Can 8th Pay Commission deliver the consumption boost promised by PM Modi?

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New Delhi: The Union Government's decision to constitute the 8th Pay Commission has been widely welcomed by nearly 50 lakh central government employees and 65 lakh pensioners, who are expected to benefit from the move.
While the fiscal impact of the commission's recommendations will only be felt in 2026, it has sparked discussions on whether it can effectively boost consumption and improve the quality of life, as Prime Minister Narendra Modi suggested.
Since India's independence in 1947, the central government has constituted seven pay commissions to revise its employees' salary structures, allowances, and benefits. These panels, set up roughly every 10 years, also propose formulas for revising dearness allowance and dearness relief to offset inflation. The recommendations of the 7th Pay Commission, constituted in 2014, were implemented on January 1, 2016, leading to an expenditure increase of Rs 1 lakh crore for fiscal 2016-17.
The term of the 7th Pay Commission concludes in 2026, and the decision to initiate the process for the 8th Pay Commission ensures that its recommendations will be received well in advance, facilitating smooth implementation.
“We are all proud of the efforts of all government employees, who work to build a Viksit Bharat. The Cabinet's decision on the 8th Pay Commission will improve quality of life and give a boost to consumption,” Modi said in a post on X.
The commission's recommendations will likely affect central government employees, employees of state-owned organisations, and several state governments, which typically align their pay revisions with central guidelines.
Economic implications
Despite the potential benefits, experts remain cautious about the broader economic impact of the pay commission. During the 7th Pay Commission's implementation, Rs 1 lakh crore was infused into the economy. However, as economist S Adikesavan points out, "For an economy with a GDP of Rs 326 lakh crore, this is a meagre sum. It is unlikely to create a huge impact as anticipated."
Consumption patterns further complicate the picture. Lower-income groups are more likely to spend additional income, providing a boost to demand. They often use the extra funds to make purchases they had postponed due to lower wages and higher debt burdens.
However, the middle and upper-middle classes—who constitute a significant portion of government employees—may not significantly increase spending due to already sufficient disposable incomes.
Additionally, there are concerns about inflationary pressures. "The push of Rs 1 lakh crore could impact the money in circulation, which is currently Rs 34 lakh crore. This could add to inflationary pressures," warns Adikesavan.
In addition, implementing the 8th Pay Commission is expected to significantly increase the government's revenue expenditure, potentially reducing the funds allocated for capital expenditure. "While the award related to the 8th Pay Commission is unlikely to affect fiscal metrics in FY2026, its potential impact should be factored into the new medium-term fiscal consolidation path as well as the Finance Commission's recommendations," says Aditi Nayar, Chief Economist and Head of Research & Outreach at ICRA.
Multiplier effect: Limited or transformative?
Academics are sceptical about the pay commission's ability to create a significant multiplier effect. Dr Paramaswaran of the Centre for Development Studies in Thiruvananthapuram notes: "Since the number of people benefiting is relatively small, it is unlikely to create a major multiplier effect in the economy."
Economists also dismiss the idea that a spike in government salaries would prompt the private sector to raise its salary structures. “The private and public sectors cannot be directly compared, so it is unlikely to create pressure on the private sector,” says Adikesavan.
While the economic impact may be limited, the quality-of-life improvements for government employees and pensioners are undeniable. Pay commissions often lead to increased financial security, better resource access, and improved employee morale.