Eighth Pay Commission: Fiscal impact unlikely in FY26

The Eighth Pay Commission’s fiscal implication may come into play only in the Union Budget 2026-27, giving Finance Minister Nirmala Sitharaman ample financial leeway in the next Union Budget 2025-26 . However, the fiscal impact of the Pay Commission should be considered in the medium-term expenditure plans and in the recommendations of the Sixteenth Finance Commission.

In a welcome move for more than 60 lakh central government employees and 65 lakh pensioners, the Center has announced that it is setting up a committee for the eighth Pay Commission. The Commission is likely to be formed by 2026, and its recommendations are likely to come into force on January 1, 2026.

The formation of the new payment commission is expected to provide a significant boost to consumption and economic growth, with an 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 recommended an overall adjustment factor of 2 .57 based on inflation movement. According to sources, the Seventh Pay Commission has seen an increase in expenditure of Rs 1 lakh crore for FY 2016-17.

The Eighth Pay Commission will also have to estimate a similar adjustment factor, taking into account the movement of CPI inflation during the intervening period.

DK Srivastava, Chief Policy Advisor, EY India noted that 10-year wage and pension revisions usually lead to a sharp increase in revenue expenditure growth. For example, the growth in revenue expenditure of the Center in 2016-17 was 9.9% against 4.8% in the previous year. “Such an increase in 2026-27 would also have implications for the fiscal space available for growth in capital expenditure by the Centre,” he said.

The increase in salary and pension expenses of central government employees will start being reflected in the central budget for FY27 onwards, he also said.

“There would be a tangible increase in government revenue expenditure affecting the estimates of the Sixteenth Finance Commission and its recommended transfers,” he also said, adding that there is a need to properly calibrate the path of fiscal consolidation in view of the additional pressures generated by these. revisions.

The recommendations of the Sixteenth Finance Commission will 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 integrated into the new fiscal consolidation in the medium term. road and the recommendations of the Finance Commission.

The Center is expected to do slightly better on its fiscal deficit target of 4.9% of GDP in FY25 and is seen to peg the fiscal deficit at 4.5% or slightly lower in FY26. He also indicated that from 2026-27 onwards, he would switch to a new fiscal consolidation plan and try to maintain the fiscal deficit every year so that the debt of the central government will be on a path of decrease as a percentage of GDP.