8th Pay Commission likely to be set up by mid May

After a period of delay, the government is moving quickly to finalize the terms of reference (ToR) for the 8th Pay Commission. Official sources indicate that the ToR, along with the appointment of the commission's chairman and members, is expected within the next two to three weeks.

Typically, the salaries and pensions of central government employees are revised every ten years, considering economic conditions, purchasing power, spending habits, and price levels. The upcoming commission is likely to be given at least a year to formulate its recommendations after extensive discussions with various stakeholders, including central and state governments, as well as public sector enterprises.

With the report anticipated around mid-2026, the resulting pay and pension revisions are expected to be implemented retroactively from January 1, 2026, with arrears paid to employees. The Central Pay Commission (CPC) is established once every decade for this purpose.

An official stated, "Significant progress has been made on the ToR and the selection of members for the 8th CPC. We anticipate notification within the next 2-3 weeks." This development follows the department of expenditure's recent announcement of 35 vacancies within the 8th CPC, to be filled through deputation.

The 7th CPC, formed on February 28, 2014, under the chairmanship of Justice Ashok Kumar Mathur, had an 18-month timeframe to submit its report. Implemented on January 1, 2016, its recommendations included a 23.55% increase in pay and pensions for central government employees, costing an estimated ₹1.02 lakh crore in FY17 (0.65% of GDP). This substantial payout posed challenges for the government's fiscal deficit reduction targets.

While pay hikes from such commissions can stimulate consumption, they also create financial burdens for state governments, public sector undertakings, and central universities, which often follow suit with similar revisions. The financial implications of the 8th CPC's recommendations will likely be factored into the government's medium-term fiscal planning and the 16th Finance Commission's recommendations for tax devolution and grants to states, effective from FY27.

Approximately 5 million central government employees, including those in defense, and around 6.5 million pensioners will benefit from the 8th Pay Commission's decisions. Millions of state and union territory government employees are also expected to see salary increases as a consequence.

The 7th CPC introduced a new pay matrix, replacing existing pay bands and grade pay, setting a minimum monthly pay (including dearness allowance) of ₹18,000 and a maximum of ₹2.5 lakh. This was a significant increase from the previous starting pay of ₹7,000 and the highest pay of ₹90,000 (excluding the then 119% dearness allowance). The 7th CPC also maintained a 3% annual increment and recommended a fitment factor of 2.57%.

The 8th CPC will likely consider the movement of CPI inflation to determine a similar fitment factor. The 7th CPC's implementation led to a 9.9% increase in the Centre’s revenue expenditure in 2016-17, compared to 4.8% in the preceding year. A similar increase in 2026-27 would impact the fiscal space available for capital expenditure growth.