As the 8th Pay Commission looms, a look at what really drives the govt’s wage bill

In October, the government finalized the terms of reference for the 8th Central Pay Commission (CPC), which has been given 18 months to submit its recommendations. While the report is due sometime in 2027, the recommended pay scales are expected to be effective from 1 January 2026.

Here is a look at the previous CPCs' recommendations and their impact on the government’s fiscal situation.

Mounting spend, melting share

The CPC determines the fitment factor, which is arrived at by calculating the minimum pay required for a family’s survival (using the Aykroyd Formula for nutrition, clothing, and housing), which is then adjusted on the basis of inflation.

A fitment factor of 2.00 means that a basic pay of ₹10,000 becomes ₹20,000. As per media reports, the 8th CPC may recommend the fitment factor of 1.92-2.86, largely in line with 1.86 recommended by the 6th CPC and 2.57 by the 7th CPC.

While the pay increases add to the government's employee costs, recent trends show they have become less cumbersome.

The central government spent ₹2.75 trillion on the pay and allowances of its regular civilian employees in FY23, accounting for 6.6% of the total budgetary expenditure. This marks a notable decline from 11.4% in the financial year 2000.

This has been mainly due to a sharp decline in the total number of regular civilian employees since the late 90s, while Centre’s budget continuously grew.

Downsizing paradox

Over the last 25 years, the number of central government employees has gone down considerably from about 3.9 million in 2000 to 3.1 million in 2023. A sharp dip took place at the turn of the century when there was a transfer of staff from the central government to BSNL, a public sector company, between 2000 and 2001. Even after that, the downsizing continued over the next two decades.

While there has been a strong case for making governments more efficient by cutting redundant work and posts, and thereby cutting fiscal costs, it is notable that the number of sanctioned posts has remained high. The number of sanctioned posts, which saw a mild decline initially, has risen since 2005 and reached 4.0 million in 2023.

The trend of contracting employee headcount and an expansion in the sanctioned posts has led to vacancy rate rising from 8.6% in 2000 to 24.2% in 2023, creating a paradox. If the bureaucracy is indeed oversized and requires rationalisation, the continued sanctioning of additional posts seems contradictory.

Fewer heads, higher costs

While there has been a considerable decline in the number of employees, the expenditure on their remuneration has continued to rise steadily to keep salaries in line with the price rises.

Across the last three CPC tenures, the compound annual growth rate (CAGR) in employee headcount has either been negative or close to zero, whereas the CAGR in employee expenditure has been higher, showing substantial variation. This reflects the steady pay hikes, primarily driven by revisions in the dearness allowance.

The gap in growth rates widened during the tenure of the 6th CPC—a period largely marked by high inflation rate—implying higher annual increments for the employees during that period.

In comparison, the period before FY05 witnessed a sluggish expansion of the government’s employee expenditure, largely due to massive downsizing and a slower growth in average pay. As employee count declined again during 7th CPC and inflation came under control, the increase in expenditure on employees was slower.

Pay premium?

The average remuneration of central government employees stands nearly five times India's per capita gross national income (GNI). The remuneration of government employees consists of basic pay, dearness allowance (DA) and various other allowances such as house rent allowance, transport allowance, children education allowance, etc.

At the start of each CPC cycle, the DA component is effectively nil. As the tenure of CPC progresses, the share of DA in the remuneration increases to compensate for the higher cost of living.

In FY23 the average remuneration of a central government employee stood at around ₹9 lakh, while per capita GNI was around ₹194,000. The ratio has remained broadly stable, at five times, over the last two decades, barring a brief dip below 4 times during FY06-07. While the pay commission recommendations are eagerly awaited, the trend shows the salaries of government employees have risen largely in proportion with the growth in an average citizens’ income. Between FY2000 and FY2023, the average pay grew at 10.6% CAGR, broadly in line with the 10.4% CAGR in per capita GNI.

Mirroring inflation

The dearness allowance component of the salary is inflation-indexed and derived from the Consumer Price Index-Industrial Workers (CPI-IW), published by the Labour Bureau. In effect, higher inflation directly translates into higher average remuneration.

The slowest growth in average remuneration (7.3% per year) was recorded during FY00-FY05, when the average annual inflation rate was just 4.1%. As inflation accelerated sharply after 2009, the duration of the 6th CPC saw the steepest increases in average pay (14.3% per year).

Theoretically, a higher fitment factor, decided upon by the pay commission, results in faster growth in both bureaucratic compensation and the government’s personnel costs.

However, its significance in the overall fiscal calculus remains limited, as it influences only the basic pay component of the total employee expenditure. In contrast, maintaining price stability plays a far more crucial role in keeping the government wage bill under control.

The author is a PhD student in economics at the Indian Institute of Technology, Roorkee.