The fiscal implication of the Eighth Pay Commission can be implemented only in the Union Budget 2026-27, giving ample fiscal space to Finance Minister Nirmala Sitharaman in the upcoming Union Budget 2025-26. However, the fiscal impact of the Pay Commission should be taken into account in the medium term expenditure plans as well as in the recommendations of the Sixteenth Finance Commission.
In recognition of over 60 lakh central government employees and over 65 lakh pensioners, the Center has announced the formation of a committee for the Eighth Pay Commission. The commission will be set up by 2026, and its recommendations are likely to come into effect from January 1, 2026.
Sources said the establishment of the new pay commission is expected to give a significant boost to consumption and economic growth along with raising the standard of living of government employees.
The Seventh Pay Commission was set up in 2014 and its recommendations for the 10-year period from January 1, 2016 to December 31, 2025, had recommended an average fit factor of 2.57 based on the movement of inflation. According to sources, the Seventh Pay Commission has increased its expenditure by Rs 100 crore for the financial year 2016-17.
The Eighth Pay Commission will also have to estimate a similar fixation factor taking into account the movement of CPI inflation in the interim period.
DK Srivastava, Chief Policy Advisor, EY India, noted that 10 annual revisions in wages and pensions usually lead to sharp increases in revenue expenditure. For example, the growth in revenue expenditure of the Center in 2016-17 was 9.9% as against 4.8% in the previous year. “Such an increase in 2026-27 will also impact the fiscal space available for growth in the capital expenditure of the Centre,” he noted.
He added that the increase in salary and pension expenditure of central government employees will start reflecting in the central budget for FY27.
“There will be a tangible rise in government revenue expenditure as affected by the Sixteenth Finance Commission estimates and their recommended transfers,” he added, adding that there is a need to properly calibrate the path of fiscal consolidation keeping in mind the additional pressures arising from these. amendments.
The recommendations of the Sixteenth Finance Commission are from 2026-27 to 2030-31.
Aditi Nayar, Chief Economist and Principal Research and Head, ICRA, also noted that while the 8th Pay Commission related award is unlikely to impact financial metrics in FY2026, its potential impact should build on the new medium-term fiscal consolidation. Way as well as the recommendations of the Finance Commission.
The Center is expected to do better by targeting a fiscal deficit of 4.9% of GDP in FY25, while the fiscal deficit will narrow to 4.5% or slightly lower in FY26. It has indicated that from 2026-27 it will move towards a new fiscal consolidation plan and will try to maintain fiscal deficit every year so that central government debt as a percentage of GDP is on a downward trajectory.