The All India Consumer Price Index- Industrial Workers (AICPI-IW) serves as the standard inflation index for calculating dearness allowance (DA) and dearness relief (DR) for central government employees and pensioners. This index is based on prices of food, services and other essential items in the CPI basket, and the 12-month average reading of the AICPI-IW index is used to determine the biannual DA. However, the All India Defence Employees’ Federation (AIDEF), which represents a large group of defence civilian employees, is pushing for a change in the index used for calculating DA, DR and pay revision for the 8 th Pay Commission (8 th CPC).
In its second supplementary memorandum submitted to the 8 th Pay Commission, the AIDEF has proposed replacing the Consumer Price Index (CPI) with a new employee-specific cost-of-living index.
AIDEF claims that the current index doesn’t protect real incomes of central government employees and pensioners and a new index would provide a more realistic basis for determining DA, DR, pay revision and pension protection.
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The defence civilian employees’ body has requested the 8th Pay Commission to examine the feasibility of creating a separate cost of living index that gives greater weightage to food, healthcare, housing, education, transportation and essential consumption expenditure, which are some of the major items in the CPI basket.
What did AIDEF find wrong with the AICPI-IW index?
AIDEF says that the CPI basket was revised in 2022-23, but the new basket failed to address rising prices of food commodities and seasonal agricultural products.
The defence employee body says that the revised CPI basket food and beverages account for only 36.75% weightage compared to 45.86% under the index in 2012. The defence employees' body further argues that the revised basket assigns greater weight to housing, healthcare, transport, communication, recreation and digital services. It says that many of these items exhibit relatively stable prices compared with food commodities and seasonal agricultural products.
AIDEF says since the weightage of food and beverages has fallen, DA revisions may not fully reflect inflation experienced by families whose expenditure on food remains high.
"This issue is particularly relevant for lower-paid employees and pensioners. Many central government employees and pensioners spend a higher proportion of their income on food, medicines, healthcare, essential household items, house rent and education. Consequently, they may experience a higher rate of inflation than that reflected in the revised CPI," says AIDEF in its memorandum.
AIDEF says the current way of DA calculation can create a growing gap between official inflation measurements, and actual household expenditure experiences.
Impact on pensioners
AIDEF says many pensioners allocate a greater portion of their income to food, medicines, medical treatment, health insurance and caregiving services.
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"If these expenditures rise faster than overall CPI inflation, pensioners may experience a decline in real purchasing power despite receiving periodic DR increases," says AIDEF.
What are AIDEF’s suggestions for a revised index?
AIDEF says since the revised CPI does not adequately capture inflation experienced by government employees and pensioners, DA neutralisation requires re-examination.
The defence employees’ body has suggested reforms such as a new employee-specific cost-of-living index, to use changing expenditure patterns to determine future fitment factors, and greater recognition of elderly-care expenditure in determining compensation.
AIDEF recommends: “The 8th Pay Commission should examine the feasibility of creating a separate Cost of Living Index for central government employees and pensioners, with enhanced weightage for food, healthcare, housing, education, transportation and essential consumption expenditure. Such an index would provide a more realistic basis for determining DA, DR, pay revision, and pension protection.”
