The fiscal ramifications of the 8th Pay Commission may only come into play in the Union Budget 2026-27, giving Finance Minister Nirmala Sitharaman ample fiscal leeway in the upcoming Union Budget 2025-26. However, the financial impact of the Remuneration Commission must be taken into account in the medium-term expenditure plans as well as in the recommendations of the Sixteenth Finance Commission.
In a welcome move for over 60,000 central government employees and 65,000 pensioners, the Center announced that it will form a committee for the 8th Pay Commission. The committee is likely to be formed by 2026, and its recommendations are likely to come into effect from January 1, 2026.
The formation of the new pay committee is expected to provide a major boost to consumption and economic growth, along with improving the quality of life for government employees, the sources said.
The Seventh Pay Commission was established in 2014 and its recommendations were for a period of 10 years from 1 January 2016 to 31 December 2025, recommending a general setting factor of 2.57 based on the movement of inflation. According to sources, the 7th Pay Commission saw an increase in expenditure of Rs 1 lakh crore for the financial year 2016-17.
The 8th Pay Commission will also have to estimate a similar setting factor taking into account the movement of CPI inflation during the intervening period.
D.K. pointed out: Srivastava, senior policy advisor, EY India, notes that 10-year reviews in salaries and pensions typically lead to a sharp increase in revenue expenditure growth. For example, the growth in the center’s revenue expenditures during the period 2016-2017 was 9.9% compared to 4.8% in the previous year. “Such an increase in 2026-27 will also have implications on the fiscal space available for growth in the Centre’s capital expenditure,” he noted.
He further said that increases in salary and pension expenditure for central government employees will begin to be reflected in the central budget for FY27 onwards.
“There will be significant increases in government revenue expenditures impacting the 16th Finance Commission estimates and recommended transfers,” he added, adding that there is a need to properly calibrate the fiscal consolidation path in light of the additional pressures resulting from these reviews.
The recommendations of the Sixteenth Finance Committee will be from the period 2026-27 to 2030-2031.
Aditi Nayar, Chief Economist and Head of Research and Outreach, ICRA also noted that although the award related to the 8th Pay Commission is unlikely to impact fiscal metrics in FY2026, the potential impact of this should be incorporated into the new fiscal consolidation process on Medium range. The path as well as the recommendations of the Finance Committee.
The Center is expected to do slightly better on its fiscal deficit target of 4.9% of GDP in FY25, and is expected to peg the fiscal deficit at 4.5% or slightly lower in FY26. It also noted that from 2026- 2027 onwards, it will move to a new fiscal consolidation plan and attempt to maintain the fiscal deficit each year so that central government debt is on a decline path as a percentage of GDP.
