By KR Shanmugam
The Eighth Central Pay Commission (CPC) is set to revise the compensation structure for over 4.7 million central government employees & 6.8 million pensioners. The fitment factor serves as a multiplier applied to an employee’s existing basic pay to determine the revised basic pay, explains KR Shanmugam
Objectives of the pay commissions
Since eight independent CPCs have been established — in 1946, 1957, 1970, 1983, 1994, 2006, 2013 and now 2025. Common objectives include adjusting pay and allowance in line with the cost of living, reducing the gap between the lowest and highest pay levels — from a 1:40 ratio (55 and2,000) initially to 1:14 (18,000 and2,50,000) under the 7th CPC, simplifying the pay structures by minimizing the number of pay scales (from 51 to 34 by the 5th CPC) and introducing structural reforms to boost efficiency and performance linked incentives.
The 7th CPC scrapped the ‘grade pay’ system and introduced a matrix-based pay system (Levels 1-18). The 8th CPC will assess the overall economic situation, fiscal prudence, availability of resources, and the likely impact of its recommendations on state finances. It will review salary structure, benefits and working conditions in public sector units and the private sector. It will also assess the unfunded liabilities of the non-contributory pension system, in the light of the recent decision to transition from the National Pension Scheme (NPS) to the Unified Pension Scheme for pre-2004 recruits.
Rationale for pay revisions
While annual increments (usually 3% of basic pay) reward experience and seniority, and dearness allowance (DA) or dearness relief for pensioners offsets inflationary effects, a pay commission revision represents an overhaul of the entire compensation system. It resets the basic pay, from which future increments and DA accumulate and rebalances pay structure, allowances and pensions.
The 8th CPC is expected to revise the fitment factor (likely between 2.75 and 3) based on inflation, productivity indices and fiscal considerations, introduce performance linked pay, reconcile Old Pension Scheme demands and NPS demands through hybrid or contributory models, link pay progression to skills, innovations and digital competency, and rationalise allowances like house rent allowance and travel/transfer allowances using updated cost indices and occupational categories. The 7th CPC applied a uniform factor of 2.57.
Understanding the fitment factor
The fitment factor serves as a multiplier applied to an employee’s existing basic pay to determine the revised basic pay. It also bridges the gap between the existing pay structure and the proposed salary hike, ensuring uniformity across various pay levels.
This multiplier is based on inflation, DA neutralisation, economic conditions and government’s fiscal capacity. Typically, 2.25 of the multiplier accounts for DA neutralisation (assuming DA is 125% at the time of revision). The remaining increment (2.57-2.25= 0.32 in the 7th CPC) represents the real salary gain — 14.3% (0.143 fitment gain) intended raise over and above existing pay plus DA and 17.7% raise to account for equity adjustments and fiscal prudence.
This ensures that when DA inflation reaches high levels, it is merged into the pay base to reset the structure for the next cycle. For instance, for basic pay of 20,000, 125% DA means it adds25,000. That is, the total pay is 2.25 times the original pay —the real value of the original ‘basic’ has eroded. After merging, the DA will start from zero on the revised base.
Economic and fiscal implications
The resultant note boost raises household liquidity, supporting higher consumption, savings and sectors like housing, education, retail and auto. However, this surge in disposable income can lead to short-term inflationary pressures. For the Union government, salary and pension outlays typically spike after pay revision.
Following the 7th CPC, salary expenses grew to 1,20,002 crore in 2016-17 from55,163 crore in 2015-16 (a 2.18-fold rise), pension liabilities rose to 1,31,401 crore from96,771 crore (a 1.36-fold rise). DA payments fell to 30,245 crore from64,304 crore, as they were merged into the revised pay.
State governments usually adopt pay revisions with a lag of one or two years, leading to deferred fiscal impacts. Some states use their own salary revision committee to decide the pay revisions. Nonetheless, higher salaries can partially offset fiscal pressures via increased tax revenues and broader economic activity.
The writer is former director, Madras School of Economics and economic consultant to the Tamil Nadu government