Government hike DA by 5%

The Cabinet has approved the increment of Dearness Allowance from 12% to 17%. The move will benefit at least 50 lakh government employees and 65 lakh pensioners. The hike would be effective from July. The cost to the exchequer will be ₹16,000 crore.

This increase is based on the recommendations of the 7th Pay Commission.

What is Dearness Allowances?

DA is provided by the government to its employees to cushion the impact of the rising cost of living due to inflationary impacts.

How this is calculated?

• For instance, if the annual inflation is 5%, it means that a commodity that cost Rs 100 in the first year, would cost Rs 105 in the second. If the employee has a salary that allows her to spend Rs 100 on that commodity, she will be able to buy that commodity in the first year.
• Hence, in the second year, that Rs 100 will no longer be enough for the employee to buy that commodity, which now costs Rs 105, thanks to the inflation rate. It is to compensate for this gap that the government pays DA to its employees.

Impact on the market:

• The Sensex surged nearly by 650 points after six days of losses as 5% DA hike puts more money in the hands of over one crore government employees and pensioners and pushed several heavyweight stocks higher in trade.
• People have more money for their disposal and hence spur in the economic activity, even though they keep money with banks still it will help the economy by bolstering the flow of funds to the banking system.

Downside of hike

This money will come out of the government’s treasury and surely it will hit the resources available with the government and constraint the economic activity.

As under the current circumstances, when the government is finding it difficult to raise revenues, an additional outgo for DA will either push the government to borrow money from the market — thus leaving less money to be lent to private businessmen and businesswomen.