How a different norm adopted to revise DA gives central staff an edge

The inflation calculator used to determine the dearness allowance (DA) for government employees is the consumer price index for industrial workers (CPI-IW).

Central government employees have earned themselves a generous 5 per cent rise in their pay on Wednesday, because the inflation measure for them is different from what is used for most other segments of wage earners in the economy.

"The decision was delayed because we wanted the staff side to consider using the wholesale price index instead, but they did not agree,” a source said. The announcement of any revision in the dearness allowance is usually made in September and February.

The inflation calculator used to determine the dearness allowance (DA) for government employees is the consumer price index for industrial workers (CPI-IW). It is India's oldest measuring rod for consumer price inflation dating back to 1946. But the Reserve Bank of India (RBI) does not now use this measure to calibrate the rates of interest and neither does any segment of India’s service economy, preferring instead the combined CPI measure. Those measures show a far lower inflation reading at present. For instance, of the two parts to the new CPI, urban and rural that the RBI uses under its Monetary Policy Framework agreement with the finance ministry, the CPI-Urban shows an inflation rate of 4.33 in August 2019, but measured by CPI-IW it is 6.31 per cent. The DA is calculated as a percentage of the basic pay of the employees.

So, a private sector employee in a bank or a service delivery platform will see her wages linked only to CPI-Urban in this festival season. Her counterpart in the government will get a far more generous compensation for inflation. Since the banks would also set their retail interest rates for their customers with an eye on CPI-Urban, the benefit for government employees will go up further. She will be compensated more in her wages and enjoy the benefit of lower retail prices and interest rates in her purchases. In fact the difference could be more stark because the RBI uses CPI (General), which in the current environment, further tapers down the inflation numbers. The CPI (General) was 3.21 per cent in August. Throughout this calendar year, CPI-IW has exceeded the CPI by an average of 300 basis points.

It is understood that the proposal for the latest revision in dearness allowance lay pending in the finance ministry for close to two months because it was considered excessive. But the persistent slowdown in the economy helped it clear the Cabinet.

Business Standard