New Delhi, May 1: The Ashok Lavasa committee submitted its final report on allowances under the seventh pay commission to the ministry of finance last week. the report calls for a revision of rates under key allowances such as the House rent Allowance (HRA) and the Dearness Allowance (DA), and the subsumption or abolition of others. The resultant increase in salary of central government employees, however, could lead to a massive inflation in the coming months.
The commission has called for a revision of the house rent allowance based upon the city of residence of the employee, as well as the Dearness Allowance extended to him or her. Depending on whether the employee is residing in an X, Y or Z class city, the committee has recommended that the current rates of HRA under the seventh pay commission be revised to a rate of 24 per cent, 16 per cent and 8 per cent of the current basic pay.
Further, the report has suggested that wherever the Dearness Allowance crosses 50 percent, the HRA be given at a rate of 27 per cent, 18 per cent and 9 per cent. However, if the Dearness Allowance crosses 100 percent of the basic pay, the suggested House Rent Allowance  (HRA) rates are 30 per cent, 20 per cent and 10 per cent.
The above structure of allowance pay, when implemented, will result in a massive hike in the salaries of employees. the minimum hike in the central government employees’ income would be 106 per cent, while the maximum would be a massive 122 per cent.
The downfall, however, is that with over 47 lakh central government employees and 53 lakh pensioners, the allowance hike would lead to inflationary tendencies, resulting in a hike to the costs of goods and services. According to the apex bank’s estimates, the implementation of the Lavasa committee’s recommendations, which also merges with the rollout of the Goods and Services Tax, is expected to push the CPI base inflation by 1 to 1.5 per cent in 2017-18.
Commenting on the possible inflation, RBI Governor Urjit Patel said, “The implementation of the HRA allowances recommended as part of the 7th CPC and the GST are risks, which could alter the inflation outturn in 2017-18.” A meeting of the monetary policy committee pointed out to the risks of the implementation of the Lavasa committee’s recommendations.
It said, “In case the increase in house rent allowance as recommended by the 7th CPC is awarded, it will push up the baseline trajectory by an estimated 100-150 basis points over a period of 12 to18 months, with this initial statistical impact on the CPI, followed by second-order effects.”
Michael Debabrata Patra a member of the 6th pay commission explained the inflationary projections and said, “The first order statistical impact on the CPI may take headline inflation to or beyond the upper tolerance band. Second order effects will work through expectations and ‘Deusenberry effects’ as it spreads to states, PSUs, universities, and onwards. These effects will occur on top of the first order effect and 6% plus inflation could be here to stay for some time.”