DEARNESS ALLOWANCE

Dearness Allowance (DA) is a compensatory payment to the employees for the erosion in the real value of their salaries, resulting from price increase.

For the calculation of PFcontributions, Bonus, Gratuity, and other benefits, Basic Salary + DA is considered. Most companies have "merged" Basic and DA, and show it as a consolidated amount (Basic + Fixed DA)..

There are two type of DA calculation. One is FDA (FIXED)other one is (VDA) VDA. Fixed Dearness will remain same changes are made by the government/company policy. Whereas VDA is calculated on Consumer Price Index basis it is announced by the Statistical Department every month.

There are two kinds of Price Index Number one is All India Price Index Number other is State Price Index Number. The State Consumer Price Index Number varies from every metro districts according to the cost of living. At the Staff and other level the declaration of DA is the Policy matter of employer. The percentage and Fixation of DA is purely employer choice.

Wholesale Price Index (WPI) vs Consumer Price Index (CPI) Wholesale Price Index (WPI) and Consumer Price Index (CPI) are two of the many indices that play the integral part in setting the goods price in the market. Without these two indices, the market would fall into chaos. These indices are great tools for different businesses in keeping track of the price of their goods.

WPI

Wholesale Price Index (WPI) is used in some countries as a basis for the inflation or deflation rate in the market. The traded goods and services amidst different manufacturers and corporations is the core of the WPI. The WPI can be established using the status of the five groups in basic human commodity namely: manufacturing, agriculture, quarrying, mining, and in the export/import industry.

CPI

Consumer Price Index or CPI measures the average prices of goods and services that we, the consumers, have paid for. There are 8 groups in which CPI is used. They are: education, apparel, foods and beverages, communication, transportation, recreation, housing, and medical care. Other services like school and government registration fees and electricity and water bills are sometimes counted as well.

DIFFERENCE BETWEEN CPI AND WPI

Wholesale Price Index is the middle point of all the prices that the merchants pay for certain goods or services from the manufacturers or traders. While the Consumer Price Index, on the other hand, is also the middle point of all the prices that the consumers, homeowners and private sectors have paid for particular products and services. These two indices are very important factors in determining how strong a countrys economy is. WPI measures the deflation and CPI is for inflation.

Wholesale price index is the basis for the economic deflation rate while consumer price index is the basis for the inflation rate. Wholesale price index is the middle point of the sum of all the goods bought by the sellers/traders whereas consumer price index is the middle point of the sum of all the goods bought by consumers/homeowners.

Let's calculate WPI for the year 1980 for a particular commodity, say wheat. Assume that the price of a kilogram of wheat in 1970 = Rs 5.75 and in 1980 = Rs 6.10 The WPI of wheat for the year 1980 is, (Price of Wheat in 1980 Price of Wheat in 1970)/ Price of Wheat in 1970 x 100 i.e. (6.10 5.75)/5.75 x 100 = 6.09 Since WPI for the base year is assumed as 100, WPI for 1980 will become 100 + 6.09 = 106.09

CPI

In this method, a set of 435 commodities and their price changes are used for the calculation

CPI BIASES
Quality Bias: over time, technological advances have increased the life of the products. But CPI does not reflect these improvements New products bias: new products are not included into the index until they become commonplace Substitution bias: takes place when one or more items price increases in a basket

VIEWS OF EARLIER PAY COMMISSIONS

Successive Pay Commissions have made changes to the DA formula, suggesting their own methodology for determining the quantum and frequency.

The Fifth Central Pay Commission recommended uniform neutralization of DA at 100% to employees at all levels; conversion of DA into Dearness Pay each time the CPI increases by 50% over the base index

The Commission did not favor the option of employing separate indices for each category of employee because of the sheer impracticality of the task and, therefore, recommended using the 12 monthly average of All India CPI (IW) with base 1982 for calculating DA.

EXISTING POSITION

The Government of India presently calculates the level of inflation for purposes of grant of dearness allowance to Central Government Employees on the basis of the All India Consumer Price index Number for Industrial Workers (1982=100) (AICPI).

WHAT IS DEARNESS ALLOWANCE ?

Dearness Allowance is granted to compensate the price hike above 536 points(Base Year 1982=100) 115.76 Points(Base Year 2001=100), to which the revised pay scales relate. This will be sanctioned twice a year, payable from 1st Januray and 1st July, reckonedon the following basis.

(i) The twelve monthly average price index above 536/115.76 Points is determined twice in a year for the period ending December and June.

When the money devaluation is fully compensated it is called as full DA neutralisation. The formula for full DA neutralisation = (Total points - Base points)/ Base points (in percentage). The AICPI is introduced in India in 1960 and revised in 1982 & 2001. AICPI of 2001 x 4.63, we get AICPI of 1982 and AICPI of 1982 x 4.93, we get AICPI of 1960. For DA calculation AICPI of 1960 is accepted as the base

The compensation for price rise is admissible twice a year i.e. on 1st January and 1st July of each year. Only the whole number component of the percentage increase in prices is adopted for estimation of DA.

DETERMINING THE LEVEL OF INFLATION METHODOLOGY

While considering the issue of the quantum of DA admissible, the Commission considered at length the procedure for estimation of inflation. Presently, inflation as determined by the AICPI (IW), is estimated using the Laspeyeres Fixed base methodology. The inflation index using this methodology captures the cost of buying a basket of goods (fixed in the base year) at current prices relative to the cost of buying the same basket of goods at base year prices.

REVISION OF BASE OF AICPI (IW) FOR CALCULATION OF DA

The Fifth CPC had adopted the AICPI (IW) using the 1982 series for estimation of DA. The Government has developed a new series with base 2001, with effect from January 2006.

REVISED DEARNESS ALLOWANCE CALCULATION AS PER SIXTH PAY COMMISSION

536 is taken as a base as on 01/01/2006 for revised DA calculation. It comes to 115.76 when converting in 2001 series after dividing by a linking factor 4.63 in 1982 series (536/4.63= 115.76)

HOW TO CALCULATE DEARNESS ALLOWANCE:

(i) Dearness Allowance is paid on the Basic Pay as defined in FR 9(21)(a)(i)+NPA, if any (Personal Pay, Special Pay, etc., not included). (ii) Fractions of 50 paisa and above to be rounded off to the next higher rupee and less than 50 paisa ignored. (iii) For part of a month, rate of Dearness Allowance to be applied on the rate of pay+NPA and then Dearness Allowance for the number of days calculated. (iv) In the case of daily-rated worker, monthly pay reckoned at 26 times his basic daily wages. Hence for part of a month, calculation of Dearness Allowance will be on Monthly pay + 26 x Number of days.

FORMULA FOR DA

% increase for AICPIN = DA =

Average of AICPIN for last 12 months 115.76 X 100 115.76

Date 1.1.2006 1.7.2006 1.1.2007 1.7.2007 1.1.2008 1.7.2008 1.1.2009 1.7.2009 1.1.2010 1.7.2010

Rate of DA 0 2 6 9 12 16 22 27 35 ?

The expected All India Consumer Price Index number (AICPIN) for Industrial Workers Base 2001=100 for the month of May 2010 has been released by Statistical Department, Labour. The AICPIN for the month of May 2010 is 172.

BASED ON AICPIN INDEX, WE CALCULATED DA PERCENTAGE FOR 1ST JULY 2010.

Month All India Index % of increase Nov-08 148 21.44 Dec-08 147 22.38 Jan-09 148 23.39 Feb09 148 24.32 Mar-09 148 25.12 Apr-09 150 25.98 May-09 151 26.84 Jun-09 153 27.78 Jul09 160 29 Aug-09 162 30.23 Sep-09 163 31.45 Oct-09 165 32.67 Nov-09 168 34.11 Dec-09 169 35.7 Jan-10 172 37.43 Feb-10 170 39.01 Mar-10 170 40.59 Apr-10 170 42.03 May-10 172 43.54 Jun-10 ? ?

As per above data, we got 35% dearness allowance for last time in December 2009 based on % of increase in AICPIN.

HOW TO CALCULATE PERCENTAGE OF INCREASE ?

DA = (Avg of AICPIN for the past 12 months 115.76) * 100 / 115.76

If the index value remains 172 in June 2010, then % of increase value is 44.91, =June 10 % of Increase index value minus Jan 10 % of Increase index value. = 44.91 (-) 35.7 = 9.21. ie Minimum 9% percentage increase will be there in DA. so DA will be 35 + 9 = 44 % .

LATEST RATE OF DEARNESS ALLOWANCE

As per the announcement of All India Consumer Price Index Numbers from Labour Bureau, the index increased by 4 points and stood at 178. We have already calculated the Dearness Allowance from July, 2010 would be 45%.

Month / B.Y. 2001=100 Year Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 140 143 145 146 148 148 147

Total of

12 Months

% Increase App. DA

DA

12 Months 1623 1634 1646 1659 1673 1687 1700

Average 135.25 136.17 137.17 138.25 139.42 140.58 141.67

over 115.763 19.49 20.41 21.41 22.49 23.66 24.82 25.91 16.84 17.63 18.49 19.43 20.44 21.44 22.38

% 16 17 18 19 20 21 22