Is RBI's Monetary Policy is concerned with 7th CPC House Rent Allowances hike?

Is RBI's Monetary Policy is concerned with 7th CPC House Rent Allowances hike?

Central Government Employees are eagerly waiting for hike in allowances as per 7th Pay Commission. The 7th Pay Commission recommended the rates at which HRA is to be paid to 24 per cent, 16 per cent and 8 per cent respectively for Class X, Y and Z cities and towns respectively of new Basic pay (pay in the pay band plus grade pay multiplying by the fitment factor of 2.57). The existing rates of HRA for these cities and towns were 30 per cent, 20 per cent and 10 per cent of Basic pay (pay in the pay band plus grade pay) respectively.

Yesterday RBI has issued its First Bi-monthly Monetary Policy Statement for 2017-18. Paramnews has analyzed this report in view of early approval of allowances committee. This report has stated that the Seventh Pay Commission recommendations will not upset fiscal maths as additional expenditures will be offset by either surplus revenues or expenditure cuts. Accordingly, a view has been expressed, this time too RBI seems neutral on prohibiting to hike the allowances specially House Rent Allowances.

HERE ARE TWO QUESTIONS TO BE POINTED OUT

• Can we Say RBI plays the vital role in implementing 7th CPC House Rent Allowances?
• Whether Govt. had taken RBI’s report to delay the hike in HRA as per 7th CPC Recommendation?

To Find the above we should have a recap on RBI Monetary Policy Report From April 2016 to First Bi-monthly Monetary Policy Statement for 2017-18.

As per RBI Projected Monetary Policy Report April 2016:-

The implementation of the CPC's recommendations could impact inflation and growth through:

a) the direct impact of the proposed increase in the house rent allowance (HRA);
b) indirect effects operating through consumption to aggregate demand; and
c) inflation expectations channel

According to RBI The higher HRA would have a direct and immediate impact on headline CPI through an increase in housing inflation. As RBI assumed a rate of increase in the HRA as proposed by the 7th CPC is implemented from early 2017-18 onwards and the State Governments implement a similar order of increase with a lag of one quarter, CPI inflation could be 100-150 bps higher than the baseline for 2017-18. We can better understand in the below given chart by RBI.

The implementation of the 7th Central Pay Commission (CPC) awards can have a significant bearing on the inflation trajectory through both direct and indirect channels shown by RBI in below given chart.

RBI also assumed that the impact of the pay awards is likely to be seen over a period of two years. Compared to the 6th CPC awards, increase in the housing index would be more quick and continuous and indirect effects are likely to be smaller. Moreover, outgo of arrears under 7th CPC awards would be substantially lower but HRA rates would automatically increase when the dearness allowance of the employees crosses threshold levels3.

In the broad sense, as we see the above points projected by the RBI, we can easily say that due to the reason that the Govt has stopped giving 7th CPC House Rent Allowances and constituted the Committee on Allowances under Finance Secretary Ashok Lavasa in June last year after the government implemented the recommendation of the 7th Pay Commission.

The special committee on allowances recommended by the 7th Pay Commission is expected to recommend more than double House Rent Allowance (HRA). The committee on allowances recommended by the 7th Pay Commission is likely to propose a increases ranging between 106 per cent and 122 per cent in HRA for all categories of employees. The government was also expected to start giving HRA by October 2016, including all allowances, once again a report from the RBI ?

RBI governor Urjit Patel announced in the last bimonthly monetary policy on December 7, it seems that higher allowances, if at all, will not come before March 2017 i.e. the next financial year. As the RBI Governor said that disbursement of salaries and arrears under 7th Pay Commission award has not been disruptive to inflation outcomes, he added that the extension of two months given to the Ministry of Finance to receive the notification on higher allowances under the Pay Commission's award, could push it's fuller effect into the next financial year, rather than this financial year.

As many as 14 meeting have been held between the Committee on Allowances and the central government employees' unions so far on higher allowances under the 7th Pay Commission, but no consensus could be reached.

Various Media Reports are claiming that the report will be approved by cabinet after the ongoing Budget session of Parliament is over on April 12.

The finance secretary-led panel, which is giving final touches to the reworked allowances based on the 7th pay panel's recommendations, will hold its final meeting shortly, according to various sources.

The panel met for over three hours on Wednesday to deliberate on the subject. "Decisions are broadly taken on allowances pending a final review. But these will be announced only after current Budget session ends on April 12 to avoid any controversy," another source said.

But the questions remain here:-

• What "Decisions" will be broadly taken on House Rent Allowances?
• When "These" will be announced ?
• Whether the Govt. is waiting for "RBI" nod for good time? If yes, then when does the good time appear ? or
• Is it pending due to "MCD Election" ? After 05 may 2017.
• Is Govt waiting for Budget session of Parliament is over ? After April 12 2017.
• Is Govt waiting for RBI Second Bi-monthly Monetary Policy Statement for 2017-18 ? After June 07, 2017.