Dearness Allowance: Here's why AIDEF is demanding a change in the DA calculation formula

DA hike: The All India Defence Employees’ Federation (AIDEF) has in a second memorandum submitted to the 8th pay commission panel sought a change in how dearness allowance is calculated.

At present, as per recommendations made by the 7th CPC, DA and dearness relief (DR) are calculated using the All-India Consumer Price Index for Industrial Workers (AICPI-IW) 12-month average.

According to the AIDEF, the formula does not adequately reflect actual cost of living when it comes to mitigating inflation pressure on households of central government employees and retired pensioners.

Why AIDEF wants DA calculation formula to change

Notably, DA is adjusted twice a year for inflation based on the AICPI's 12-month average using the following formulas:

• For central government employees: DA percentage = [(Average of AICPI (Base Year 2001 = 100) for the last 12 months – 261.42) / 261.42] x 100
• For public sector employees: DA percentage = [(Average of AICPI (Base Year 2001 = 100) for the last three months – 126.33) / 126.33] x 100

Here, the AIDEF has argued that while the index seeks to provide relief against inflation, higher weightage has been assigned to relatively stable expenditure categories, which makes it “difficult for the index to adequately and fairly represent the current inflation picture”.

The defence employees' representative group noted that employees, especially those on lower pay grades, spend a larger percentage of their earnings on food, education, healthcare, house rent, medicines and other essentials. For pensioners, it noted that significant allocations are usually towards caregiving, health and medical expenses, which rise faster than overall Consumer Price Index (CPI) inflation, and thus periodic DR revisions may not fully protect their purchasing power.

Here's a breakdown of the weightage concern

As per the federation, while food and beverage account for only 36.75% of the total index, categories and aspects such as healthcare, housing, transport, communication and digital services have received greater weightage, despite generally experiencing more enduring price movements and changes.

It also categorically stated that the revised CPI basket, introduced in FY23, does not fully capture increase in food commodity prices and seasonal agricultural products.

DA calculation: What has the AIDEF suggested?

The federation suggested that countering relatively higher inflation on personal items should be what is reflected more broadly in the revised DA calculation formula. Calling for a complete overhaul of the index, it has proposed creation of an employee-specific cost-of-living index.

The new index, as per the AIDEF, must give due weight to changes in expenditure when determining future fitment factors and to better recognition of elderly care expenses in pay and pension revisions under the 8th Pay Commission.

Notably, the commission closed submissions on 15 June and has planned state visits to meet employee representative groups, unions and stakeholders to discuss revisions for pay hikes, dearness allowance, fitment factor, salary structure and other benefits. It has already held multiple meetings since April.

Could employees get another DA hike this year?

India’s wholesale inflation surged to a new high of 9.68% in May from 8.26% in April, driven by a sharp rise in fuel, crude petroleum and manufactured chemical and metal product prices. According to government data, retail inflation in May also rose to 3.93%, while food inflation climbed to 4.78%.

Vegetables such as tomato, ginger and raisin were among the items that had the strongest inflationary pressure. Rising prices of food (milk, vegetables and other essentials), power and fuel (CNG, diesel and petrol) are putting pressure on household budgets, and an adjustment in DA would significantly help address inflation concerns for burdened middle-class households, lower-income groups and daily commuters.

Reports feel that another DA hike announcement could come this year in July or September amid inflationary pressures and as employees and pensioners seek relief against steadily rising living expenses.