The Union Cabinet on Thursday raised the Dearness Allowance for Central government employees from the existing 16% to 22% with effect from Jan 1, 2009.
The Cabinet met today and cleared the hike which will increase the burden on the exchequer to over Rs 6,000 crore.
The move is significant since elections are round the corner and notification from the Election Commission is expected shortly.
In other decisions, the Cabinet cleared Rs 8,160 crore for upgrading roads in Naxal-affected areas. It also allowed states to let their fiscal deficit go up to 3.5% as compared to 3% earlier.
On Tuesday, more sops were announced by stand-in finance minister Pranab Mukherjee, who declared cuts of 2% in service tax and in excise duties on most goods. Ahead of Lok Sabha polls, the sops are estimated to cost the government over Rs 29,000 crore.
Announcing that the 4% cut in central excise duties made in December 2008 would continue for the next fiscal, the FM said excise rates at 10% would be cut by a further 2% to bring them down to 8%. Other excise slabs like 4% or 8% or items taxed at more than 10% would be unaffected by the cut. Experts said while only one slab had been slashed, it accounted for almost 96% of all items, which makes the cut almost across-the-board.