New HRA, GST to up inflation in FY18

New HRA, GST to up inflation in FY18

 The implementation of house rent allowances (HRA) recommended as part of the 7th pay commission and the Goods and Services Tax (GST) rollout may accelerate inflation in 2017-18 by 1% to 1.5%, top Reserve Bank of India officials have said.

“The implementation of the HRA allowances recommended as part of the 7th CPC and the GST are risks, which could alter the inflation outturn in 2017-18,” the RBI Governor Urjit Patel said, according to the minutes of the Monetary Policy Committee meeting.

The outlook of the meeting said that a prominent risk could emanate from managing the implementation of the allowances recommended by the 7th CPC.

“In case the increase in house rent allowance as recommended by the 7th CPC is awarded, it will push up the baseline trajectory by an estimated 100-150 basis points over a period of 12 to18 months, with this initial statistical impact on the CPI, followed by second-order effects,” it said, adding the another upside risk arises from the one-off effects of the GST.

Another member of the six-member MPC, Michael Debabrata Patra, said the most important cost push will emanate from the 7th pay commission’s house rent allowance.

“The first order statistical impact on the CPI may take headline inflation to or beyond the upper tolerance band. Second order effects will work through expectations and ‘Deusenberry effects’ as it spreads to states, PSUs, universities, and onwards. These effects will occur on top of the first order effect and 6% plus inflation could be here to stay for some time,” Patra said.

He said the second factor impacting inflation could be one-off effect of the GST. He, however, said that it would be small relative to the 7th pay commission and short lived, but could still last a year and push up inflation.

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