7th Pay Commission – Implementation of HRA as per 7th CPC May Impact Inflation – RBI
New Delhi, Aug 2: The Reserve Bank of India announced new monetary rates on Wednesday and RBI included the implementation of house rent allowance or HRA, under the 7th Pay Commission (7th CPC) could lead to inflation. The second bi-monthly statement projected quarterly average headline inflation in the range of 2.0-3.5 per cent in the first half of the year and 3.5-4.5 per cent in the second half. The impact of implementation of HRA, as per the 7th Pay Commission‘s recommendations, would be one of the factors to determine the inflation, said the RBI.
On July 7, the government notified the recommendations of the 7th Pay Commission on allowances with 34 modifications, with a total financial implication of Rs 30,748.23 crore per annum. Under the 7th Pay Commission, HRA rates, which was paid at 30 per cent for X (population of 50 lakh and above), 20 per cent for Y (5 to 50 lakh) and 10 per cent for Z (below 5 lakh) category cities, have been reduced to 24 per cent for X, 16 per cent for Y and 8 per cent for Z category cities. Keeping in view the inflation trends, the government decided that these rates will be revised upwards when the DA crosses 25 per cent and 50 per cent respectively.
“Looking ahead, as base effects fade, the evolving momentum of inflation would be determined by (a) the impact on the CPI of the implementation of house rent allowances (HRA) under the 7th central pay commission (CPC); (b) the impact of the price revisions withheld ahead of the GST; and (c) the disentangling of the structural and transitory factors shaping food inflation,” said RBI statement. “The inflation trajectory has been updated taking into account all these factors and incorporates the first round impact of the implementation of the HRA award by the Centre,” it further said.
This is not the first time RBI raised concern regarding 7th Pay Commission impact on inflation. On April 6, RBI Governor Urjit Patel had warned saying that in case the increase in HRA as recommended by the 7th CPC is awarded, it will push up the baseline trajectory by an estimated 100-150 basis points over a period of 12-18 months.
With implementation of the 7th Pay Commission recommendations on allowances including HRA, central government employees are expected to take more salary home. HRA constitutes a substantial part of the salary. It would eventually increase the purchasing power of a large section of the society. More purchasing power means more inflation.