An avoidable change

There is little to gain from resetting the fiscal year

The government appears determined on going ahead with a change in the fiscal year. On Friday, Finance Minister Arun Jaitley informed the Lok Sabha that the government was considering shifting the fiscal year to January-December. The prime minister has been a keen votary of such a change for a while now. In April, after the National Democratic Alliance government advanced the presentation of the Union Budget to the beginning of February, Mr Modi, during a NITI Aayog meeting, urged states to come on board. Since then, at least three states, Madhya Pradesh, Telangana and Andhra Pradesh, have put their hands up.

There are two crucial elements to this debate, however. One relates to the validity of the arguments being proffered in favour of the shift, and the second is the concern over whether such a change will have several adverse effects. The central argument of the government is the link between the Union Budget and the occurrence of the south-west monsoon. One strand is that Budgets should be prepared immediately after the receipt of agricultural incomes for the year since agricultural income is exceedingly important in a country such as India. A February Budget, it is held, is unable to correctly anticipate the monsoon and fails to make a judicious call about resource allocation. The other argument relates to the working season and use of funds. Since much of construction activity occurs after the passage of the monsoon, appropriations lie idle and their use is lopsided. Essentially, the timing of the Budget introduces an inefficiency in allocating and using resources. These are age-old arguments going back to the 1970s and 1980s but, thanks to the changing structure of the Indian economy, they have lost their persuasiveness over time. 

For instance, as far as the effect of the monsoon on agriculture is concerned, it should be noted that crops directly affected by the monsoon account for just about 11 per cent of India’s gross domestic product. Moreover, the use of funds can easily be altered at the ministry level, depending on local conditions without necessarily changing the fiscal year. On the flip side, a fiscal year change will raise transaction costs across the economy. To begin with, it will necessitate presenting another Budget in the current calendar year, by the first week of November. Moreover, almost all significant economic entities in India will have to change their accounting. Apart from the higher compliance costs, this move will bring about another wave of disruption that can be easily avoided. As it is, India has just shifted to a new accounting standard in Ind-AS. Add to this the substantial upheaval being caused due to a hurried shift to the goods and services tax regime. Lastly, a new fiscal year will further obfuscate the understanding of the existing macroeconomic data. Already, there is enough confusion on this front, even leading to some concerns about its credibility. A new fiscal year would have been alright only if the benefits outweighed the costs by a significant margin. Since that is not clear, the government’s focus should be on fixing the economy instead of attempting yet another disruptive change.