The Union Cabinet, chaired by Prime Minister Narendra Modi, approved on Wednesday, 28 October, a 3-percentage-point increase in dearness allowance for central government employees and dearness relief for pensioners, taking the rate from 60% to 63% of basic pay or pension. The revised rate applies from 1 July 2026. An official statement says the increase follows the formula recommended by the Seventh Central Pay Commission. According to Deccan Chronicle, the decision benefits about 48.54 lakh employees and 68.71 lakh pensioners, a combined group of more than 1.17 crore people, and the combined burden on the exchequer is ₹10,016.10 crore a year.
The strongest argument for the hike is that prices have been rising. Retail inflation climbed to 5.54% in September from 4.83% in August, according to the ministry of statistics figures reported by Business Today, and food inflation jumped from 5.97% to 7.74% over the same period. Rural inflation reached 6.08% and urban inflation 4.88%, and food inflation was 8.06% in rural areas against 7.18% in urban areas. The figures use the revised series with 2024 as the base year. Dearness allowance exists to protect the buying power of fixed salaries and pensions against exactly this kind of rise, and the formula is applied mechanically rather than at the government's discretion. Pensioners, who cannot take on extra work to keep up with food prices, are among the people most exposed, and the 68.71 lakh of them covered by the decision outnumber the 48.54 lakh serving employees. Withholding or delaying the increase would effectively cut real pay for the households that depend on it.
The argument against is about cost and fairness. Spread across 1.17 crore people, the bill works out to about ₹8,500 a year for each beneficiary on average, by simple division. A recurring bill of ₹10,016.10 crore a year is a commitment that does not end with this year's budget, and it is paid for by taxpayers, most of whom have no inflation-linked income. Rural inflation of 6.08% is hitting farm workers, informal workers and small traders whose earnings are not indexed to anything, and they will not see a similar adjustment. The timing is also awkward for policy. The Reserve Bank raised its repo rate by 25 basis points to 5.50% on 7 October to restrain prices, and a sceptic can argue that a rise in assured incomes for 1.17 crore people pushes in the opposite direction. The Finance Ministry told the Lok Sabha on 10 August that it has not decided when the recommendations of the 8th Pay Commission will take effect.
The decision matters beyond the government payroll. The 8th Pay Commission was set up on 3 November 2025 and has 18 months to report, which points to about May 2027, so the dearness allowance will remain the main tool for pay adjustments until then. In its August reply to the Lok Sabha, the Finance Ministry put civilian central employees at about 35.77 lakh as of 1 March 2026 and pensioners and family pensioners at 33.76 lakh as of 31 December 2025, excluding defence pensioners. Those figures differ from the larger counts in the dearness allowance decision, and the reports I reviewed do not explain the gap. How the balance between pay and prices is managed will influence both inflation and fiscal deficits across the country.
The hike is justified on the formula and costly on the books, and both statements can be true at once. The government has protected a large and politically important group from rising prices. It has not yet explained how it will protect the much larger group of Indians who receive no such cushion.