The fact that Pay Commission recommendations, when implemented by the government, result in higher demand for goods and services has been known for a long time. It would also impact inflation, at least partially, because some goods and services would be part of the CPI basket. Shortly after the 7th Pay Commission came out with its recommendations, the Reserve Bank of India (RBI) estimated that these would directly impact the headline CPI by 150 basis points, and by another 40 basis points as a result of indirect impact. This impact would largely be because of housing and transportation sectors, and it would be spread over a period of time.
Now a Mint Street Memo, authored by Praggya Das, Director of Monetary Policy Research, estimates that there has been a 35 basis point impact so far on CPI because of the pay panel recommendations on HRA. Housing has a 10.07 per cent weightage in the CPI, with 9.56 per cent weight given to HRA, and the remaining 0.56 per cent because of miscellaneous housing expenses.
Central government employees got revised wages from July 2017. Their HRA went up by 105.6 basis points. By calculating the number of houses in the sample surveyed by the Central Statistics Office, which would be occupied by central government officers, the paper estimated that the impact of HRA peaked at 35 basis points for CPI in December 2017 and it will remain at that level for the next six months before gradually dissipating by the end 2018.
The study says in case all the states implement the HRA recommendations, the impact could be as much as 100-105 bps, and would show up from April 2018, and would dissipate only by 2019. And that is the HRA impact alone. That could be one reason RBI does not expect inflation to come down anytime soon.