

The new deal, which has financial backing from the Federal Reserve, is likely to raise concerns that the U.S. government is prepared to help rescue Wall Street bankers even as millions of home owners face the possibility of foreclosure.

The Federal Reserve Bank of New York is providing $29 billion in special financing for the deal and will take control of a $30 billion portfolio of Bear's less liquid assets.

"This action is being taken by the Federal Reserve, with the support of the Treasury Department, to bolster market liquidity and promote orderly market functioning," the New York Fed said in a statement.

Rather than a bailout of Bear, the Fed's action "more closely resembles the torpedoing of a sinking ship" to remove a hazard to others and avert a broader crisis, said David Wyss, chief economist of Standard & Poor's.

"The bank is dead," he said.

UNDER PRESSURE

JPMorgan, facing pressure from disgruntled Bear shareholders such as British billionaire Joe Lewis, raised its offer to about $10 a share in stock from its original bid on March 16 of $2 per share for the 85-year-old Wall Street investment bank, representing a boon to short-term traders who jumped in last week when the shares plunged.

While the new offer represents a less onerous fire-sale price, it is still 68 percent below the March 14 closing price of Bear shares of $30.85, and more than 90 percent below Bear's all time peak level...

Courtesy : THEFINANCIALEXPRESS.COM