7th CPC DA Calculation – Important factor of AICPI (IW) BY 2001 continue or not..?

7th CPC DA Calculation – Important factor of AICPI (IW) BY 2001 continue or not..?

The continuation of the All India Consumer Price Index for Industrial Workers (AICPI-IW) by 2001 holds significant importance in the calculation of Dearness Allowance (DA) for the 7th Central Pay Commission (CPC). The Pay Commission acknowledges the significance of DA and has recommended different methods of calculation throughout its iterations.

Prior to the 6th Pay Commission, DA would increase by 1 or 2% until the 5th Pay Commission. However, there was a sudden surge in double-digit figures thereafter. The calculation of DA before the 6th Pay Commission was based on the Consumer Price Index Number for Industrial Workers 1982=100. However, from the 6th Pay Commission onwards, the CPI-IW 2001=100 was adopted for this purpose. Additionally, the reference base index was changed to 115.76 from 01.01.2006 onwards.

Many are curious to know if the 7th CPC will introduce a new CPI-IW or modify the reference base index. It is important to observe the disparities between the calculation methods of the 5th and 6th CPCs. The 5th CPC used a formula that calculated DA until 1-1-2004 as follows: (12 Monthly Average – 306.33) x 100 / 306.33 = percentage increase in prices. The 5th CPC recommended that DA should be converted into DP each time the CPI increased by 50% over the base index. From 1-4-2004, the government merged 50% of DA with basic pay. The formula for calculating DA from 1-7-2004 was: [(12 Monthly Average – 306.33) x 100] – 50 / 306.33 = percentage increase in prices.

On the other hand, the 6th CPC used a different formula: [(12 Monthly Average) – 115.76] x 100 / 115.76 = percentage increase in prices.

To explain the origin of the value 306.33, it was derived from the calculation of the 12-month average of AICPI for the year 1995. The average value for the 12 months was found to be 306.33.

Starting from 2006, the average base index became 115.76 with a base of 2001=100. This change was implemented by the government through the development of a new series with a base year of 2001, effective from January 2006. The back data series with base year 2001 could be generated by using a linking factor of 4.63. Consequently, the AICPI average of 2005 (with base year 1982=100) which was 536, had to be modified using the linking factor of 4.63 to align with the new series in the calculation of DA. This led to the determination of the base index number as 115.76.

For the 7th Pay Commission, which will be implemented from 1.1.2016, the AICPI average of 2005 will serve as the base index for calculating DA.

5th CPC calculation method

[(12 Monthly Average – 306.33) x 100] – 50 = percentage increase in prices
306.33

6th CPC calculation method

[(12 Monthly Average) – 115.76] x 100 = percentage increase in prices
115.76