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After halting dearness allowance hikes from January 2020 due to Covid pandemic and the consequent slump in the economy, the Central government announced two successive hikes — by 11 per cent in June and 3 per cent in October. This has increased the DA from 17 per cent to 31 per cent of the basic pay.
During normal times, DA hikes are given based on the inflation numbers.
Fiscal 2020-21 was an economic disaster for the world and India, too; India’s GDP shrank by 7.5 per cent. From ₹188.87-lakh crore in FY19, the country’s GDP (in current prices) increased to ₹203.51-lakh crore in FY-20 and then fell to ₹197.45-lakh crore in FY21.
The corresponding per capita net national income is ₹1.26 lakh, ₹1.34 lakh and ₹1.29 lakh, respectively. At 2011-12 prices, the corresponding per capita net national income is ₹92,214, ₹94,566 and ₹86,659 for FY19, FY20 and FY21, respectively. That is, the per capita income decreased by ₹7,907 in FY21 compared to FY20 at 2011-12 prices.
On the positive side, the World Bank, the IMF and ADB have estimated that India’s GDP growth in FY22 will be 8.3 per cent, 9.5 per cent and 8.3 per cent, respectively. The Finance Ministry expects double-digit GDP growth in FY22.
With India administering over 100 crore vaccination doses, the probability of a big Covid wave that could affect economic growth has been decreasing, and growth is likely to be on expected lines.
It is true that the Indian economy is recovering and is bound to grow much faster. This is aided in no small measure by the government addressing some of key structural issues since 2014. Even at such high and consistent growth rates, it would take at least a year or two for per capita income to become noticeably higher than pre-Covid levels.
The DA hike announced by the Centre has to be seen in this backdrop. There was no stoppage of monthly salary or pension for government employees, despite the Covid-induced lockdown and the associated slowdown of economic activities in FY21. But this was not the case for a sizeable section of other employees, both in the formal and informal sectors, who witnessed salary cuts, underemployment and even job losses.
The counter question would be that if the government maintained nil inflation during the 18 months interregnum, there was no need for the Central Government to announce DA hikes. In fact, the lockdown was a conducive period for significant inflation as supply-side constraints increased for the basket of goods that go into estimating the Consumer Price Index. When many not fortunate enough to be Central Government employees or pensioners witnessed noticeable loss of income in FY21 and expect to get back to normalcy only in a couple of years, the Centre’s decision to increase the DA by 14 per cent seems to lack a sense of proportion.
Cascading effect
There is also a cascading effect to this announcement. It has become customary for State government employees and pensioners to expect their governments to follow the DA pattern set by of the Centre.
The Tamil Nadu Government, for instance, has already promised its employees and pensioners that it would increase DA from January 2022. Profligate States have been spending a substantial portion of their tax revenues towards salary, pension and debt servicing. With the DA increase, the outgo would only rise further.
The Centre might have thought that the DA increase will signal that economic recovery has already started and it can mop up tax revenues that would on a par with or more than pre-Covid levels. However, there are better ways to signal economic recovery than announcing a DA hike. Or, the Centre might be of the view that the DA disbursed may spur demand and, thereby, the economy. Given the recent memory of the slowdown due to Covid-19 and uncertainty of the future, there is a fair possibility that government employees may not spend the additional DA received on non-essential items.
Government employees and pensioners have gained substantially even before the economy has witnessed recovery on the ground. This is not the case with rest of India.
It is time, therefore, to ensure that per capita income is also increased significantly. Hikes in DA once in six months based on CPI figures must be stopped till the per capita income rises beyond pre-Covid levels.
The writer is a public finance specialist
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