Will the impact on inflation following the increase of HRA under 7th Pay Commission have a bearing on the government's decision to increase the basic minimum pay of Central Government employees.
Sources say that this would not have any impact and discussions on the pay hike and fitment factor are still on. Recently a research by the RBI's monetary policy department had said that the increase in House Rent Allowance had impacted CPI inflation by nearly 35 basis points at its peak.
"Ex-post analysis of CPI shows that the 7th Pay Commission'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'.
While government sources maintained that the pay hikes in future would be inflation based, the existing dialogue on fitment factor is still on. This report will have no bearing, the source also said. The government is currently discussing the issue and is likely to announce a pay hike by the end of the year. The pay hike would be effective from April 2018 onwards.
Meanwhile, the report said that 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.