Dearness Allowance Background :

Dearness Allowance (DA) is a compensatory payment to the employees for the erosion in the real value of their salaries, resulting from price increase. During the Second World War, dearness was paid fully to low paid employees of the Central Government. DA formula has undergone several modifications on account of each of the earlier Pay Commission's suggesting their own formulae.

1996 DA Formula :

The existing formula for grant of DA of Central Government employees is based on the recommendations of the Fourth CPC. At present DA is admissible twice a year as on 1st January and 1st July and is payable with the salary for March and September respectively in the same year. Each installment of DA is calculated with reference to the percentage increase in the 12 monthly average of AICPC (base 1960) over the average index of 608, which is the base for the existing scales of pay as recommended by the Fourth CPC. This percentage increase is taken in whole numbers only.

Thus, the formula for calculating DA is :

12 Monthly Average - 608 of AICPI
--------------------------------- x 100 = The percentage increase in prices
608

The extent of neutralization admissible to employees against the percentage increase in prices for different pay ranges is as follows :-

The yearly expenditure on Dearness Allowance in the case of Central Government employees beginning from 1987-88 is given below. The tentative estimate of expenditure on Dearness Allowance in 1995-96 is of the order of Rs.8154.08 crores.

The State Government employees as well as the Public Sector employees are getting dearness allowance as a distinct component of the pay packet.

Objections against Dearness Allowance :

There are three types of wages, minimum wage, fair wage and living wage. Fifth Central Pay Commission has given living wage to its employees and question of Dearness Allowance does not arise for 38 lacs employees of Central Government. The Fifth Pay Commission in its Report, Vol. III, at page 1753, has observed as under :

Practice of giving D.A. done away in foreign countries :

"The practice being followed by the Government and the public sector in India runs contrary to the international experience and the practice in the Private Sector, where Cost of Living Adjustment in (COLA) has been done away with, either partially or completely. In the private sector, inflation neutralization, if paid, does not constitute a distinct component of the pay fixation. In countries abroad, on the other hand, this scheme has been totally abolished. France discontinued its quarterly adjustment of public salaries for inflation in the 80's. Greece has abandoned automatic indexation, while termination of Automatic indexation of police staff in UK is on the cards. In general, countries which have abolished automatic indexation have done this on the assumption that this tends to fuel inflation."

Inspite of above observations and knowing fully well that other countries have dispensed with giving Dearness Allowance on the grounds of inflation, Fifth Pay Commission recommended Dearness Formula as under :

"We therefore, recommend that AICPI (IW) may continue to be the Index that may be used for calculating Dearness Allowance for Government employees. The AICPI (IW) series with base 1982 may however be used henceforth for the purposes of calculating Dearness Allowance, as against the existing practice of using AICPI (IW) series with 1960 as the case, this is not likely to cause any difference to the calculations, as the 1960 series on being discontinued in 1988, is being generated from the 1982 series by using a conversion factor of 4.93."

Increase of Dearness Allowance in January and July and Fifth Central Pay Commission recommended inflation neutralization to make uniform 100% at all levels and observed, inflation neutralization on a graduated scale in present circumstances will be anachronistic and unduly unjust to the senior officers. The Fifth Central Pay Commission even had recommended automatic conversion of dearness allowance to dearness pay when the index increases by 50%. Fifth Pay Commission recommendations were implemented in the year 1998 with 12% D.A. of new scale, increased dearness allowance was announced every year in January and July and now dearness allowance is given @ 59% of basic pay. The Central Government used to make before about 10 years, provision of special allocation for dearness allowance in budget. Since last number of years there is no mention regarding allocation of increase of dearness allowance in the budget. Ultimately, Funds for development are diverted to increase of dearness allowance. Government has to spend about additional Rs.1600 crores towards increase of DA for two installments of increase of DA apart from paying full dearness allowance.

Perverse recommendations regarding DA free from
Income-Tax.

Fifth Central Pay Commission recommended in para 105.12 as under :

"Regarding the exemption of Dearness Allowance from tax, we propose that in line with our general recommendation on giving all allowances net of income tax, Dearness Allowance (including Dearness Pay referred to in the last paragraph) should be paid net of tax.

D.A. increased from 12% 59% of Basic Pay :

The Central Government employees, State Government employees or Local-Self Government employees, where the Fifth Central Pay Commission recommendations are accepted give Dearness Allowance. The Fifth Central Pay Commission recommendations were made applicable in 1998 with retrospective effect from 1996 with 12% Dearness Allowance. The Central Government accepted the report of the Fifth Central Pay Commission recommendations of Dearness Allowance and declared revision of Dearness Allowance twice in a year, January and July. Dearness Allowance rate is increased from 12% to 59% of basic pay. It is unfortunate that none of the authorities including the concerned Hon'ble Minister had read the chapter on D.A. and relevant para as stated above.

Suggestions :

The Central Pay Commission had recommended 12% Dearness Allowance on basic pay and directed to give Dearness Allowance on certain formula twice in one year. Today, D.A. has increased within five years from 12% to 59% of basic pay. The following suggestions are made on the following grounds :-

• 59% Dearness Allowance which is granted today to the Central Government employees and Pensions should be reduced to fixed 12% of basic pay. D.A. should not be given as it increases inflation in consistent in practice of foreign countries, who have abolished granting of Dearness Allowance. D.A. increases the inflation and so, it should not be granted.
  

• Living-Wage, which is an ideal wage is already given to the Central Government employees, who work only for 193 days in a year and enjoy 172 holidays in a year, which is the minimum output by the Central Government employees.
  

• Dearness Allowance should be reduced as Fifth Central Pay Commission had recommended to reduce 30% of staff. The said recommendation has not been carried out. The Central Government can rectify the mistake which they have committed, even now relying on the international practice of not granting increase of D.A. If D.A. is reduced from 59% of basic pay to 12% of basic pay, the Central Government can save about 8,000 crores on Pay and Pension.

Postponing decision of D.A. freeze by Central Govt. :

The Hon'ble Prime Minister, Finance Minister and all Chief Ministers of States and also Finance Ministers of States know very well that implementation of the Fifth Central Pay Commission recommendations takes away about 45% to 50% of Revenue Receipts of Central Government and the State Government after payment of interest liability which is the first liability to be discharged by the Centre and the State. There was a meeting called by the Hon'ble Prime Minister of all the Chief Ministers of the States and it is unfortunate that without taking any positive decision to freeze Dearness Allowance, issue has been postponed and declared that revision of D.A. and Bonus will be continued. The writer has pointed out in Part- I of the Book that "The Indians cannot take decisions at the right time." We hope this chapter may be circulated amongst the participants of the meeting, who are to decide regarding freezing D.A. and can decide reductions of D.A. as suggested above.