Wednesday, November 18, 2020

Dear Comrades, 

Parliament on 22nd September 2020 passed The Essential Commodities (Amendment) Bill, 2020, which removes cereal, pulses, oilseed, edible oil, onion and potatoes from the list of essential commodities. 

Now the question before every Central Government employee how this Essential Commodities (Amendment) Bill, 2020, will affect us in terms of calculation of Dearness Allowance. 

What is Dearness allowance: 

Dearness allowance is a cost of living adjustment allowance paid to government employees, public sector employees and pensioners and is calculated as a percentage of basic salary to mitigate the impact of inflation. 

Dearness Allowance is granted to employees of the central government each year with effect from January 1 and July 1st. It is calculated on the basis of a rise in inflation and increase in prices of essential commodities. 

The formulae for calculating dearness allowance are as under: For central government employees: DA% = ((Average of AICPI (Base Year 2001=100) for the past 12 months -115.76)/115.76)100 

What is Inflation? 

Inflation is a measure of rise in the general price level or equivalently average level of prices of all the goods and services in an economy. The general price level varies inversely with the purchasing power of a unit of money, say one rupee. As such, inflation is often viewed as a reduction in the purchasing power of money. Inflation does not necessarily mean that the prices of all the goods and services in an economy rise. In an inflationary situation, the average level of prices rise with some items showing excessive rise while others may not follow suit. 

Let us understand the Essential Commodities Act: 

Essential Commodities Act was enacted way back in 1955. 

It has since been used by the Government to regulate the production, supply and distribution of a whole host of commodities it declares ‘essential’ in order to make them available to consumers at fair prices. 

The list of items under the Act include drugs, fertilisers, pulses and edible oils, and petroleum and petroleum products. 

The Centre can include new commodities as and when the need arises, and take them off the list once the situation improves. 

The Essential Commodities Act gives consumers protection against irrational spikes in prices of essential commodities. 

What is Consumer Price Index? 

Consumer Price Index or CPI as it is commonly called is an index measuring retail inflation in the economy by collecting the change in prices of most common goods and services used by consumers. Called market basket, CPI is calculated for a fixed list of items including food, housing, apparel, transportation, electronics, medical care, education, etc. Note that the price data is collected periodically, and thus, the CPI is used to calculate the inflation levels in an economy. This can be further used to compute the cost of living. This also provides insights as to how much a consumer can spend to be on par with the price change. 

The CPI is calculated with reference to a base year, which is used as a benchmark. The price change pertains to that year. Remember, when you calculate the CPI, note that the price of the basket in 1 year has to be first divided by the price of the market basket of the base year. Then, it is multiplied by 100. 

Consumer Price Index formula: 

CPI = (Cost of basket divided by Cost of basket in the base year) multiplied by 100 

A basket of goods is a constant set of general goods produced in an economy whose prices are tracked over time. The basket is used to measure inflation over time, such as with the consumer price index (CPI). 

Basket, CPI is calculated for a fixed list of items including food, housing, apparel, transportation, electronics, medical care, education, etc. Note that the price data is collected periodically, and thus, the CPI is used to calculate the inflation levels in an economy. 


In India, the Consumer Price Index (CPI) is calculated on a monthly basis by Ministry of Statistics and Programme Implementation (MOSPI)

The following table provides All-India Sub-group/Group Weights of CPI (Rural), CPI(Urban) and CPI(Combined). (Base 2012=100) 


Index Base Year 2012 

Rural 

Urban 

Combined 


100.00 

100.00 

100.00 


54.18 

36.29 

45.86 


12.35 

6.59 

9.67 


4.38 

2.73 

3.61 


0.49 

0.36 

0.43 


7.72 

5.33 

6.61 


4.21 

2.81 

3.56 


2.88 

2.90 

2.89 


7.46 

4.41 

6.04 


2.95 

1.73 

2.38 

1.70 

0.97 

1.36 


3.11 

1.79 

2.50 


1.37 

1.13 

1.26 


5.56 

5.54 

5.55 


3.26 

1.36 

2.38 


7.36 

5.57 

6.53 


6.32 

4.72 

5.58 


1.04 

0.85 

0.95 

HOUSING 

21.67 

10.07 


7.94 

5.58 

6.84 


27.26 

29.53 

28.32 


3.75 

3.87 

3.80 


6.83 

4.81 

5.89 


7.60 

9.73 

8.59 


1.37 

2.04 

1.68 


3.46 

5.62 

4.46 


4.25 

3.47 

3.89 

The Essential Commodities (Amendment) Bill, 2020, which removes cereal, pulses, oilseed, edible oil, onion and potatoes from the list of essential commodities. How will it affect the Central Government employees, State Government employees, public sector employees and pensioners 

Cereals : 9.67% 

Pulses : 2.38 % 

Oil seeds and edible oil: 3.56 % 

Onion and potatoes : 1% 

Total : 16.61 % 

So total say 17% of the total weightage of items are being affected, at present, these items will be replaced with other items, the new consumer price index with weightage will be issued by the Government in due course, which may or may not yield higher consumer points, so we have to wait for some time to assess the actual impact on the CPI and DA . 

July 2019 CPI was at 319 points 

June 2020 is at 330 points 

Net Increase in CPI last year : 11 points 

DA as on July 2019 : 17 % 

DA as July 2020 : 24 % 

DA we got last year : 7% 

Net loss of DA per year due to the Essential Commodities (Amendment) Bill, 2020 is to be assessed only after the new consumer price index with weightage will be issued by the Government in due course. Always it is believed with previous experience this will have an impact on DA and it is presumed that the Government employees are always at loss due to Government policy the exact impact will be studied in due course.

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