8th Pay Commission: 14% To 34% — The Latest Salary Hike And Fitment Factor Speculations Making Rounds

The buzz continues to grow around 8th Pay Commission, even as it remains yet to be formally constituted by the central government. Key stakeholders, along with brokerage firms, have shared their expectations about the likely fitment factor and the resultant salary hike.

The speculations of effective wage rise ranges from 13% to 34%, according to two research reports released in recent period.

Fitment factor, which is the multiplication unit used for salary revision, could be in the range of 1.83 to 2.46, Ambit Capital said in a note released on July 9.

Under their base case scenario, which is based on 1.82 as the fitment factor, the effective salary could rise by 14%.

Their median case forecast suggests a fitment factor of 2.15, which can raise the salary by 34%.

However, in the upper case scenario, the fitment factor could be recommended as 2.46, which would end up raising the effective wage by a massive 54%, as per Ambit Capital.

On the other hand, a note released by Kotak Institutional Equities on July 21 projected a fitment factor of 1.8, which would effectively raise the salaries by 13%.

Decoding Fitment Factor-Salary Hike Calculation

A fitment factor of 1.8 means that the existing 'basic' salary would be multiplied by 1.8 or 80%. However, the effective salary growth is lower because the dearness allowance is reset to zero once the new pay commission comes into effect.

For example, the 7th Pay Commission had recommended a fitment factor of 2.57. This raised the basic minimum salary of Rs 7,000 to Rs 18,000 (Rs 7,000 x 2.57 or 157%) in 2016. However, the real salary growth was way lower if one takes the resetting of DA to zero into account.

Under the 6th Pay Commission, the overall minimum pay stood as follows: Rs 7,000 (basic salary) + Rs 8,750 (DA) + Rs 2,100 (House Rent Allowance) + Rs 1,350 (Travel Allowance) = Rs 19,200.

Under the 7th Pay Commission, the overall minimum wage was revised in the following the manner in 2016: Rs 18,000 (basic salary) + Rs 4,320 (HRA) + Rs 1,350 (TA) + Rs 0 (DA) = Rs 23,670.

Therefore, from Rs 19,200 to Rs 23,670, an effective growth of 14.3% was seen in the minimum salary of central government employees following the rollout of 7th Pay Commission nine years ago.

Even with a lower fitment factor, the 8th Pay Commission may end up rolling a sharper effective salary hike as compared to the last pay panel. This is due to the fact that the DA—which is reset to zero once the new pay commission comes into effect—presently stands at nearly the half at what it stood during the concluding period of 7th Pay Commission.

In 2016, before the revised salaries were rolled out, the DA stood at 125% of the basic pay. In comparison, the key allowance is currently at 55% of the basic salary.

Notably, the DA is revised bi-annually by the Centre to offset the impact of inflation.

Latest Salary Hike Expectations

If a central government employee is currently earning Rs 50,000, the overall salary gets boosted by Rs 15,000 in form of HRA, Rs 2,160 as TA and Rs 30,000 as DA (taking the grand total to Rs 97,160). This DA component will be zero once the 8th Pay Commission is rolled out. However, it will be raised at every six months, thereafter.

Based on the fitment factors that have been lately projected by the brokerages, here's a look at the likely salary hike scenarios:

- Fitment factor of 1.82: Salary of Rs 97,160 could rise by 14% to Rs 115,297.

- Fitment factor of 2.15: Salary of Rs 97,160 could rise by 34% to Rs 136,203.

- Fitment factor of 2.46: Salary of Rs 97,160 could rise by 54% to Rs 151,166.

"As per back-of-the-envelope calculations, depending on the salary growth seen over different Pay Commissions, the range of fitment factors that the government could be looking at lies between 1.83 and 2.46," Ambit Capital stated in its note.

The actual fitment factor would be recommended by the 8th Pay Commission after it holds deliberations with all stakeholders — a process that would require several months. The commission's formation is currently awaited, and the Terms of Reference, which will serve as a broad framework for its functioning, is yet to be finalised.