The pay hike is likely to benefit 18mn general government employees and 13mn pensioners; Market expectations of a significant boost to India's economy and consumption is building.
Tanvee Gupta Jain,
Economist at UBS India
Mumbai, March 11, 2025: Market expectations of a significant boost to India's economy and consumption is building. India usually revises the wages of central government employees every decade, based on the Central Pay Commission's (CPC) recommendations, and a revision is due in January 2026. Considering state governments and Central Public Sector Enterprises (CPSEs) typically follow the CPC's recommendations, the pay hike is likely to benefit 18mn general government employees and 13mn pensioners. Our base case is for any pay rise to unlikely come at the cost of India's fiscal position. Macro stability is a key policy objective for the government, as is investment-cycle-driven economic growth rather than consumption. Experience of past pay commissions suggests a boost to household savings more than consumption.
Three scenarios for likely pay hikes under 8th CPC; macro implications
1) Fiscal prudence continues (our base case). Here, we assume a 15-20% increase in total wages (basic+Dearness Allowance+House Rent Allowance+other allowances) vs. the 24% recommended by the previous CPC. The likely increase in the comprehensive wage bill (centre + states + pensions + CPSEs) would be about Rs4.5trn (US$50bn, 110 bp of FY27 GDP) and our base case forecasts would stand. 2) Modest slippage (wages rise 20-25%) – interest rates would increase modestly, real GDP growth would get a near-term boost but then trend towards our base case. 3) Fiscal shock (wages rise 40- 45%) – the INR would weaken, inflation would jump higher, the RBI would hike rates, and real GDP growth would accelerate in the near term but then weaken.
Who pays the bill? Not a zero-sum game
If implemented, the pay hike could be funded by: 1) tax increases; 2) other spending cuts; 3) higher fiscal deficit. Our base case is for the impact on the central government's fiscal balance to be modest and the shift in central government focus towards "debt to GDP ratio" as the fiscal anchor (from FY27) renders them greater flexibility. But the impact could be significant for states as they likely account for about 60% of the potential gross impact of any wage increases. State-level implementation usually takes over 2-3 years and would be driven by: a) the state’s fiscal ability to absorb the cost considering many states have announced over US$20bn in total cash transfers for women recently; and b) states' elections timeline.
CPC's wage hike to drive growth-inflation narrative in 2026-28E
c40% of formal employment is in the public sector currently and pay revisions for government employees could indirectly influence wages in the private sector. We thus reason government pay revisions may be entrenching inflation, especially if productivity does not keep pace. Private sector salaries seem to have anecdotally grown at a slower pace in recent years, also relative to government wages, as the latter has inflation-linked increases. Our analysis reveals the total pay of the lowest-ranked government employees is typically more than twice that of comparable private sector jobs.
Consumption positive, capex cautious, margin compression for few sectors
Per UBS' India strategist, the average income increase would be Rs150k annually and key beneficiaries would be 2-wheelers (TVS Motor, Royal-Enfield), compact cars (Maruti Suzuki), consumer durables (Voltas, Havells), retailers (DMART, Zomato, Swiggy), tourism (MakeMyTrip) and affordable housing. Pay rises would likely be negative for: 1) industrial/infra stocks (L&T) as FY27E capex growth could be low, at a mid- to high-single digit; 2) high salary increase for gov't employees would pressure private salaries too and that impacts margins for India Pharma (medical reps detailing to doctors), hospitals (paramedic staff), higher delivery cost (Jubilant Food, Zomato, Swiggy), metal & mining.
