The Union Cabinet has approved the recommendations of the 7th Pay Commission on allowances with some modifications.

7th Pay Commission allowances: The Union Cabinet has approved the recommendations of the 7th Pay Commission on allowances with some modifications.  However, a lot of doomsayers have been saying that the cash in hand of employees is going to lead to a massive spending trend and the resultant negative might affect the economy and drive inflation higher. Now, there is no need for central staff to feel guilty, because a report says that there is unlikely to be any adverse impact on the larger economy. Here are reasons why:

Among all, House Rent Allowance (HRA) is the most publicly discussed allowances due to its coverage across people and linkages with CPI. As per 7th CPC recommendation, HRA is fixed at 24%, 16% and 8% for X, Y and Z category of cities (based on population).

The Cabinet has approved the HRA rates suggested by CPC with some modification by fixing lower bound of HRA at Rs 5400, Rs 3600 and Rs 1800 for X, Y and Z category of cities for employees falling in lower pay bracket based on 30%, 20% and 10% of minimum pay of Rs 18,000. Apart from this, the Cabinet also recommended the HRA to be revised upwards from the existing level to 27%, 18% and 9% and 30%, 20% and 10% when the Dearness Allowances (DA) crosses 25% and 50%, respectively, against the 7th CPC recommendation of 50% and 100%.

“The RBI consistently in its monetary policy review meetings is indicating that CPC recommendations have potential risks to inflation (around 30-40 bps). However, after a close look at the arithmetic of HRA allowances, as suggested by the Cabinet, we strongly believe that there will be no impact on CPI because at the suggested rates, even a top rank officer in the government will get HRA @ Rs 28,440 in metro cities (i.e. X cities), which is very low compared to the existing market rates. On a lighter note, one will not even get a single room in Mumbai. In this case instead of opting for HRA almost everyone will prefer to stay at government accommodated quarters,” said the SBI Ecoflash.

Secondly, when the DA crosses 25%, the increment in HRA for a top-ranked officer only increases by Rs 3555-Rs 7110. Hence, even if DA increases in future (currently DA at less than 5%), the HR impact will continue to be non-existent.

Hence on these accounts, the higher HRA as suggested by the Cabinet will have no impact on headline and core CPI. In CPI, housing has a weightage of merely 10%. “We maintain that CPI is expected to be sub-2% for the next two–three months, sub-3% for the next two months and sub-4% for Nov-Dec’17. The RBI will find it difficult to ignore the clamour for a rate cut and if the CPI data continues to be significantly benign (July CPI at a trough of possibly sub 1.5%), the chorus will get louder,” said the Ecoflash.

Source:- Financial Express