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 room in the upcoming Union Budget 2025-26. However, the fiscal impact of the Remuneration Commission will have to be taken into account in the medium-term expenditure plans, as well as in the recommendations of the XVI 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 committee for the eighth Pay Commission. The Commission is likely to be formed in 2026, and its recommendations are likely to be effective from January 1, 2026.

The formation of the new pay commission is expected to give a significant boost to consumption and economic growth, along with an improvement in 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 had recommended an overall adjustment factor of 2 .57 depending on the movement of inflation. According to sources, the Seventh Pay Commission saw an increase in expenditure of Rs 1 lakh crore for the fiscal year 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 at EY India, noted that decennial revisions to salaries and pensions usually lead to a sharp increase in revenue expenditure growth. For example, the Centre’s revenue expenditure growth in 2016-17 was 9.9% as against 4.8% in the previous year. “This increase in 2026-27 would also have implications on the fiscal space available for growth in the Centre’s capital expenditure,” he noted.

The hikes in wages and pension expenses of central government employees would start being reflected in the central budget for FY27 onwards, he said.

“There would be tangible increases in government revenue expenditure that would affect the 16th Finance Commission’s estimates and its recommended transfers,” he further said, adding that the fiscal consolidation path needs to be properly calibrated given the additional pressures that are generated as a result of these. revisions

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

Aditi Nayar, Chief Economist and Head – Research and 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 the same should be incorporated into the new fiscal consolidation in the medium term. path as well as 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 or slightly below 4.5% in FY26 He has also indicated that from 2026-27 he will move to a new fiscal consolidation plan and would try to maintain the fiscal deficit every year so that the debt of the central administration is on a decreasing trajectory as percentage of GDP.