Eighth Pay Commission: Fiscal impact unlikely in FY26

The fiscal impact of the Eighth Pay Commission may come up only in the Union Budget 2026-27, which gives Finance Minister Nirmala Sitharaman ample fiscal space in the upcoming Union Budget 2025-26 also 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 will set up a commission for the eighth pay commission. The commission is likely to be formed by 2026 and its recommendations are likely to come into effect on January 1, 2026. from

The formation of the new pay commission is expected to provide a significant boost to consumption and economic growth, as well as improving the quality of life of 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 suggested an overall compliance ratio of 2.57 based on the movement of inflation, sources said. The Seventh Pay Commission has seen an increase in expenditure by Rs 1 lakh crore for the financial year 2016-17.

The Eighth Pay Commission will also assess a similar compliance factor taking into account the movement of CPI inflation over the interim period.

EY India Chief Policy Advisor D.K. Srivastava noted that 10-year revisions of salaries and pensions usually lead to a sharp increase in revenue expenditure.For example, the Centre’s revenue expenditure growth was 9.9% in 2016-17, compared to 4.8% the previous year. “Such an increase in 2026-27 will also affect the available fiscal space for the growth of the center’s capital expenditures,” he said.

He also said that hikes in salaries and pension costs of central government employees will start reflecting in the central budget for FY27.

“There will be a tangible increase in government revenue expenditure, which will affect the Sixteenth Finance Commission’s estimates and their proposed transfers,” he said further, adding that there is a need to properly calculate the path of fiscal consolidation given the additional pressures resulting from them. revisions.

The recommendations of the Sixteenth Finance Commission will be from 2026-27 to 2030-31.

Aditi Nayar, Chief Economist and Head of Research and Outreach, ICRA, also said that while the 8th Pay Commission award is unlikely to affect financial performance in FY2026, its potential impact should be factored into the new medium-term fiscal consolidation. the path as well as the recommendations of the Finance Commission.

The Center is expected to slightly better the fiscal deficit target of 4.9% of GDP in FY 25 and the fiscal deficit is expected to be 4.5% or slightly lower in FY 26. It also said, that from 2026-27 it will move to fiscal consolidation new plan and will try to keep the fiscal deficit every year so that central government debt to GDP is on a downward path.