The fiscal implication of the Eighth Pay Commission may come into play only in the Union Budget 2026-27, giving Finance Minister Nirmala Sitharaman ample financial space in the upcoming Union Budget 2025-26. However, the fiscal impact of the Pay Commission will have to be taken into consideration in the medium-term expenditure plans as well as in the recommendations of the Sixteenth Finance Commission.
In a welcome move for over 60 lakh Central government employees and 65 lakh pensioners, the Centre has announced that it will set up a committee for the eighth Pay Commission. The Commission will likely be formed by 2026, and its recommendations are likely to be effective from January 1, 2026.
The formation of the new pay commission is expected to provide a significant boost to the Consumption and economic growth, along with improved quality of life for government employees, sources said.
The Seventh Pay Commission was set up in 2014 and its recommendations were for the 10-year period from January 1, 2016, to December 31, 2025, in which it had recommended a general fitment factor of 2.57 based on the movement of inflation. According to sources, the Seventh Pay Commission saw an expenditure increase of Rs 1 lakh crore for FY 2016-17.
The Eighth Pay Commission will also have to estimate a similar fitment factor taking into account the movement of CPI inflation during the intervening period.
DK Srivastava, Chief Policy Advisor, EY India noted that the 10-yearly revisions in salaries and pensions usually lead to a steep increase in the growth of revenue expenditures. For example, the growth in the Centre’s revenue expenditure in 2016-17 was 9.9% as against 4.8% in the previous year. “Such an increase in 2026-27 would also have implications for the available fiscal space for growth of the Centre’s capital expenditure,” he noted.
Increases in the salary and pension expenditures of the central government employees would start getting reflected in the central budget for FY27 onwards, he further said.
“There would be tangible increases in government revenue expenditures affecting the Sixteenth Finance Commission estimates and their recommended transfers,” he further said, adding that there is a need to properly calibrate the path of fiscal consolidation in view of the additional pressures generated resulting from these revisions.
The recommendations of the Sixteenth Finance Commission would be from the period of 2026-27 to 2030-31.
Aditi Nayar, Chief Economist and Head – Research & Outreach, ICRA also noted that while the award related to the 8th Pay Commission is unlikely to affect fiscal metrics in FY2026, the potential impact of the same should be built into the new medium term fiscal consolidation path as well as the Finance Commission’s recommendations.
The Centre is expected to do a tad better on its fiscal deficit target of 4.9% of the GDP in FY25 and is seen to peg the fiscal deficit at 4.5% or slightly lower in FY26. It has also indicated that from 2026-27 onwards, it would move to a new fiscal consolidation plan and try to keep the fiscal deficit each year such that the central government debt will be on a declining path as percentage of GDP.