The government said on Friday that meeting the 2016-17 fiscal deficit target of 3.5 per cent of the gross domestic product (GDP) would be a challenge due to additional spending on wages, following the implementation of the Seventh Pay Commission.In its Medium Term Expenditure Framework (MTEF) for the next three years, placed in Parliament, the finance ministry said reducing the fiscal deficit to 3.5 per cent, compared to 3.9 per cent last year, would be difficult on account of the huge burden of implementation of pay panel recommendations.“Keeping in view the challenge of reduction of the fiscal deficit by 0.4 per cent of GDP in a difficult year in 2016-17 with substantial additional liabilities on pay revision, the government is quite optimistic of fully achieving the fiscal deficit target of three per cent by March 2018,” it added.MTEF stated the Indian economy was showing ‘bright’ near-term prospects, and that macro-economic stability has improved with the continuance of fiscal prudence and lower inflation particularly due to moderation in crude prices.“In light of the encouraging performance of the economy during the previous financial year, marked by pick-up in economic growth, lower inflation, buoyant tax revenues, increasing foreign direct investment flows and the government’s push to reforms in crucial areas including banking, infrastructure, power, taxation, the near-term prospects for the economy look bright,” MTEF stated.The MTEF, tabled by Finance Minister Arun Jaitley according to the requirements of the Fiscal responsibility and Budget Management Act, said major subsidies were expected to decline gradually from 1.5 per cent of GDP in 2016-17, to 1.4 per cent in 2017-18 and further to 1.3 per cent in 2018-19.In June, the Cabinet had approved recommendations of the Seventh Pay Commission on pay and pensions for the central government’s 4.7-million employees and 5.3-million pensioners. On an average, the hike in basic pay and pension will be 2.5 times the existing structure. A decision on allowances is still under consideration.The burden on the exchequer will be Rs 72,800 crore on account of salaries and pensions and Rs 12,000 crore on account of arrears, aggregating Rs 84,933 crore during 2016-17. Of this, Rs 60,608 crore would come on the Budget and Rs 24,325 crore on the Railway Budget.