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Union finance minister Nirmala Sitharaman is flanked by minister for railways, commerce and industry Piyush Goyal (left) and environment minister Prakash Javadekar in New Delhi on Friday (Photo: Pradeep Gaur/Mint)
Union finance minister Nirmala Sitharaman is flanked by minister for railways, commerce and industry Piyush Goyal (left) and environment minister Prakash Javadekar in New Delhi on Friday (Photo: Pradeep Gaur/Mint)

Centre raises dearness allowance for govt staff by 4%

  • Hikes in dearness allowance, dearness relief may help boost income and drive demand
  • The combined impact of the hike on the exchequer will be 14,595 crore in FY21

New Delhi: The Union cabinet led by Prime Minister Narendra Modi on Friday announced a 4% increase in dearness allowance (DA) and dearness relief (DR) from 17% to 21% for 2020-21. The move will benefit over 11.37 million government employees and pensioners. In October 2019, the Centre had increased DA from 12% to 17%.

“The combined impact on the exchequer on account of both DA and DR would be 12,510 crore per annum, and 14,595 crore in financial year 2020-21 (for a period of 14 months from January, 2020 to February, 2021). It will benefit about 48.34 lakh Central government employees and 65.26 lakh pensioners," the Union cabinet said in a statement. The government believes the DA/DR hike will help increase disposable income and help drive demand in the market.

However, experts said while the DA hike will work as a mood enhancer in a fragile market condition, it is unlikely to boost consumption. “The government could have delayed the DA announcement, but they did so today because they are willing to pull the economy up. But, on a practical note, the sentiment is down and people are now risk-averse. Any additional money in their hand may push them to save than spend," said Sunil Sinha, principal economist, India Ratings and Research.

Sinha said in a situation like this, people in the lower income bracket, whose needs are not met will spend more if money comes into their pocket, but government employees and pensioners do not fall under this category.

Private consumption in India grew modestly at 5.9% in the December quarter, as against 5.6% in the three months ended 30 September. However, this was much lower than the previous year.

India’s economy grew at 4.7% in the December quarter, its slowest rate in more than six years. Fears of the Covid-19 outbreak may throw the global economy into a recession, further pulling down the growth prospects of Asia’s third largest economy.

While the 4.7% print in December is better than the September quarter’s initial estimate of 4.5%, the National Statistical Office (NSO) has revised its growth estimates upward for the June quarter to 5.6% and the September quarter to 5.1%, signalling the economy is yet to bottom out.

The cabinet also approved the rehabilitation and upgradation of various national highways, covering over 780km in the states of Himachal Pradesh, Rajasthan, Uttar Pradesh and Andhra Pradesh. The project involves investment of 7,662.47 crore including a loan component of 3,500 crore from the World Bank. The loan assistance of the World Bank will be under Green National Highways Corridor Project.

“The projects have been selected based on the necessity of providing smooth and motorable roads after considering the socio-economic needs of the region. The external factors like the nature and quantum of local produce of the region, logistic infrastructure available to carry the produce and the requirement for connecting local population with the mainstream region etc. have been considered," the cabinet statement said.

Asit Ranjan Mishra contributed to this story.

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