7th Pay Commission: How increase in HRA impacted inflation

The increase in HRA or House Rent Allowance under the 7th Pay Commission has impacted the CPI inflation by nearly 35 basis points at its peak. This was revealed in a research conducted by the RBI's monetary policy department.

The revised HRA structure under the pay panel came into force in July 2017. "Ex-post analysis of CPI shows that the 7th CPC"s HRA increase pushed up headline inflation prints gradually from July 2017, with a peak impact of about 35 basis points (bps)," said the research paper titled 'Impact of Increase in House Rent Allowance on CPI Inflation'.

It said while some states have implemented similar revision in pay and allowances for their employees, the impact is not showing up in the data due to reasons like administrative delays between announcement and actual disbursals, and partial disbursals by states.

"Even if disbursements have been made, the representation of state government houses in the sample of dwellings may not be adequate to capture the impact," it said.

As per the recommendation of the 7th Pay Commission, the basic pay of government employees rose by a factor of 2.57. Accordingly, HRA stood revised by 105.6 per cent, that is, by more than double the pre-CPC level.

Housing is a major component in CPI with a weight of 10.07 per cent. Within the housing, the weight of house rent is 9.51 per cent and that of other miscellaneous housing services 0.56 per cent.

The paper suggested that since proper assessment and understanding of HRA impact is important for policy analysis, the producers of CPI may consider - for the future base revisions, while preparing fixed sample of dwellings for each state for collecting house rent data, representative share of government houses that reflect the actual share of central and state government houses in the states may be kept.

As states' impact unfolds going forward, for the existing series, housing index may be published separately for the government dwellings and other dwellings, the paper also said.