7th Pay Commission: How HRA Structure Has Impacted Inflation

United Nations' "Economic And Social Survey Of Asia And The Pacific 2018", which was released recently, said that inflation accelerated in 2017 mainly as a result of increased food and fuel prices following severe floods in several countries and rising global oil prices. In India, the report noted, higher inflation was also due to the housing rent allowances (HRA) for government employees recommended by the 7th pay commission. While inflation is expected to remain stable in the forecast period, risks are posed by global oil prices, said the report. If higher oil prices require tighter monetary policy to meet the inflation target, the report added, real interest rates could exert a drag on consumption.

The Goods and Services Tax (GST) as well as protracted issues of corporate and bank balance sheet problems pushed India's economic growth downward in 2017 but a gradual recovery is expected and the country's economy is forecast to grow at 7.2 per cent in 2018, according to a UN report.

A research paper, released in April this year, by RBI's monetary policy department had said that the increase in house rent allowance (HRA) for central government employees under the 7th central pay commission (CPC), has impacted the CPI or consumer inflation by nearly 35 basis points at its peak. The revised HRA structure, under the 7th CPC, came into place 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 CPC, 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 housing, the weight of house rent is 9.51 per cent and that of other miscellaneous housing services 0.56 per cent.