Dear Johny Nawab,
Considering the living cost and all, wage revision is being done once every five or ten years. However, inflation will continue to rise day by day, causing the value of money to decrease. Waiting until the next wage revision to compensate for this is impractical, which is why the Dearness Allowance (DA) is introduced.
Understanding Indices for Money Devaluation
The devaluation of money can be assessed through various indices such as the Wholesale Price Index and the All India Consumer Price Index. The key difference between these two is that the Wholesale Price Index considers the price variation of all commodities, while the All India Consumer Price Index has some specific limitations:
- It focuses on a particular consumer, namely the Industrial Worker.
- It defines a set of specified goods and services known as the "basket of goods."
- In addition to price variations, it also considers the quantity consumed.
- A total of 78 centers across India are selected to calculate the average.
Calculation of Industrial Dearness Allowance (DA)
Based on the All India Consumer Price Index, Industrial Dearness Allowance (DA) is paid, varying by quarters starting from January, April, July, and October. For example, for January, the AICPI will be the average of the previous September, October, and November. Similarly, for April, it will be December, January, and February; for July, March, April, and May; and for October, June, July, and August.
When the devaluation of money is fully compensated, it is referred to as full DA neutralization. The formula for full DA neutralization is calculated as (Total points - Base points) / Base points (in percentage). The All India Consumer Price Index was introduced in India in 1960 and revised in 1982 and 2001. To calculate DA, the AICPI of 1960 is taken as the base.
The indexes can be accessed from the web: Labor Statistics Page 2.
Wage Settlements and Base Points
In India, there are mainly two terms for wage settlements in existence: Wage Settlements of 1.1.1997 and 1.1.2007. The base point in 1.1.1997 is 1708 and in 1.1.2007 is 2884.
Example Calculation of AICPI for July '10
This is equivalent to the average of the previous March, April, and May, which were recorded as 170, 170, and 172 (Base year 2001). When multiplied by 4.63 and rounded, we get 787, 787, and 796 (Base year 1982). Further multiplication by 4.93 and rounding gives us 3880, 3880, and 3924 (Base year 1960). The average of these three and rounding results in 3895.
For the 1.1.97 scale DA, the total points are 3895, base points are 1708, and the difference is 2187. The percentage is calculated as 2187/1708 x 100 = 128.0 (correct to one decimal).
For the 1.1.2007 scale DA, the total points are 3895, base points are 2884, and the difference is 1011. The percentage is calculated as 1011/2884 x 100 = 35.1 (correct to one decimal).
I will insert an Excel sheet for IDA calculation effective from 1.10.2008. You may extend the rows as necessary and enter the three indexes towards the year 2001 in green-colored columns. The results will appear in yellow, with red used for static information.
Regards,
Abbas P.S
Ph. [Phone Number Removed For Privacy Reasons]