History of Dearness Allowance

8/6/2019 History of Dearness Allowance

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HistoryofDearnessAllowance

DearnessAllowanceDearnessAllowance iscompensatorypartofwages. In India,DA isbeingpaidsincetheSecondWorld

War.During theWar,DAbecamepayableatvarious rates. Itbecamepayableasaresultofdifferent

costsoflivingindifferentcitiesnotknowntoeachother.

Originally,itwasthetextileindustryinBombaywhichintroducedDAschemefirstlyunderthebipartite

settlementandsubsequentlytheytooktheshapeofarbitration,adjudicationandfinally,afterknocking

atthedoorsofindustrialcourts,gotintoawards,whichishowinIndiaDAschemestarted.

Inotherpartsof theworld tooDAwaspaiddependingupon the rise in thecostofconsumergoods

prices.Within510years, thesystemofDAbecameacommonsystem throughout theworldbut the

basicprinciplesremainedthesame.

Inmostpartsoftheworld,thoughnoteverywhere,commonplatformDAbecamepayablethoughnot

onthesamerates.

Ultimately,thequestionof DAbecameasubjectmatteroftheSupremeCourt.Thecourt initially laid

downgeneralprinciplesforfixationofDAgrantandthelinkwithcostoflivingindex.

Slowlyandgradually,SupremeCourtgaveeffecttoDAintermsofriseinthecostofliving,higherprices

andhighercostof living.Thisgaverise inthewholecountryforConsumerPrice Indexwhich is linked

withriseinindexindifferentcitiesinthecountry.

Bombaywas foundtobe themostexpensivecity inthecountryandsometimeseven in theworld. It

movesfromtimetotimeandsotheatmospherewithit. Atdifferenttimes,eachspherehaddifferent

price levelwhich is recorded regularlyonprice index. Eachprice index isdifferentlynumbered and

differentlymarkedineachstate.

In our country, this price index as Bombay Price Index, Delhi Price Index, Kolkata Price Index,

AhmedabadPrice Indexetc.,andpricesofeachnumber ineachcityaredifferentlymadeandknown.

ThisispreliminaryofDA.

The issueofDAhasgonemuchaheadandnow itispaidaccordingtothestandardofeachcity inthe

country.

With

passing

of

time

and

cost

of

living

going

up,

working

class

life

became

more

and

more

miserableasaresultofwhicheverywagefixingauthorityhadtoviewitspointtothephenomenonand

fortunately in our country the Government which is the biggest and model employer had to take

cognizanceofthisfactandwentonappointingpaycommissionsoneafteranotherafteralapseof five

to 7 years and each pay commission gave thorough consideration to the problem of Dearness

Allowance.


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EachpaycommissionnotonlyincreaseddearnessallowanceoftheCentralGovernmentemployees and

gavehigherandhigherbenefitsunderthe improvedschemes.On thechapteronDearnessAllowance

(DA), the fourth pay commission for the Central Government employees said that the Dearness

allowancewhichisbeingpaidatpresentisinthenatureofacompensatorypaymenttoemployeesfor

erosionintherealvalueoftheirsalariesresultingfrompricerise.

Theallowancehasbeeninexistenceforaboutfourdecadesandnowcoversalmostallemployeesinthe

organised sector. Accordingly, it has emerged as an important area of pay administration having

financial,economicandadministrativeimplications.

Over the years, there have been many changes in the policy for payment of dearness allowance,

particularlywithregardtocoverageofemployees,percentageofneutralisationfordifferentcategories,

periodicityofpayment,etc.

Theratesofdearnessallowanceprovidedaneutralisationofabout95percentonthelowestpayand

the neutralisation percentage went on declining for higher pay levels so that m respect of the

employeesdrawingpaybetweenRs.1600/ and2250/ permonthitworkedouttoabout30percentor

less.

TheCommissionalsorecommendedthatonthepricelevelrisingabovethe12monthlyaverageof272

(1960=100), government should review the position and decide whether the dearness allowance

schemeshouldbeextendedfurtherorthepayscalesshouldberevised.

Governmentdecidedonthreeoccasionstotreatpartofdearnessallowanceasdearnesspayforcertain

purposesmoreparticularlytoprovidereliefinthematterofdeathcumretirementbenefitstoretiring

employees.

The state governments also compensate their employees for price rise in the form of dearness

allowance,which is granted by themmore or less on the same pattern as followed by the central

government,sincethepayscalesofstategovernmentemployeesarelinkedtodifferentindexlevels,the

actualratesofdearnessallowancepaidbythemaredifferentfromthosepayabletocentralgovernment

employees.

We are also of the view that the compensation should provide full neutralisation of price rise to

employeesdrawingbasicpayuptoRs.3500/,75percenttothosegettingbasicpaybetweenRs.3501/

and6000/ and65percenttothosegettingbasicpayaboveRs.6000/subjecttomarginaladjustments.

Thiscompensationmaycontinuetobeshownasadistinctelementofremuneration.

Wehaverecommendedthatcompensationforpriceriseshouldbesanctionedtwiceayear.Thiswould

ensure that therewouldbeno uncertainty in themindsof government employees in regard to the

periodicityofgrantofcompensation.Werealise that theremaybesituationswhengovernmentmay

notfinditpossibletosanctionthecompensationforpriceriseaccordingtotheschemerecommended

by us. We are of the view that in such situations, the restraint, if any, should apply to the entire

organisedsectorincludingcentralgovernmentemployees.


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FifthPayCommissionalsosaidDearnessAllowance(DA)isacompensatorypaymenttotheemployees

for the erosion in the real value of their salaries, resulting from price increase.While the First and

SecondCPCssuggestedpaymentofDAatflat ratesforemployeesindifferentpayscalesfordifferent

levelsofConsumerPrice Index (CPI):the3rdand4thCPCswhile linkingDAtoboth theCPIandpay

scales,recommendedDAasapercentageofthebasicpay.WhileDAwasmadepayableautomaticallyby

the firstCPConcea specific levelofConsumerPrice Indexwasattained, the2ndCPCdidnot favour

automaticslidingscaleadjustmentsandrecommendedthattheGovernmentshouldreviewtheposition

andconsiderthecaseforanincreaseinDA,eachtimetheindexincreasedby10points.

Thistheyfeltwasnecessaryasallowinganautomaticincrease,eachtimepricesrise,withoutgoinginto

the reasons forprice rise,would tend to fuel inflationbecauseofawageprice spiral.Price increase,

fuelledbyafallinproductionlevelsorduetohikeinindirecttaxesshouldnotmeritcompensation.

The absence of a precise scheme of DA revision, however, resulted in a situationwhere two high

poweredbodieshadtobeappointedintheintervening periodbetweenthe2ndandthe3rdCPCforthe

paymentofDAbecauseofthecontinuingupwardtrendofprices.

Asaresult,the3rdCPCpartiallyreversedtherecommendationsofthe2ndCPCbymakingDApayment

automaticeachtimetheCPIroseby8pointsovertheindexof200,uptothelevelof272.DAuntilthe

2nd CPC had been imagined to be a temporary expedient and was intended to deal with the

phenomenonofatemporaryriseinprices.Itwaspreciselyforthesereasonsthatthepaystructurethen

hadtohavethreeseparatecomponents:basicpay,dearnesspayanddearnessallowance.Whilebasic

anddearnesspayrepresentedtheirreversiblecomponents,DArepresentedthecomponentwhichcould

bereversedinthecaseofapricefall.

WehavereceivedseveraldemandsonDearnessAllowance.Theserangefromuniformneutralizationat

all levels, toanalternativeConsumerPrice Indexand theuseofamonthly.3monthlyor6monthlv

averageinsteadofa12 monthlyaverageofCPI.

ThemergerofDAwithbasicpaywhen itcomestobe25%ofthebasic,payandtheexemptionofDA

fromtaxaresomeotherdemands.

IthasbeenstronglyurgedthatauniformneutralisationofDAat100%shouldbegiventoemployeesat

alllevels.Weseemeritinthisdemand.

Theerosion in therealvalueofsalaryatthehighest level,hasbeen themostsevere,beginning from

1949followedbyotherGroupAofficersdownthe line. Incontrast,acomparisonofthe indexofreal

earningsforthepeonbetween1949and1996showsthatthepeonwasmorethanfullyneutralizedfor

inflationandwasinrealtermspaid53%morethanhissalaryin1949.TheSecretaryontheotherhand

wasnotevenpaid fullneutralization for inflationand consequentlyhis real salaryhaseroded to the

extentof72%ascomparedtothepositionin1949.

Accordinglywe,recommendthatinflationneutralizationbemadeuniform@100%atalllevels.


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So far as the newspaper industry is concerned, it normally followed the patterns of Central Pay

commissionsfromtimetotime.SchemeofDAinthenewspaperindustry isasperrecommendationsof

thewageboards.Duringthelastfourwageboards,dearnessallowanceinnewspaperindustrywaspaid

asfollows.

DearnessallowancethroughsuccessiveCentralPayCommissions

The Sixth Central Pay Commission (CPC) has devoted fourth chapter of the report to the subject of

DearnessAllowance (DA)payable togovernment servants. The sanctionofDearnessAllowance is at

present based on calculated six monthly increase in the All India Consumer Price Index (Industrial

Workers)(AICPIIW)withbaseyear1982=100.

AtthetimewhenthescalesgrantedbyFifthCPCcameintoexistence(1stJan.1996)thisindexstoodat

306.03.FifthCPCstartedwithcalculationofDA@0%,from1stJan.1996.

In themonthofApril2004 the rate atwhichDAwasadmissiblehad crossed the figureof50%and

thereforebasedonrecommendationsoftheFifthCPC50%DAwasmergedinthebasicpay.

ThisadditiontobasicpaywasknownasDearnessPay.

ThereaftereveryincreaseinDAwascalculatedon(BasicPay+DearnessPay).Ithasbeenobservedthat

sinceafterthemergerofdearnesspaywithbasicpaythebaseforcalculationofincreaseinAICPIwas

notchangedtheneutralizationincostoflivingwaspresentlybeingdoneataratehigherthan100%.

ThePayCommissionhaspointedoutthatthepresentmethodofcalculationforincreaseincostofliving

takes into account the price rise in a group of identified commodities. It has compared the relative

meritsofchainbasedandfixedbasemethodsofcalculationofestimatedgrowthincostofliving.

TheAICPIasstatedaboveisbasedontheincreaseincostofabasketofidentifiedcommodities.Inthe

fixed base method the calculations are based on the assumption that consumer would adjust his

consumptionneedsinrelationtoincreaseordecreaseinpricesoftheconstituentcommodities.

Thechainbasedmethodtakes intoaccount thepossibilitiesofchange inconsumptionpatterndueto

availabilityofwider rangeof consumptiongoodsand the improvement in thequality thereofdue to

economicgrowth.Thelattermethodologyhasbeenconsideredtobemorerelevantintodayseconomic

scenario. However the basic data for the pattern of consumption in respect of several essential

commoditieswouldhavetobecompiledthroughadetailedallIndiasurveyifthismethodologyistobe

adopted.

ThepreviousPayCommissionshaddifferentviewsonthismatter.TheFourthCPCfavouredevolutionof

aseparateindexforcalculationofcostoflivingforthegovernmentservants.TheFifthCPChoweverfelt

thatsuchindexwouldalsosufferfromimbalancessinceconsumptionpatternsofvariouscategoriesof

employeeswouldbedifferent.


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TheSixthCPChassuggestedasamplesurvey throughNationalStatisticalCommission forevolvingan

indexbasedonconsumptionpatternofgovernmentemployees.

Tillthisexercise iscompletedthepresentmethodologyofcalculatingtheincrease incostoflivingand

calculationofDAwouldcontinue.

ViewsofearlierPayCommissionsSuccessivePayCommissionshavemadechangestotheDAformula,suggestingtheirownmethodology

fordeterminingthequantumandfrequency.

FifthCPCrecommendations

TheFifthCentralPayCommissionrecommendeduniformneutralizationofDAat100%toemployeesat

all levels;conversionofDA intoDearnessPayeachtimetheCPI increasesby50%overthebase index

with Dearness Pay counting for all purposes including retirement benefits; andDearness Allowance

includingDearnessPaybeingpaidnetoftax.TheCommissiondidnotfavourtheoptionofemploying

separate indices for each categoryof employee becauseof the sheer impracticalityof the task and,

therefore, recommended using the 12 monthly average of All India CPI (IW) with base 1982 for

calculatingDA.

TheGovernmentof Indiapresently calculates the levelof inflation forpurposesofgrantofdearness

allowancetoCentralGovernmentEmployeesonthebasisoftheAllIndiaConsumerPriceindexNumber

for IndustrialWorkers(1982=100)(AICPI).ThetwelvemonthlyaverageoftheAICPI(1982base)ason

1stJanuaryand1stJulyofeachyearisusedforcalculatingtheDearnessAllowance(DA).IncreaseinDA

is calculatedwith reference to the AICPI (IW) average (base 1982=100), as on 1st January 1996 of

306.33.Thecompensationforpriceriseisadmissibletwiceayeari.e.on1stJanuaryand1stJulyofeach

year.Onlythewholenumbercomponentofthepercentageincreaseinpricesisadoptedforestimation

ofDA.TheGovernmentmerged50%oftheDAwithbasicpayw.e.f.1.4.04andthedearnessallowance

continuedtobecalculatedwithreferencetotheAICPI(IW)averageason1stJanuary1996of306.33

withoutchangingthebaseconsequenttothemerger.

Accordingly,DAatfollowingrateswassanctionedbytheGovernmentfrom1.7.04till1.7.07:

As a consequence, salariesofGovernment employees are being neutralizedmore thanhundredper

cent.Demandsmade In the demandsmade before the Commission, it has been suggested that the

existingDAformulacontinuewiththefollowingmodifications:

InsteadofrevisingtheDAonceinsixmonths,itshouldberevisedonceinthreemonths.

Theprinciplelaiddownbythe5thCPCformergerof50%ofDAwiththePayasDPshouldbemodified

to25%toremovedistortionsinthepaystructures.

DAshouldbepaidnetoftaxesonthesamelineasrecommendedbythe5thCPCtomaketheconcept

of100%neutralizationsomewhatmeaningful.


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Determining the level of inflation methodology While considering the issue of the quantum of DA

admissible, theCommissionconsideredat length theprocedure forestimationof inflation.Presently,

inflationasdeterminedbytheAICPI(IW), isestimatedusingtheLaspeyeresFixedbasemethodology.

Theinflationindex6usingthismethodologycapturesthecostofbuyingabasketofgoods(fixedinthe

baseyear)atcurrentpricesrelativetothecostofbuyingthesamebasketofgoodsatbaseyearprices.

Economictheorypostulatesthat,generally, ifthepriceofacommodityrisesvisvisothergoods,the

consumeradjustshisconsumptionbaskettobuy lessofthegoodsthepricesofwhichhave increased

relativelyandmoreof thosegoods thepricesofwhichhave fallen relatively.This envisaged shift in

consumptionpattern shouldbe considered for calculating inflation.A chainbase index captures the

inflation taking into account the changes in quantities purchased consequent upon changes in the

relativeprices.Moreover,italsoconsidersnewproductsintheconsumersbasketaswellasqualityof

theexistingproducts improvingeveryyear.Therefore, inflationcapturedusing Chainbasetechnique

would generally tend to be lower than the Laspeyres price index. [Under certain circumstances,

however,thechainbase indexcouldbehigherthantheLaspeyers index, i.e. ifthere isan increase in

thepriceofbasic items,whicharenecessities,having low substitutabilityandwhich forma sizeable

chunk of the consumption basket. The increase in prices of such goods would result in less than

proportionate reduction in quantity, thereby translating into higher expenditure in value terms.

Therefore, theweightage (calculated in termsofpercentagevalueof totalconsumptionexpenditure)

attributedtothese items intheconstructionofthecompositeprice indexwould increase.Thiswould

result in the chainbaseprice indexbeinghigher than theprice indexestimatedusing the fixedbase

technique.

Analysis India is on the growth path. Growth leads to wider choice with enlarged availability of

substitutes. Such availability of substitutes would impact the pricedemand relationship. Given this

backdrop, the feasibility of developing chain base index was explored by the Commission. It was

observed from the Reports of the National Sample Survey Organization on Consumer Expenditure

Survey, thatwhileexpendituredata invalue termswasgenerated through the survey, itsbreakup in

termsofquantityandpricewasavailableonlyforafewitemsunderfood,clothing,bedding,etc.Data

on durables consumed poses a problem as consumption of individual items is very infrequent and

reportingirregular.ThisissuegetscompoundedwhenaggregationisattemptedattheAllIndialevel.

RecommendationonchainbaseindexThefeasibilityofdevelopingaChainbasedindexisdependentontheavailabilityoftimeseriesdataon

bothpricesandthecorrespondingquantitiesdemandedofeachitem.Whilethereismeritindeveloping

a chainbased index for capturing inflation, thiswouldbe feasibleonly if theConsumer Expenditure

Surveygeneratestimeseriesdata,onbothquantityconsumedaswellasvalueofexpenditureforfairly

large listof items in the consumptionbasketproviding thepossibilityof substitutionover short time

span.

TheGovernmentmayexplore thispossibility. In themeantime, theGovernmentshouldkeeprevising

thebaseyearintheexistingfixedbaseindexmethodasfrequentlyasfeasible.


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UseofAICPI(IW)forestimationofDAPresently,theestimationofDAforCentralGovernmentEmployees isbasedonthemovements inthe

AICPI(IW)(1982=100).TheFourthCentralPayCommission,whileconsideringtheissueofsuitabilityof

the AICPI, opined that the Government should examine whether a more suitable index could be

preparedforGovernmentemployeestakingintoaccounttheirconsumptionpatternandotherrelevant

factors. This recommendation was based on the view that the AICPI does not truly represent the

consumptionpatternofall centralGovernmentemployees.On theotherhand, theFifthCentralPay

CommissiontooktheviewthatconsumptionpatternsofGroupA,B,C,DemployeeswithinGovernment

are 7bound to be different due to different income levels and hence a suitable index based on

consumption pattern for Government employees as recommended by the Fourth Central Pay

CommissionislikelytosufferfromthesamesetofproblemswhichtheAICPI(IW)suffers.

TheFifthCentralPayCommissionopinedthateventhoughtheoptionofemployingseparateindicesfor

eachcategoryofemployeesdidexist,itwasdevoidofmeritbecauseofthesheerimpracticalityofthe

taskaswellasneedlesssuspicionsuchanarrangementwas likely toarousebetweenvariousgroups.

Therefore,theyrecommendedthattheAICPI(IW)shouldcontinuetobetheindexusedforcalculating

DAforGovernmentemployees.

TheFifthCentralPayCommission,observedthatforthepurposeofestimationofAICPI(IW)byLabour

Bureau, thecoverageof IndustrialWorkersextendedto70selectedcentres insevensectorsnamely

Factories,Mines, Plantations, Railways, PublicMotor TransportUndertakings , ElectricityGeneration

andDistributionEstablishments,andPortsandDocks.

AWorkingClassfamilywasdefinedasonewhereoneofthemembersworkedasamanualworker in

anyofthesevensectorsandwhichderivedonehalformoreofitsincomethroughmanualworkdefined

onthebasisofclassificationofoccupationsandjobsinvolvingsufficientphysicallabourbutatthesame

timenotrequiringmuchofeducationalbackgroundinthefieldofgeneral,scientific,technicalandother

areas.

TheFifthCentralPayCommissionalsoobservedthatintheFamilyLivingSurvey,whichisthebasisfor

estimationof theAICPI (IW), thedesignof themonthly family incomeclasses isopenended, ranging

fromlessthanRs.750toRs.5000andabove.TheWorkingClassfamilyIncomeandExpenditureSurvey

(19992000) forDelhi points to the fact that 53% of the families fall in the income class less than

Rs.5000permonth,which islessthantheminimumearningofaGovernmentemployeeinDelhi.This

impliesthatacompositepriceindexgeneratedfromthissurveymaynotadequatelyrepresenttheprice

index

for

Government

employees.

This

is

because

consumption

pattern

of

the

Government

employees

visvisthe WorkingClassFamilysampleselected intheFamilyLivingSurveywouldbeconsiderably

different.Recommendation TheGovernmentofIndiahassetuptheNationalStatisticalCommissionto

serveasanodalandempoweredbodyforallstatisticalactivitiesofthecountry;toevolve,monitorand

enforce statistical priorities and standards and to ensure statistical coordination among different

agencies involved. The Commission ismandated to evolve standard statistical concepts, definitions,

classificationandmethodologiesindifferentareasofstatisticsandlaydownnationalqualitystandards


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onthosestatistics.TheCommissionisoftheviewthattheNationalStatisticalCommissionmaybeasked

to explore the possibility of a specific survey coveringGovernment employees exclusively, so as to

construct a consumption basket representative ofGovernment employees and formulate a separate

index.Meanwhile,theGovernmentmaycontinuetouse theAICPI(IW)forestimatingtheDA,subjectto

themodificationsproposedinthesubsequentparas.

RevisionofBaseofAICPI(IW)forcalculationofDA

TheFifthCPChadadoptedtheAICPI(IW)usingthe1982seriesforestimationofDA.TheGovernment

hasdevelopedanewserieswithbase2001,witheffectfromJanuary2006.Itispossibletogeneratethe

backdataserieswithbase2001,withthehelpofthestipulated linkingfactorof4.63.The2001series

hasanextendedcoverageof78centerscomparedtothe70centersinthe1982series.Theweightage

emerging from the series with 2001 base, being recent, is more representative of the current

consumptionbasket. TheCommission,therefore,recommendsthattheAICPI(IW)withbase2001may,

henceforth,beusedforthepurposeofcalculatingDAtillitgetsrevised.Asmentionedearlier,thebase

year should be revised as frequently as feasible. The Commission also looked into the weightages

assigned8tovariouscomponentsofconsumptionandthemannerinwhichtheLabourBureauconducts

thesurvey.Theexaminationhasrevealedadirectcorrelation in themovementof theprice index for

housingand themovementoftheHRAratesofGovernmentemployees. Ifarepresentativesample is

used for construction of the price index for housing, there should not be such a direct correlation

keeping inviewthefactthatfor industrialworkers,theescalation inrentalshouldnotbesosteepfor

various obvious reasons. Since housing has a largeweightage in AICPI (IW), there is a possibility of

substantialdistortioninDAcalculations.

The Commission recommends that the Government take expeditious steps to rectify these noticed

distortionsintheconstructionofthecurrentAICPI(IW)series.TheNationalStatisticalCommissionmay

alsotakethesefactorsintoconsiderationwhileevolvingaseparateindexforGovernmentemployees.

Courtesy:CGStaffnews

History of Dearness Allowance

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