7th Pay Commission: HRA goes up nearly 105%; This is what investment bank JP Morgan thinks will happen

Prime Minister Narendra Modi-led Union Cabinet last month notified slightly modified recommendations from the 7th Pay Commission over pay and allowannces for  nearly 50 lakh central government employees. 

The government said that the increased allowances like House Rent Allowance (HRA), Dearness Allowance (DA), etc will be applicable from July 1, 2017 and will cost the national exchequer Rs 30,000 crore. This is slightly more than what was projected by the 7th Pay Commission. 

The Commitee on Allowances under Finance Secretary Ashok Lavasa made its recommendations to the cabinet earlier this year and said that HRA should be paid between 25-27%. This was  higher than the HRA recommended by 7th Pay Commission, at 24%, 16% and 8%, respectively. 

However, Modi-led Cabinet accepted recommendations after slight modification and said that House Rent Allowance (HRA) will now be paid at a rate of 24% of the new basic pay for cities with populations of 5 lakh and above (X), 16% for cities with populations of 0.5-5 lakh (Y) and 10% for cities with populations below 0.5 lakh (Z). The HRA rates earlier were 30%, 24% and 18%, respectively, payable on the old basic salary.

Floor for HRA has been set at Rs 5,400 per month for X cities, Rs 3,600 per month for Y cities and Rs 1,800 per month for Z cities.

For Dearness Allowance (DA), 7th Pay Commission had recommended that HRA rates be revised upward in two phases, to 27%, 18% and 9%, respectively, when the DA crosses 50%, and to 30%, 20% and 10%, respectively, when the DA crosses 100%. However, government decided that DA will be revised upward when the it crosses 25% and 50%, respectively.

Investment bank JP Morgan believes that this accepted modified recommendations of the 7th Pay Commission will impact inflation as much as 50 basis points over the coming six months. 

It said, "Per the 7th CPC recommendations, the HRA allowance was expected to increase by around 105%. Our preliminary reading is that the HRA allowance is close to this range. As a consequence, our early assessment is that this will mechanically increase CPI inflation by around 40-50 bps over the course of six months."