Implementation of Pay Commission may lead to additional borrowing and disrupt the plan of lowering debt to GDP (Gross Domestic Products) ratio, EY has cautioned in its monthly report. In its special edition on economy watch, it also said that maintaining tax buoyancy in the 1.2-1.5 range could help the government achieve the growth rate of 6.5- 7 per cent.
“The GoI is still far away from the FRBMA (Fiscal Responsibility and Budget Management Act) 2018 debt-GDP target of 40 per cent which itself needs to be corrected. Any intermediate economic event such as the implementation of the Eighth Central Pay Commission may lead to the need for additional borrowing in FY27, which may upset the downward path of the debt-GDP ratio and further delay in achievement of sustainable levels of debt and fiscal deficit,” a special article on fiscal match published in the February edition of Economy Watch said.
The article has been authored by former Governor C Rangarajan and Chief Policy Advisor of EY D K Srivastava.
Last month, the government announced setting up of 8th Pay Commission. Though the government has neither appointed the Chairman and Members nor finalised terms of reference, but it has said that the recommendations will be implemented with effect from January 1, 2026. According to sources, around 50 lakh Central government employees, including defence personnel and approximately 65 lakh pensioners, will also see an uptick in their pensions.
The 7th Pay Commission saw an expenditure increase of ₹1 lakh crore for FY 2016-17. Now, an increase in the expenditure post implementation of recommendations by 8th Pay Commission will depend on what matrix is being applied. Also, the budget of fiscal year 2025-26 has not made any provision on account of rise in salary and pension bill. Still, economists feel that rise in pay and pension bill likely to impact fiscal consolidation roadmap as announced in FY26 Budget.
Tax Buoyancy
Taking note of restructuring in income tax rates and slab and resultant revenue foregone of ₹1 lakh crore, the monthly report slight highlighted personal income tax buoyancy coming down to 1.42 in FY26 from 2.09 in FY25 Over the past three years, the gross tax revenue buoyancy has gently moderated — from 1.4 in FY24 to 1.15 in FY25 (RE) and projected to be 1.07 in FY26 (BE). tax buoyancy is a ratio of change in tax revenue in relation to change in GDP.
“The FY26 Budget strategically balances fiscal consolidation with growth imperatives. However, for India to achieve a medium-term growth trajectory of 6.5-7 per cent and realise its Viksit Bharat vision, it must ensure tax buoyancy remains in the 1.2-1.5 range,” Srivastava said. Further, this would help create the necessary fiscal room to accelerate infrastructure expansion, enhance social sector spending, and maintain fiscal discipline.
The report advised that the government may need to strengthen revenue mobilisation, particularly by increasing the tax-to-GDP ratio from the estimated 12 per cent in FY26 (Budget Estimates) to 14 per cent by FY31. Over the past decade, the government has reduced its fiscal deficit to GDP ratio from 4.1 per cent in FY15 to 3.4 per cent in FY19, with the ratio expected to adjust to 4.4 per cent by FY26. “It needs to be steadily reduced to the FRBM consistent level of 3 per cent,” the report said.