In India, the basis used for determining and periodically revising dearness allowance (DA) payable to employees is which of the following economic indicators?

Introduction / Context:
Dearness allowance (DA) is a very important component of salaries for government employees and many organised sector workers in India. It is intended to protect the real purchasing power of wages against the rise in the cost of living. Examinations on Indian economy frequently ask which economic indicator is actually used as the formal basis for determining and revising DA. To answer correctly, you must distinguish between broad macroeconomic variables like national income and inflation and the more specific cost of living index constructed from consumer prices.

Given Data / Assumptions:
- The focus is on dearness allowance (DA) as paid to employees in India.
- DA is meant to compensate for the rising cost of living due to price increases.
- Four candidate indicators are given: national income, consumer price index, standard of living and inflation rate.
- We assume the standard practice followed by pay commissions and government orders.

Concept / Approach:
Dearness allowance is directly linked to changes in the cost of living faced by workers and their families. In India, this cost of living is statistically captured through specially constructed Consumer Price Indices, particularly the Consumer Price Index for Industrial Workers and similar series for other categories. These indices track changes in the prices of a representative basket of goods and services typically consumed by workers. DA formulas are usually specified as a certain number of points increase in DA for each rise of the index by a fixed number of points. Therefore, among the options given, the consumer price index is the correct basis.

Step-by-Step Solution:
Step 1: Recall the purpose of DA. It is intended to neutralise, fully or partially, the effect of price rises on the real income of employees.Step 2: Identify which indicator best reflects changes in the cost of living. National income does not directly tell us about individual cost of living; it measures the total income of the country.Step 3: Recognise that the Consumer Price Index (CPI) is specifically designed to measure price changes for a typical consumption basket, so it is a cost of living index.Step 4: Understand that vague ideas like standard of living or the general inflation rate are not the formal triggers used in government DA formulas. Instead, DA is linked to movements in the CPI for defined categories of workers.Step 5: Conclude that the correct answer must be the Consumer Price Index, because DA slabs and revisions are calculated on the basis of CPI point movements.

Verification / Alternative check:
A practical verification is to look at any government office memorandum on DA revision. It typically mentions that DA is revised twice a year based on the average CPI for Industrial Workers over a defined period and indicates how many additional percentage points of DA correspond to the observed increase in the index. There is no mention of national income or a separate abstract standard of living calculation in these formulas, which confirms that CPI is the operative basis.

Why Other Options Are Wrong:
National Income is wrong because it measures aggregate production and income and may rise even when the cost of living for ordinary workers is also rising. Standard of living is wrong because it is a broad, qualitative concept that is influenced by many factors, not a specific index used for DA calculation. A general inflation rate is wrong because DA is not directly pegged to a single headline inflation number; instead, it is tied to a specific CPI series that reflects the consumption basket of workers.

Common Pitfalls:
A common mistake is to equate any discussion of rising prices with the word inflation and therefore to choose inflation rate as the answer. Another pitfall is to think that because DA aims to preserve standard of living, that phrase must be the formal basis. However, exams expect you to know the precise statistical index used in practice, which is the CPI. Remember that DA is essentially a cost of living adjustment that is mechanically linked to consumer price indices.

Final Answer:
The basis of determining DA for employees in India is the Consumer Price Index (cost of living index).