7th Pay Commission: For central government employees, this is far from good news; what RBI said

7th Pay Commission: Central government employees are waiting for good news on salary hikes beyond the recommendations of the panel report. Hopes have been high as finance minister has said some positive words on this burning issue. While there is uncertainty plenty, RBI has stepped in with some data that may be of big concern for government employees. An increase in house rent allowance (HRA) following recommendations of the 7th Pay Commission has reportedly pushed up inflation significantly, with a peak impact of about 35 basis points.

The 7th Pay Commission impact was seen across most states and Union Territories. The RBI paper shows that, so far, the actual impact of the HRA increase on headline consumer price index has turned out to be similar to the assessment provided by the Reserve Bank of India in the Fifth Bi-monthly Monetary Policy Statement in December 2017. The study conducted by Praggya Das from Monetary Policy Department analyses the impact of increase in House Rent Allowance on headline Consumer Price Index.

The revised HRA structure under the 7th Pay Commission came into existence in July 2017. According to the recommendation of the 7th CPC, the basic pay of government employees rose by a factor of 2.57. Accordingly, HRA stood revised by 105.6 per cent, i.e., by more than double the pre-CPC level. However, the HRA was increased only for the central government employees in July 2017. Considering the central government dwellings to be a fourth of total government dwellings under the chain-base method, a sixth of these dwellings reported an increase in house rent by 105.6 per cent in July 2017. In six months, all the Central government houses in the sample were covered and each house reported such an increase. Taking this into account, the impact of the 7th Pay Commission HRA award on headline inflation was expected ex ante to peak at 35 bps by December 2017; remain at that level for the next six months, and then gradually dissipate by end-2018.

In case all States (i.e., remaining three-fourth of sample government dwellings) implement HRA increase similar to the 7th Pay Commission and the impact starts showing up from April 2018, headline inflation is expected to get pushed up further, with the impact peaking at about 100-105 bps and dissipating by end-2019, case study Mint Street Memos (MSM) titled “Impact of Increase in House Rent Allowance on CPI Inflation". Similar quantum of increase in headline inflation, due to 7th CPC’s and states’ HRA awards, were communicated by RBI through its Monetary Policy Reports (MPRs) and policy statements. 
So, the 7th Pay Commission HRA impact has generated some worry for the Centre as well central government employees. What they can do now is wait for the impact to peter out gradually.