7th Pay Commission: HRA Hike Impacted Inflation Rate, Claims RBI Research

A recent research shows that the hike in House Rent Allowance (HRA) of central government employees in accordance with the 7^th Central Pay Commission (CPC) has given a push to inflation. The research, undertaken by Praggya Das, Director, Monetary Policy Department of the Reserve Bank of India says that the revised HRA structure with effect from July 2017 led to the basis pay of government employees go up by a factor of 2.57 and resultantly, the revised HRA stood at 105.6 per cent. This number is more than double of the previous level. Here’s how:

A look at the HRA numbers

The average increase across salary segments has been 105.6. For example, after the 7^thCPC, those earning more than Rs 50 lakh annually received 61.7 per cent of their pre-CPC basic salary as HRA. Those earning anywhere between Rs 5 to 50 lakh received 41.1 per cent of their pre-CPC basic salary as rent allowance while this number stood at 20 per cent for those earning less than Rs 5 lakh annually. 

Impact on states

Most states were impacted by this steep rise in HRA and the resultant inflation in housing that is pegged at a peak of about 35 basis points. Among states and union territories, Lakshadweep was the most impacted followed by Andaman and Nicobar Islands, Uttar Pradesh, Uttarakhand, Madhya Pradesh, Chandigarh, Haryana, Chattisgarh, Himachal Pradesh and Jammu and Kashmir.

“The sharpest rise is witnessed in the UTs of Lakshadweep, Andaman and Nicobar Islands, and Chandigarh where the share of Central government dwellings in housing stock is expected to be high. This increase across states is not a reflection of implementation of pay and allowance increase by states but, most likely, emanates from the increase in HRA of Centre’s accommodations in these states following the 7th CPC’s HRA increase,” reads the research.

Where is the problem?

The problem lies in the inflation and how price rise pushes it further. In 2016, the RBI was given a clear mandate that it should conduct the monetary policy and the primary objective would be to “maintain price stability while keeping in mind the objective of growth”. This stability is understood as a consumer price index or CPI of 4 per cent with a tolerance band of +/- 2 per cent. So far so good but since last year due to the revision of the HRA, inflation has picked up.

Housing is an important component when it comes to CPI. House rent comprise of 9.51 per cent of the weight while housing services is weighed at 0.56 per cent. Housing inflation, which stood at 9.2 in 2012, gradually decelerated and averaged 5 per cent in 2015 and 2016. Since July 2017, housing inflation started increasing sharply and reached 8.3 per cent in 2018. 

Other issues to be considered

Besides the hike in the HRA of central government employees, the state governments of Rajasthan, Tamil Nadu, Assam and Delhi had also announced salary hikes similar to 7^th CPC. Data suggest that the headline CPI may have got pushed by 11-12 bps by December 2017 given that together, these states have a CPI of 17.3 per cent. The impact is not visible yet but that could be because of the delay in actual payments.

“Even if disbursements have been made, the actual impact will depend on the share of State government houses in that State’s housing sample. For instance, the housing inflation in case of Delhi has fallen. Actual housing stock in Delhi is expected to consist of a fair number of Central and Delhi State government accommodations. A decline in housing inflation between June 2017 and March 2018 in Delhi suggests either absence or low coverage of government houses in Delhi’s sample of dwellings; or a sharp decline in ‘other-than-government’ houses, which, however, is not possible to assess with the existing CPI data.”