Government employees may soon receive some good news. The central government is expected to constitute the 8th Pay Commission next week. This move comes just before the Bihar Assembly elections and nearly ten months after Cabinet approval.

This commission will recommend new pay and pension rules for approximately 11.8 million central government employees and pensioners. According to media reports, the government has finalized the commission's Terms of Reference (ToR), the scope of work, and the names of the chairman and members, who will oversee the pay and pension revision process, which occurs every ten years.

This move is being taken approximately one year later than previous pay commissions. The commission is expected to take 6 to 12 months to prepare its report. Once implemented, its effects will be considered retrospective, effective January 1, 2026. Prime Minister Narendra Modi approved the formation of the 8th Pay Commission on January 16, 2025, just before the Delhi Assembly elections. The government has also sought input from all key stakeholders, including state governments and public sector companies (PSUs), in this process.

Impact of the Pay Commission
Implementation of the Pay Commission's recommendations leads to an increase in employee salaries, which boosts consumption. However, it also imposes a significant financial burden on state governments, PSUs, and central universities, as pay revisions are generally made in line with the central government's recommendations. Although the Pay Commission's recommendations are not binding on the central government, they are often accepted with minor changes. The Commission advises on the pay structure, allowances, pensions, and other benefits for central employees.

The Example of the 7th Pay Commission
The 7th Central Pay Commission was constituted on February 28, 2014, with an 18-month deadline. It came into effect on January 1, 2016, and resulted in a 23.55% increase in salaries and pensions. This imposed an additional burden of approximately ₹1.02 lakh crore (0.65% of GDP) on the government annually, making it difficult to reduce the fiscal deficit from 3.9% to 3.5%.

Fiscal Impact of the 8th Pay Commission
The impact of the 8th Pay Commission will be incorporated into the new Medium-Term Fiscal Roadmap and the recommendations of the 16th Finance Commission. The 16th Finance Commission will determine tax sharing and grants to states for FY27 to FY31 (2027-2031). This will also benefit millions of state government employees, as they typically follow the Central Government's Pay Commission for salary revision.

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