The union cabinet has approved a 3% hike in dearness allowance to central government employees and dearness relief to pensioners, taking the effective rate to 34% of basic pay or pension. The rate has been hiked from existing 31% to compensate for the price rise, said the central government in a statement on Wednesday.

The increased rate of 34% for dearness allowance (DA) and dearness relief (DR) would be effective from January 1, 2022. The combined effect of rise in rate for DA and DR on the exchequer would be around ₹9,544.50 crore every year. The move is expected to benefit about 47.68 lakh central government employees and 68.62 lakh pensioners.

This increase in DA and DR rates is in accordance with the accepted formula recommended in the 7th Central Pay Commission.

The last hike in dearness allowance, when it was increased by 3% to 31%, came in October last year, effective July 1, 2021. Earlier last year, DA rates were hiked in July 2021 from 17% to 28% after being frozen for almost a year.

In view of the Covid-19 pandemic and the subsequent economic disruptions, the central government had frozen three additional instalments of the DA and DR due from January 1, 2020, July 1, 2020 and January 1, 2021.

The recent hike will come as a relief to the central government employees as the Indian economy faces a steady rise in inflation. Retail inflation, measured through Consumer Price Index (CPI) has remained above 6% for two months in a row. The Reserve Bank of India (RBI) has prescribed a target range of 2-6% for retail inflation, and closely follows changes in consumer prices while formulating its monetary policy.

Notably, this inflation data does not reflect the impact of heightened crude oil prices in the wake of the Russia-Ukraine war. Analysts believe the prices are likely to rise even further, increasing inflationary pressure in the economy.

Amid sanctions imposed by the U.S. and its allies against Russia, global crude prices have been hovering around $110 per barrel. On Wednesday, the Brent oil futures were trading around $108 a barrel.

In India, petrol and diesel prices, benchmarked to the global crude oil prices, have been constantly increased eight times over the past nine days after being informally frozen for four months amid assembly elections in five states.

With the latest hike in transportation fuel prices, petrol in Delhi now costs ₹101.01 a litre, while diesel rates climbed from ₹91.47 per litre, as per the latest price notified by state-run oil retailers on Wednesday. In Mumbai, diesel prices breached ₹100-mark to ₹100.10 per litre, while petrol costs rose to ₹115.88. In Kolkata, petrol and diesel will now cost ₹110.52 and ₹95.42 per litre, respectively. Meanwhile, in Chennai, petrol will be sold at ₹106.69 per litre and diesel at ₹96.76 a litre.

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7th Pay Commission: 3% DA hike for central govt employees, effective Jan 1, 2022