Union Minister Prakash Javadekar Union Minister Prakash Javadekar

The Union Cabinet Friday approved a 4 per cent hike in Dearness Allowance to 21 per cent for 48 lakh govt employees, 65 lakh pensioners, announced I&B Minister Prakash Javadekar. The government will incur Rs 14,595 crore additional expense due to the hike, added Javadekar.

DA is provided by the government to its employees to cushion the impact of the rising cost of living. Inflation (or rate of increase in prices) eats away the buying power of money; hence the justification for DA.

“The combined impact on the exchequer on account of both dearness allowance and dearness relief would be Rs 12,510.04 crore per annum and Rs 14,595.04 crore in financial year 2020-21 (for a period of 14 months from January 2020 to February 2021),” the statement said.

It will benefit about 48.34 lakh central government employees and 65.26 lakh pensioners. “The increase is in accordance with the accepted formula, which is based on the recommendations of the 7th Central Pay Commission,” it added.

For instance, if the annual inflation is 5 per cent, it means that a commodity that cost Rs 100 in the first year, would cost Rs 105 in the second. If the employee has a salary that allows her to spend Rs 100 on that commodity, she will be able to buy that commodity in the first year.

To calculate DA, the government typically uses the All India Consumer Price Index-based inflation rate as a broad marker. For greater effectiveness, the DA is revised twice a year.

An increase in DA provides additional money in the hands of government employees. If all this additional money is spent, it will have a positive impact on the sagging consumption demand, which the biggest problem in the economy right now. However, the impact will depend on whether — and to what extent — employees actually spend this money.

Meanwhile, the Cabinet also approved reconstruction scheme for Yes Bank under which SBI will acquire 49 per cent stake in the crisis-ridden private sector bank. Finance Minister Nirmala Sitharaman said the Union Cabinet has approved the reconstruction scheme for Yes Bank as suggested by the Reserve Bank.

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