DA from July 2016 set to increase by 6% or 7%

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DA from July 2016 set to increase by 6% or 7% on the basis of All India Consumer Price Index (Industrial Workers) with base year 2001=100, which has been recommended to be retained by 7th Pay Commission for calculation of Dearness Allowance

DA from July 2016 – An analysis – Labour Bureau, Govt of India has released the Consumer Price Index (IW) for the month of April 2016 yesterday.

Click here to read the press release of Labour Bureau for release of Consumer Price Index for April 2016

Having actual All India Consumer price index for 10 months in hand, out of AICPI-IW needed for calculation of DA, an attempt has been made here to estimate the said DA from July 2016.

This DA estimation is based on Consumer Price Index (IW) with the base year 2001=100 which is being followed presently for calculation of Dearness Allowance applicable for Central Government Employees, Defence personnel and Pensioners.

7th Pay Commission has also recommended that the same consumer price Index could be retained for granting Dearness Allowance.

Here is the extract of analysis and recommendations of 7th Pay Commission relating to Dearness Allowance

“The VICPC had recommended that the National Statistical Commission may be asked to explore the possibility of a specific survey covering government employees exclusively, so as to construct a consumption basked representative of government employees and formulate a separate index. This has, however, not been done.

Keeping in mind that the present formulation of DA has worked well over the years, and there are no demands for its alteration, the Commission recommends continuance of the existing formula and methodology for calculating the Dearness Allowance.”

Hence, it is assumed that CPI-IW with the base year 2001=100 would be followed with effect from January 2016 on implementation of 7th Pay commission report as far as Dearness Allowance is concerned.  In that case, after merger of DA of 125% with Basic Pay, DA from January 2016 would be calculated as 0%.

CPI-IW from July 2015 to April 2016

Month	Actual AICPI-IW
July-2015	263
Aug-2015	264
Sep-2015	266
Oct-2015	269
Nov-2015	270
Dec-2015	269
Jan-2016	269
Feb-2016	267
Mar-2016	268
Apr-2016	271
May-2016	yet to be released
Jun-2016	yet to be released

Scenario 1: Possibility of increase in DA from July 2016 working out to be less than 6%

Possibility of increase in DA from July 2016 working out to be less than 6% is very remote due to the fact that the index should be getting reduced by at least 4 points in any one of the coming two months from the previous month and further reduction of at least 3 points in the other month.

In other words index for May 2016 should be getting reduced by 4 points to 267 and also witness further reduction by 3 points to 264, for increase in DA from July 2016 less than 6%. If index for May 2016 registers not more than 3 point reduction then index for June 2016 has to reduce at least by 4 points in order get the less than 6% increase in DA from July 2016

Calculation of DA from July 2016 based on CPI(IW) from July 2015 to June 2016

DA from July 2016	=[(263+264+266+269+270+269+269+267+268+271+267@+264@)-115.76]X100/115.76
	=130% (5% increase in DA from July 2016)
@ Assumed CPI(IW) for May 2016 and June 2016

DA from July 2016	=[(263+264+266+269+270+269+269+267+268+271+268@+264@)-115.76]X100/115.76
	=130%-125% (5% increase in DA from July 2016)
@ Assumed CPI(IW) for May 2016 and June 2016

Scenario 2: Possibility of increase in DA from July 2016 working out to be 6%

Even if index gets lower by 3 points during both of these months compared to previous month, viz., May 2016 registers 3 point reduction from April and further three point reduction in June 2016 compared to May 2016, increase in DA from July 2016 will be 6%.

DA from July 2016	=[(263+264+266+269+270+269+269+267+268+271+268@+265@)-115.76]X100/115.76
	=131% -125% (6% increase in DA from July 2016)
@ Assumed CPI(IW) for May 2016 and June 2016

We are of the opinion that increase in DA from July 2016 registering at least 6% is quite possible as chances for CPI (IW) getting reduced to less than 265 from the present level 271 in two months is very remote.

Scenario 3: Possibility of increase in DA from July 2016 working out to be 7%

If CPI (IW) gets increased at least by 2 points in any one of the coming two months and by 1 point increase in the other month compared to previous month, then DA from July 2016 will be poised for an increase of 7%.

In other words, if consumer price index for May 2016 and June 2016 witnesses at least 2 point increase and further 1 point increase respectively or vice versa, increase in DA from July 2016 is calculated to be 7%

DA from July 2016	=[(263+264+266+269+270+269+269+267+268+271+273@+274@)-115.76]X100/115.76
	=132% -125% (7% increase in DA from July 2016)
@ Assumed CPI(IW) for May 2016 and June 2016

DA from July 2016	=[(263+264+266+269+270+269+269+267+268+271+272@+273@)-115.76]X100/115.76
	=132% -125% (7% increase in DA from July 2016)
@ Assumed CPI(IW) for May 2016 and June 2016

Considering the inflationary trend shown by 3 point increase in April 2016, this scenario may become a reality. In that case DA from July 2016 will be 7%

Scenario 4: Possibility of increase in DA from July 2016 working out more than 7%

In order to get an increase in DA from July 2016 more than 7%, CPI(IW) for both May 2016 and June 2016 should witness at least 7 point increase from the present level of 271. If any one of this month registers lesser increase than 7 points then the other month has to compensate the same by registering increase of index by more than 7 points.

It is apparent that possibility for such an increase in CPI(IW) is not at all Possible. Hence we can conclude that increase in DA from July 2016 may not be more than 7%A