Eighth Pay Commission may impact fiscal consolidation, tax devolution by 16th Finance Commission: Economists

8th Pay Commission’s recommendations are expected to benefit around 50 lakh central government employees and 65 lakh pensioners

The Eighth Central Pay Commission’s recommendations could spur consumption and economic growth but there is also a need to recalibrate fiscal strategies to ensure sustainable development, economists said.

The challenge lies in balancing the dual objectives of improving employee welfare and maintaining fiscal prudence in the years ahead, they said.

The upcoming pay revisions, effective from FY 2026-27, will significantly increase government expenditure, requiring adjustments to the fiscal consolidation path and the 16th Finance Commission’s tax devolution recommendations.

“While the award related to the Eighth Pay Commission is unlikely to affect fiscal metrics in FY 2025-26, 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,” Aditi Nayar, Chief Economist at ICRA Ltd, said.

The increases in the salary and pension expenditures of central government employees would start reflecting in the central budget from FY 2026-27.

“The Eighth Pay Commission will need to estimate a new fitment factor, considering CPI inflation during the intervening period,” DK Srivastava, Chief Policy Advisor at EY India, said. Such revisions typically have a multiplier effect on demand and consumption, but they also pose challenges for maintaining fiscal discipline, he said.

Steep increase in expenditures

“The 10-yearly revisions in salaries and pensions usually lead to a steep increase in revenue expenditures. For example, the growth in the Government of India’s revenue expenditure in 2016-17 was 9.9 percent, compared to 4.8 percent in the previous year. A similar increase in 2026-27 would have implications for the fiscal space available for capital expenditures,” Srivastava noted.

The Seventh Pay Commission’s recommendations, implemented in January 2016, resulted in an expenditure increase of Rs 1 lakh crore in FY 2016-17. These changes boosted consumption and economic growth while enhancing the quality of life for government employees and pensioners.

Similarly, the Eighth Pay Commission’s recommendations are expected to benefit around 50 lakh central government employees and 65 lakh pensioners, including defence personnel. However, economists note that these increases in revenue expenditures could strain fiscal resources and necessitate a careful reassessment of fiscal priorities.

“Since state governments generally undertake similar revisions, corresponding increases in their budgets may also follow, possibly with some lags. However, arrears may have to be given in due course,” he said.

Union Minister Ashwini Vaishnaw on January 16 said that the setting up of the Eighth Pay Commission well ahead of 2025 will ensure sufficient time to review and finalise its recommendations, enabling the government to implement the proposed changes effectively before the Seventh Pay Commission’s tenure ends.

Since 1947, seven pay commissions have been constituted to determine salary structures, allowances, and benefits for central government employees. While these commissions have significantly improved the financial well-being of millions, their recommendations often lead to steep increases in government expenditures.