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7th Pay Commission: Increased HRA pushed up CPI inflation, says research paper

A research paper by RBI's monetary policy department has confirmed that revised HRA has impacted CPI inflation by nearly 35 basis points at its peak.

twitter-logo BusinessToday.In   New Delhi     Last Updated: April 25, 2018  | 20:59 IST
7th Pay Commission: Increased HRA pushed up CPI inflation, says research paper

Increase in house rent allowance (HRA) for the central government employees under the 7th Central Pay Commission (CPC) had raised concerns that this might lead to more inflation. Now, a research paper by RBI's monetary policy department has confirmed that revised HRA has impacted CPI inflation by nearly 35 basis points at its peak.

"Ex-post analysis of CPI shows that the 7th CPC's HRA increase pushed up headline inflation prints gradually from July 2017, with a peak impact of about 35 bps," the research paper titled 'Impact of Increase in House Rent Allowance on CPI Inflation' said.

The increase in HRA under the 7th pay commission was put into effect from July 2017. As per the recommendations of the pay panel, the basic pay of central government employees was increased by a factor of 2.57. This led to HRA being revised by 105.6 per cent that is more than double the pre-CPC level. This pushed up housing inflation significantly, which in turn, increased the headline inflation. The impact has been observed in most of the states and union territories.

Housing forms a major part of CPI with a weight of 10.07 per cent. Out of this, house rent weighs 9.51 per cent and that of other miscellaneous housing services 0.56 per cent. Central Statistics Office (CSO) considers both rented and self-owned houses in urban centres for compiling housing index.

Some state governments had also increased the pay and allowances for their employees on the lines of 7th pay commission but its impact is not showing up in the data due to several reasons, the paper said.

"First, there may be administrative delays between announcement and actual disbursals. Second, the disbursals may be partial/ staggered at States' discretion. Third, even if disbursements have been made, the representation of State government houses in the sample of dwellings may not be adequate to capture the impact," the research paper said.

As states' impact unfolds going forward, for the existing series, housing index may be published separately for the government dwellings and other dwellings, the paper said.

The paper suggested that since proper assessment and understanding of HRA impact is important for policy analysis, the producers of CPI may consider - for the future base revisions, while preparing fixed sample of dwellings for each state for collecting house rent data, representative share of government houses that reflect the actual share of central and state government houses in the states may be kept.

(With PTI inputs)

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