Bridging the Data Gap: The True Fiscal Cost of Public Sector Pay and Pensions in India

Executive Summary

India’s public sector compensation system is characterised by fragmented reporting, incomplete coverage, and inconsistent classification, which leads to a systematic understatement of fiscal commitments. Addressing these gaps is essential for fiscal sustainability, intergovernmental equity, and statistical accuracy for sound policy planning.

This report highlights critical reporting data gaps in government accounts and estimates a more accurate fiscal cost of public sector employment. Definitions of both the public sector and compensation differ widely across institutions, limiting comparability and weakening fiscal analysis. As a result, official statistics systematically understate compensation bills due to structural weaknesses in coverage, classification, and reporting, such as the following:

• Omission of Key Workers: Contract workers and scheme-based workers (such as Accredited Social Health Activist [ASHA] and Anganwadi workers) are routinely excluded from government employee bases, meaning their compensation is not reflected under normal salary heads. This creates a structural bias in reported expenditure, particularly as reliance on non-regular workers increases.
• Fragmented Reporting: Compensation is often fragmented across different accounts, such as Grants-in Aid (GIAs) for autonomous bodies, separate defence pay, and distinct railway and post pension accounts. This fragmentation weakens fiscal transparency because no single dataset provides a complete view of compensation obligations.
• Lack of Standardisation: Reporting lacks standardisation, especially across states, with differing definitions leading to divergence across multiple official data sources. As a result, inter-state comparisons and aggregation at the general government level are unreliable.

Key Findings

• Reported Versus Adjusted Fiscal Costs: When adjusting for these omissions and reporting fragmentation, the actual public sector compensation expenditure is substantially higher than the officially reported numbers.
• Union Government: Reported figures suggest that central pay and pension averaged 2.8% of GDP between 2015–2016 and 2020–2021. However, after adjusting for data gaps (like contract worker pay and autonomous institution salaries), the true cost is estimated at 3.8% of GDP. When including Public Sector Enterprise (PSE) employees, this rises further to 4.6% of GDP. This indicates that a significant portion of compensation-related expenditure lies outside standard payroll reporting frameworks.
• State Governments: In 2022–2023, reported figures showed states spending 2.5% of the national GDP on salaries. Adjusted figures, which include GIA salaries, scheme worker honorariums, and PSE salaries, place this at 4.1% of GDP. For specific states like Maharashtra, the adjusted pay is nearly triple the reported amount. This highlights wide variation in reporting practices and underscores the scale of underestimation at the subnational level. These adjustments do not reflect new spending, but a more complete measurement of existing obligations.

Policy Recommendations

To address these weaknesses in Public Financial Management (PFM), the 8th Central Pay Commission (CPC) should move beyond its traditional role of pay revision and prioritise a reform-oriented framework for improving the measurement, classification, and transparency of public sector compensation.

This includes the following:

• Comprehensive Coverage: Align disclosure with international standards such as the International Monetary Fund (IMF)’s Government Finance Statistics Manual (GFSM) 2014 to include all contracts, schemes, and PSE workers.
• Standardised Definitions and Classification: Uniformly codify salary and compensation across accounting frameworks to ensure comparability across states, levels of government, and over time.
• Integrated Data Systems: Link personnel and payroll databases with treasury systems to enable real-time tracking of compensation expenditure and improve the assessment of workforce size, fiscal commitments, and long-term liabilities.
• Improved Pension Transparency: Publish medium- to long-term actuarial projections to better assess fiscal risks across all categories of pension liabilities.
• Meaningful Breakdown of Compensation Data: Headline compensation figures should be accompanied by detailed and standardised disaggregation across workforce categories, sectors, and levels of government.

Together, these reforms would enable the creation of a unified public sector compensation framework, improving fiscal transparency, strengthening intergovernmental comparability, and supporting better policy decisions.

Without a comprehensive and transparent accounting of compensation obligations, fiscal policy risks are being systematically misaligned—overestimating fiscal space while underestimating long-term commitments. Strengthening compensation measurement is therefore essential for sustaining public investment in infrastructure, climate transition, and human capital.

Keywords: Public Sector Compensation, Fiscal Sustainability, Data Gaps, Contractual Workers, Central Pay Commission (CPC), Pensions, Public Financial Management (PFM), workforce, transparency, scheme-based workers