Why in News?
- The Government of India has approved the Terms of Reference (ToR) for the Eighth Central Pay Commission (8th CPC), marking the formal start of its work.
- The commission will review and recommend revisions in pay, allowances, and pension structures for central government employees and pensioners.
- Recommendations are expected by April 2027, with implementation likely from January 1, 2026.
Relevance:
- GS-2 (Governance | Polity):
• Administrative reforms and public service pay rationalisation.
• Centre–State fiscal dynamics and impact on cooperative federalism.
• Debates on Old Pension Scheme (OPS) vs National Pension System (NPS). - GS-3 (Economy):
• Fiscal policy implications — impact on revenue expenditure, fiscal deficit.
• Linkages between pay revision and aggregate demand, inflation.
Background
- Constitutional basis: No constitutional provision mandates a Pay Commission; it is a convention-based body constituted by the Union Government roughly every 10 years.
- Historical lineage:
- 1st CPC – 1947 (post-Independence pay rationalization)
- 6th CPC – 2006 (introduced grade pay system)
- 7th CPC – 2014 (implemented in 2016; introduced Pay Matrix)
- 8th CPC – 2024 (to be implemented from 2026)
Mandate of the 8th CPC
- Review and recommend changes in:
- Pay, allowances, and pension structure of central government employees (including defence forces).
- Service conditions of Central Public Sector Undertakings (CPSUs) and autonomous bodies, where applicable.
- Examine the fiscal sustainability of pay hikes in the context of:
- Fiscal deficit targets.
- Economic growth trajectory.
- Inflation and cost of living indices.
- Evaluate non-contributory pension systems and rationalize them.
New Addition to Terms of Reference
- A new ToR has been added:
- Examine demands for restoration of the Old Pension Scheme (OPS) or its variants.
- Specifically, evaluate the “unfunded cost” of non-contributory pensions (OPS) versus the National Pension System (NPS), introduced in 2004.
- This inclusion reflects political and social debates over NPS vs. OPS, especially for employees hired post-2004.
Significance
- The ToR expansion is crucial amid growing demands to reintroduce OPS for post-2004 employees.
- It may lead to a data-driven cost-benefit analysis of both pension models for long-term sustainability.
Timeline
- Commission formation: 2024
- Recommendations due: April 2027
- Implementation expected: From January 1, 2026
- Past patterns:
- 6th CPC recommendations: Implemented after ~18 months.
- 7th CPC recommendations: Implemented within 6 months of submission.
Fiscal Implications
- Pay and pension expenditure: Around 18% of the Centre’s total revenue expenditure.
- Estimated outgo:
- Pay, pension, and allowances together exceed ₹7 lakh crore annually.
- Impact of 7th CPC:
- Pay and allowance hike: ~23.5%.
- Annual additional burden: ~₹1.02 lakh crore.
- Likely 8th CPC impact: Expected rise of 18–20% in expenditure.
Institutional Composition
- Chairperson: Justice Ranjana Prakash Desai (former Supreme Court Judge)
- Members: Pulak Ghosh (IIM-Bangalore), Pankaj Jain (Petroleum Secretary)
- Nodal Ministry: Department of Expenditure, Ministry of Finance
Implementation Issues
- Implementation delays cause arrears and back-loaded fiscal pressure.
- States usually mirror CPC recommendations with modifications, affecting fiscal federalism.
- Challenges include:
- Balancing employee welfare vs. fiscal discipline.
- Aligning public sector salaries with private benchmarks.
- ManCurrent Affairs 01 November 2025aging inter-generational pension liabilities.
Macro-economic Angle
- Advantages:
- Boosts consumption demand through higher disposable income.
- Aids aggregate demand recovery in slowdown phases.
- Risks:
- May inflate fiscal deficit beyond FRBM limits.
- May crowd out capital expenditure if revenue spending surges.
