DA arrears: Oh dear

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The government can reconsider its decision on not paying dearness allowance and dearness relief for January 2020 to June 2021 to over 1.13 crore central government employees and pensioners. Payment of arrears will boost demand, provide some relief from inflation and add some more weight to the economic recovery. Effective July, the government restored the DA hike with an 11% increase from January 2020 but did not pay the arrears. A rough calculation pegs the DA arrears at around Rs 27,000 crore which can be paid in installments, with the first being paid before Diwali and the rest by March 2022. There is also a talk of the government approving 3% additional DA which has become due from July 2021.

Finding funds for this payout may not prove too difficult for the government given the robust buoyancy in direct tax collections this year. The collections in the September quarter show a net direct tax collection of Rs 5.7 lakh crore, up 74% from the same period last fiscal. Even the collections from goods and services tax have maintained a monthly run rate of well over Rs l lakh crore this fiscal year.

The payment of arrears can give a boost to the demand for manufactured goods as well and services as the economy open up after the Covid shutdowns. This payment can push demand for consumer goods, automobiles etc, and help the economy achieve better and faster recovery.

Last week the RBI maintained its GDP growth target for 2021-22 at 9.5% but the World Bank revised the country’s growth forecast to 8.3% for the current financial year 2021-22, compared to the earlier estimate of 10.1%.

On the downside, the additional payments may make meeting the fiscal deficit target a little bit harder. As India enters the world bond index next year, adhering to the fiscal deficit targets may become more important to maintain the ratings.