The tax implication of the Eighth Pay Commission may come into play only in the Union Budget 2026-27, giving Finance Minister Nirmala Sitharaman ample financial leeway in the upcoming Union Budget 2025 -26. However, the fiscal impact of the Pay Commission will need to be taken into consideration in the medium-term spending plans as well as the recommendations of the Sixteenth Finance Commission.
In a welcome move for over 60,00,000 central government employees and 65,00,000 pensioners, the Center announced that it would set up a committee for the Eighth Pay Commission. The Commission will likely be formed by 2026 and its recommendations will likely take effect on January 1, 2026.
The creation of the new wages commission is expected to provide a significant boost to consumption and economic growth, as well as an improvement in the quality of life of civil servants, sources said.
The Seventh Pay Commission was established in 2014 and its recommendations covered the 10-year period from January 1, 2016 to December 31, 2025, during which it had recommended an overall adjustment factor of 2.57 based on the the evolution of inflation. According to sources, the Seventh Pay Commission saw its expenditure increase by Rs 1 lakh crore for the financial year 2016-17.
The Eighth Pay Commission will also have to estimate a similar adjustment factor taking into account the change in CPI inflation during the interim period.
DK Srivastava, chief policy advisor, EY India, noted that decadal reviews of salaries and pensions typically lead to a sharp increase in spending and income growth. For example, the Centre’s revenue and expenditure growth in 2016-17 was 9.9% compared to 4.8% in the previous year. “Such an increase in 2026-27 would also have implications on the fiscal space available for growth in the Centre’s capital expenditure,” it noted.
Increases in expenditure on salaries and pensions of central government employees would start being reflected in the central budget from FY27, he added.
“There would be tangible increases in public expenditure affecting the estimates of the Sixteenth Finance Commission and their recommended transfers,” he said, adding that there is a need to properly calibrate the path of fiscal consolidation considering the additional pressures generated by these measures. revisions.
The recommendations of the Sixteenth Finance Commission would cover the period 2026-27 to 2030-31.
Aditi Nayar, Chief Economist and Head of Research and Outreach at ICRA also noted that while the award linked to the 8th Pay Commission is unlikely to have an impact on fiscal measures during the For the 2026 financial year, its potential impact should be integrated into the new medium-term budgetary consolidation. the way forward as well as the recommendations of the Finance Commission.
The Center is expected to do slightly better against its fiscal deficit target of 4.9 per cent of GDP in FY25 and is likely to peg the fiscal deficit at 4.5 per cent or slightly lower in FY26 He also indicated that from 2026-2027, he would adopt a new fiscal consolidation plan and try to maintain the budget deficit each year so that the central government debt is on a decreasing trajectory as a percentage of the budget. GDP.
