Payment of dearness allowance is made to the employees under wages/pay packet. It is paid by the employers to the employees in order to provide relief to the latter against ever rising prices of consumer goods. Thus dearness allowance is given to the employees by way of compensation for rising prices or consumer price index.
This compensation is called dearness allowance. It is an important part of the wages paid to the employees. To-day, dearness allowance is given to all government and most of the private sector employees.
Initially dearness allowance was kept separate from the basic salary. The main reason for it was that rise in consumer goods prices was temporary and it was hoped that in future prices will revert back to their normal level. But prices went on rising and all measures to control them failed miserably. In this way, the system of payment of dearness allowance, whose initial nature was purely temporary, has to-day become an integral part of wages. System of payment of dearness allowance in different industries and sectors is different from one another.
In India, the system of payment of wages is not very old. Prior to World War-II, system of dearness allowance was restricted to cotton textile industries of Mumbai and Ahmedabad. It was during World War I that payment of dearness allowance was first made in India in Cotton Textile Industries. In 1939, the system gained importance.
Initially, dearness allowance used to be treated as an additional income of the workers. Gradually, this system was introduced in all industries (private and public) of India. Presently, payment of dearness allowance has become an integral part of wage payment.
Methods of Computation of D.A
- D.A. linked with cost of living
(a) Dearness Allowance Linked to Change in Consumer Price Index
In this method consumer Price Index is taken into account. Dearness allowance is paid in accordance with change in price index on point basis. Employees getting low rate of wages are paid more dearness allowance than the employees getting high rate of wages.
(b) D.A. Linked to Pay Slab
Under this method, rates of dearness allowance vary with different pay-slabs. Dearness allowance increases more in case of minimum pay-slab and it increases less in case of maximum pay-slab.
- D.A. not linked with cost of living
(a) Flat Rate of D.A
Under this method all employees are paid dearness allowance at uniform rate, irrespective of consumer price index.
(b) Graduated Scale of D.A
Under this method also, consumer price index is not considered. Amount of dearness allowance increases with increase in pay but rate of dearness allowance goes on falling as the level of pay goes on rising.
Many factors influence determination of dearness allowance, such as, earning capacity of the industry, increase in productivity and consumer price index, etc. Besides, the bargaining capacity of the employees and trade unions also compels the industries for the payment of dearness allowance. Various industrial adjudications have also contributed significantly to the determination of dearness allowance.
(i) Dearness allowance scheme is beneficial for maintaining normal standard of living of the workers.
(ii) Being linked to Consumer Price Index, dearness allowance automatically compensate loss in purchasing power of money wage due to price rise.
(iii) Being an integral part of the wage, dearness allowance implies rise in wage and this rise is of permanent nature.
(i) Rise in consumer Price Index leads to corresponding rise in rate of dearness allowance. Consequently, wages paid to the workers also rise. But rise in wages is not accompanied by rise in productivity. As a result per unit cost of labour increases.
(ii) Dearness allowance, instead of being linked to the profitability of the industrial unit, has been linked to Consumer Price Index which is a different element.
(iii) Payment of dearness allowance is one of the causes of inflation.
(iv) Dearness allowance leads to increase in the inequality of income. This gives rise to mutual animosity among the workers culminating into industrial disputes.
(v) Dearness allowance causes rise in labour cost and hence rise in selling prices of the products.