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Fiscal control needed beyond FY26 as pay hikes to stoke inflation later: Economists

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The eighth Central Pay Commission (CPC), whose recommendations will come into effect from January 2026, is expected to have significant implications for the Indian economy and government finances. While its immediate impact on fiscal metrics in the next financial year may be limited, economists anticipate broader effects, including potential inflationary pressures and support for private consumption, once the government begins disbursing revised wages. The government approved the formation of the pay panel, which will review the salaries and pensions of central government employees and pensioners, with implementation of revised wages expected from July 2026, possibly with arrears.

Fiscal discipline will play a crucial role in managing the financial impact of the CPC’s recommendations. The government is targeting a reduction of the fiscal deficit to less than 4.5% of GDP by 2025-26, down from an estimated 4.9% in the current fiscal year. Economists, including ICRA’s chief economist Aditi Nayar, have stressed the need to incorporate the CPC’s recommendations into the government’s medium-term fiscal consolidation path and the Finance Commission’s advice. Similarly, Bank of Baroda’s chief economist Madan Sabnavis emphasized that a lower fiscal deficit target of 3% of GDP would better equip the government to manage the additional expenditure arising from revised wages and pensions.

The impact of higher wages extends beyond government finances. Economists have noted that salary increases for central government employees often set a precedent for state governments, public-sector undertakings (PSUs), and municipal bodies, amplifying their influence on the broader economy. While these revisions could stimulate urban consumption and boost household savings, they may also contribute to inflation and expand the government’s pension liabilities.

The upcoming 16th Finance Commission is expected to take these developments into account when drafting its recommendations, aligning fiscal policies with the anticipated pay panel awards. As India navigates the twin challenges of fiscal consolidation and economic growth, the implementation of the eighth CPC’s recommendations will require a delicate balance between boosting public sector wages and maintaining macroeconomic stability.

source :Economics Times and AI

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