8/6/2019 History of Dearness Allowance
1/9
8/6/2019 History of Dearness Allowance
2/9
2
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.
8/6/2019 History of Dearness Allowance
3/9
3
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.
8/6/2019 History of Dearness Allowance
4/9
4
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.
8/6/2019 History of Dearness Allowance
5/9
5
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.
8/6/2019 History of Dearness Allowance
6/9
6
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.
8/6/2019 History of Dearness Allowance
7/9
7
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.
8/6/2019 History of Dearness Allowance
8/9
8
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
8/6/2019 History of Dearness Allowance
9/9
9
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
Top Related