The government may defer the implementation of the Sixth Pay Commission award by a year or even two to reduce the fiscal burden of the recommendations that proposed a 28 per cent across-the-board salary increase for an estimated 4.5 million central government employees.

The report of the commission headed by Justice BN Srikrishna was submitted to the government on March 24 this year, nearly a fortnight before its 18-month tenure was to end.

• All about the 6th Pay Commission report

Senior government sources said that the government's current fiscal position may well see the arrear payments deferred to January 1, 2008, two years later than originally recommended. However, a relaxation may be granted to employees who have retired in the interim period.

Lower-level government staff in central government service, which comprises a large part of the employee base, may also get some relaxation, although it is not clear what it will be.

The panel had recommended implementing the revised pay scales from January 1, 2006. The new pay scales, if implemented as originally recommended, would have cost the exchequer Rs 7,975 crore (Rs 79.75 billion) in fiscal 2008-09. However, the one-time additional outgo on account of the retrospective revision of salaries is estimated to be at Rs 18,060 crore (Rs 180.60 billion). The arrears were to be given in instalments, which would have lessened the fiscal burden.

• All about the 6th Pay Commission report

Before the report was submitted, finance ministry officials had said the impact of the recommendations would be within 0.4 per cent of Gross Domestic Product in 2008-09. Other experts have said the impact would not exceed 0.5 per cent of GDP, unlike the previous fifth Pay Commission award when the impact was much higher.

In Budget 2008-09, the finance ministry has estimated the fiscal deficit at 2.5 per cent of GDP, which is in line with the Fiscal Responsibility and Budget Management Act, 2003. This included headroom for the likely impact of the Pay Commission award. However, subsequent developments have led to the fear that the Centre's fiscal position may have taken a beating during the year on account of the farm loan relief package and higher crude oil prices leading to an increase in the subsidy burden.

In fact, risk rating agency Moody's today forecast a deterioration of central government finances and pointed out that the central government's true borrowing need - which equals the reported fiscal deficit plus off-Budget borrowing - could reach 10 per cent of GDP, up from 8 per cent projected earlier this fiscal if global crude oil prices average $110/120 a barrel in 2008-09 and domestic retail fuel prices are not raised further.

Soon after the report was published, the defence services had opposed its recommendations on the grounds that it gave short-shrift to their demands. The matter was referred to a committee of secretaries. It is believed that the issue has been discussed and a final proposal may be put up for Cabinet consideration, officials said.

They added that a final decision could be taken as early as next month, well before six states head for elections to their legislatures. Of these, the Congress-ruled Delhi is crucial, being home to a large percentage of the country's central government employees.