Changing India's financial year makes more economic sense
 Source : News Bharati English  Date : 09-May-2017

By Yoganand Kale

Madhya Pradesh has become the first state to switch to the January December financial year from the existing April-March cycle, with the state cabinet endorsing the move on Tuesday.

The move breaks a 150 year tradition as India started adopting the April March financial year from 1867.

“The state cabinet in its meeting chaired by Chief Minister Shivraj Singh Chouhan  today decided to shift the financial year to January December. So, now the Budget session of the next financial year will be held either in December 2017 or January 2018," state Public Relations Minister Narottam Mishra told reporters in Bhopal.

The State Government, he said, would try to conclude the current financial year by December for a smooth transition to the new system. In the meeting, the Chief Minister directed all ministries and departments to prepare a quarterly, half – yearly and annual road map of works to be done with fixed deadlines in view of the new financial year cycle, an official statement said.

Madhya Pradesh's decision comes on the heels of Prime Minister Narendra Modi making a pitch for shifting the financial year to the January- December period during the NITI Aayog's governing council meet in the national capital on April 23.

The Central Government had constituted a high-level committee under former Chief Economic Advisor Shankar Acharya to examine “desirability and feasibility” of having a new financial year. The report hasn’t been made public yet.

India has been following the existing financial year cycle since 1867, mainly to align it with that of Britain. The first jolt to this was by the Atal Bihari Vajpayee Government when it shifted the time of budget presentation from 5 pm in the evening to 11am.

Until the year 2000, the General Budget was presented at 5 pm on the last working day of February. This was a colonial tradition since 1924, when the Budget speech was first introduced and was made at 5 pm to suit GMT to 2001. Yashwant Sinha became the first finance minister after independence to make the budget speech at 11 am.

Changing the financial calendar to January – December makes more economic sense. This is when the festive season is over. It is also more suited to India’s cropping pattern. Besides, weather forecasts are in by this time, and the administration can prepare for a flood or a draught. Pronab Sen, former Chief Statistician, Government of India, said, “It may not be a very bad idea to advance the financial year, as  substantial budget announcements would have been implemented before the monsoon, when practically no construction activity takes place, but there is a downside, that there may be zero forecast available for the monsoon. The database to hold the estimation for the economy may be very poor.”

India may make the calendar year, instead of April-March as its new financial year as early as 2018 as a part of its efforts to align the accounting system with the most prevalent practice in the world.

Most of the major economies in the world, barring the notable exception of the U.S. have January- December as their financial year. Besides similarly multilateral agencies such as World Bank, International Monetary Fund (IMF) and Asian Development Bank use calendar year as financial year.

A NITI Ayog concept paper written by its members Bibek Debroy and Kishore Desai also favoured changing financial year cycle. Such a change would require amendments to various statues and tax laws during the transition period.

Concept Paper by Bibek Debroy and Kishore Desai

  • The “Budget System” in India has a history of more than 150 years. It was first introduced on 7th April 1860, two years after the transfer of Indian administration from East-India Company to the British Crown. James Wilson, the first Finance Member of the Council delivered the Budget speech expounding the Indian financial policy as an integral whole for the first time.
  • The present financial year in India (1st April to 31st March) was adopted by the Government of India in 1867 principally to align the Indian financial year with that of the British Government. Prior to 1867, the financial year In India used to commence on 1st May of the current year to 30th April of the following calendar year.
  • Since then, the appropriateness of this practice has been questioned at various points of time throughout its 150 year history. As a matter of fact, suggestions to revisit this matter started as early as 1870’s – shortly after adopting Government to account for the impact of monsoon rains (one of the key factors impacting the overall socio-economic dynamics of the country) while allocating scarce budgetary resources. This limitation significantly impacted the investment planning outputs of the budget.
  • . Other key considerations often cited included factors such as (a) the current financial year led to sub-optimal utilization of working season; (b) that the current financial year cycle was chosen without any reference to national culture and traditions or convenience of legislators; and (c) that the financial year is not signed with international practices and it impacted data collection and dissemination from the perspective of national accounts etc.
  • .Various expert committees/study teams which have analyzed this matter have unanimously recommended that the Indian Financial Year should change. By and large these experts opined that changing the financial year in a much-needed reform leading to superior advantages for the country. Similarly, stakeholders such as State Governments, industry federations etc. have also voiced their support for changing the financial year at different points of time in the history. However, their opinion has been divided on the date of commencing the alternate financial year.
  • . Interestingly, serious demands for changing the financial year seem to be, at times, preceded by drought years or years when the monsoon rains were bad. The most comprehensive attempt to examine this matter was when the Government of India set up a committee on change in financial year under the chairmanship of L. K. Jha in 1984. This committee was formed after the country experienced major droughts in 1979 – 80 and 1982-83. Coming to the present context, given that the country saw a serious deficit in monsoon rains consecutively for the last 2 years 2014 and 2015, a fresh attempt is being made to revisit this aspect.

 On 6th July 2016 the Government has constituted a four-member committee to examine the desirability and feasibility of having a new financial year. The committee, headed by former Chief Economic Adviser Shankar Acharya, will look into the impact of having a new financial year in relation to effect of different agricultural crop periods, taxation systems and procedures and impact on businesses. Former Cabinet Secretary K.M. Chandrasekhar, Tamil Nadu's former Finance Secretary P. V. Rajaraman and Centre for Policy Research Senior Fellow Rajiv Kumar are the other members of the committee. “The committee shall submit its report to the Government by 31 December 2016. The committee will examine merits and demerits of various dates for the commencement of the financial year, including the existing date of April 1 to March taking into account the studies done in the past on the desirability of a change in the financial year. It will also look into the suitability of a new financial year from the point of view of receipts and expenditure estimates of central and state governments, relationship of financial year to the working season, statistics and data collection, and the convenience of legislatures for transacting Budget work.’

Depending on the recommendation of the committee the change in the fiscal year will likely happen from 2018-2019. If January – December financial year is implemented India's annual budget may have to shift to November from February now.

(The author is a noted economist, former Pro Vice-Chancellor of RTM Nagpur University and former National Co-convener of Swadeshi Jagran Manch)