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Monday, June 16, 2014

Inflation ~ DA - rise in Consumer Price Index - rise in salary too....

1097; 1102; 1107 & 1120…………. Do you know what these numbers indicate ? ~ elementary, my dear, if you are in a PSU or in a Govt. job …. Tough Q for those in Private Companies – who get handsome bonuses and incentives and look forward to revision in pay packet based on performance appraisals.....

For the earlier group – there are some fixed components that make the Salary (Salaried employees) – no CTC….. important of these is the Dearness Allowance (DA) -  a cost of living adjustment allowance paid to Government employees, Public sector employees (PSU)and pensioners in India & Bangladesh.

Dearness Allowance is calculated as a percentage of an Indian citizen's basic salary to mitigate the impact of inflation on people. Indian citizens may receive a basic salary or pension that is then supplemented by a housing or a dearness allowance, or both.  This DA is invariably linked to the – Consumer Price Index – more specifically - All India Consumer Price Index (General) for Industrial Workers (Base 1982=100)

Today read that rising prices of food and beverages like coffee, tea, poultry, fish and vegetables pushed up inflation to 5-month high of 6.01 per cent in May. The Wholesale Price Index (WPI)-based inflation was 5.20 per cent in April and 4.58 per cent a year ago in May. According to the data released by the Commerce and Industry Ministry today, food items which became expensive during the month include coffee (23 per cent), poultry chicken (7 per cent), fish-inland (6 per cent) and tea and fruits and vegetables (4 per cent each).

To elaborate a little bit : the Consumer Price Index (CPI) is calculated using following steps :
a) Market prices are collected for 252 items by the Officials of Department of Statics and Department of Posts.  These prices of that item & place are sent to Central processing unit from 78 centres all over India
b) The   all   India   weights given  the  each  category   of  items  such  as  food 49.71%,  housing 9.77 % , fuel  9.49% , footwear 0.68% transportation 7.5 %, Medical 5.31 % Personnel care 2.92 % & Miscellaneous 26.31 % total 100% . CPI points are determined using this all India weights and prices of the 252 items. 

With every Pay commission or pay revision in Banks and PSU Insurers, you might have seen or heard that the basic would go up – primarily because of DA getting merged with Basic – whereby the variable component in the form of DA gets reduced and Basic gets enhanced leading to increase in others like HRA, CCA and PF benefits …..

Have read that the Dearness Allowance was introduced following the second World War, and was then known as the "Dear Food Allowance". The "Old Textile Allowance" was also introduced in 1947, though this was revised and reintroduced in 1953 as the "Revised Textile Allowance".  Initially DA was given in response to demand of employees for wage revision, however later it was linked to Consumer Price Index.

A rise in CPI leads to pay hike (every quarter) – but rise in Consumer price index is clearly arising out of inflationary trend of prices going up … so prices go up – you have some more money to buy …. ‘Too much money chasing too few goods’ – is one definition of inflation ….  The nos. at the start of the post are the point of Consumer Price Index in Jan, Feb, Mar & Apr 2014.

With regards – S. Sampathkumar

16th June 2014.

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