7th Pay Commission: HRA implementation to ‘impact inflation’

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The implementation of house rent allowance (HRA) under the 7th Pay Commission could lead to inflation, said the Reserve Bank of India (RBI) while announcing its third Bi-monthly Monetary Policy Statement on Wednesday.

Inflation remained in the range of 2.0-3.5 per cent in the first half of this year and 3.5-4.5 per cent in the second half, said RBI in its statement, adding that the impact of implementation of HRA would be one of the factors to determine the inflation.

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Worth mentioning, the government notified the recommendations of the 7th Pay Commission on allowances with 34 modifications, including reduction in HRA rates, on July 7. It reduced the HRA rates to 24 per cent for X, 16 per cent for Y and 8 per cent for Z category cities which was earlier 30 per cent for X, 20 per cent for Y and 10 per cent for Z category cities.

“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. 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,” said the RBI statement.

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This is not the first time RBI raised concern regarding 7th Pay Commission impact on inflation. In April, it had warned that once the government gives HRA to the employees, the price indices would surpass the central bank’s estimates of inflation.

Meanwhile, the central banking institution also believes that inflationary impact of the HRA to employees will continue to distort the markets for 18-24 months with the first three to four quarters expected to witness the highest levels of inflation.

Note: HRA constitutes a substantial part of the salary which increases the purchasing power of a larger section of the society. And as we know, ‘Increase in consumers’ purchasing power directly leads to increase in inflation’.

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