Impact of 6% Raise in Dearness Allowance

There is a bonanza that has come in for all Central Government employees as the Government has raised the Dearness Allowance (DA) by 6 percentage points. This development has to be considered in detail because there are a lot of factors involved, and hence it will play a vital role for those who will benefit from the move. There are also a lot of people who will be impacted by the developments.

Coverage

The DA raise that has been announced is applicable for Central Government employees. This restricts the direct benefit to this category of people, but often there might be an indirect impact elsewhere because the pay might rise for some other categories of people. As far as this change is concerned it is restricted to the Central Government employees. In addition, there are also the Central Government pensioners who receive a monthly pension after retirement. The benefit will also be applicable for these pensioners and they will witness a rise in the pension amount that they receive in the months ahead.

Mode of Raise

There are various components of the pay that are present for an employee. Two main components that need attention are the basic pay and the DA. The basic pay is the central component of the amount that is earned but in order to compensate the employee for the rise in prices and inflation there is a DA component that changes over a period of time. This DA is usually a certain percentage of the basic pay and this is the figure that has been raised by the Government by 6 per cent. This means that even when the basic pay is the same the employee will earn a higher amount from the employer, which in this case is the Government.

Effective

There are two components of the entire rate being effective. The first is the time from which the rise will actually be effective. This has been decided as January 2009 and hence this is a good news for the employees because of the fact that the raise is already effective since the last couple of months. The other important point is also when the raise will actually be paid to them, which has been fixed as March 1. This also means an immediate benefit because they will be getting the higher amount in a short period of time and this will help them in their financial efforts because the higher income will be a benefit. Pensioners will witness a similar situation because they will be paid the higher amount and this will be relief, especially since inflation is reducing.

The other point is that the new rate will be effective till the end of the next fiscal year, which means that till March 31, 2010 the employees are assured of the higher payment. The DA is linked to the consumer price index and this has not fallen as sharply as the wholesale price index and hence this point has to be considered by the employees in balancing their household budgets.

Financial Implications

This higher payout means more money in the hands of the employees and apart from the benefit in the form of a higher income they will also need to rework their tax calculations for this financial year. This is because the entire planning till now would have been done with respect to the old figures and a rise at this stage might require some reworking of the figures.

There is also a financial implication for the Government, as they will have to shell out a higher amount as pay for its employees. This is expected to raise Government expense by another Rs 6,000 Cr and at a time when there is a large fiscal deficit, which means that the figure here is expected to rise. This might not seem to be much when there are benefits being given all around but a poor fiscal situation would be difficult for the new government to handle. In addition, foreign investors are also increasingly getting worried with the position and the attention will increasingly be on the Government finances in the months ahead.