Implications and benefits

Gautam Sen
Madhya Government has recently decided to switch over to `January – December` financial year, from 2019 onwards. This decision follows Prime Minister`s observation apropos Niti Aayog`s working paper presented to Chief Ministers,  recommending consideration of a change of from the present `April – March` time cycle to one synchronous with the calendar year. Instead of deliberating on the Niti Aayog  paper, Madhya Pradesh Government has rushed to institute the change. There is no indication whether inputs from its Accountant General –  who represents Comptroller & Auditor General of India (C&AG) were reckoned and detailed consultations held within the Government and with outside stakeholders, before taking this policy decision. The implications of the change on management of the state`s finances have also not been elucidated.
Article 150 of the Constitution stipulates that the accounts of the Union and of the States shall be kept in such form as the President may, on the advice of the Comptroller General of India, decide. The ambit of this provision may be deemed to imply  that, pattern and structure of management of finances of the Union and the States, shall be decided by the President ie. by his or her Government, in consultation of C&AG. It is not clear whether this due process has been gone through substantively, before the Madhya Pradesh Government decided to change its financial year cycle. In respect of the broader issue of alteration of the financial year pattern of the Union and all the States, it may not be judicious to resort to the change without analyzing its detailed implications from financial and accounting angles and impact on the economy. The views of C&AG and also Controller General of Accounts (CGA) – the designated authority for management of the Union Government`s accounts, are of essence in the matter.
Pertinent to the issue, there is no indication from official circles, on the benefits which will accrue to the Governments at the Union and State levels consequent on the proposed change, to outweigh any specified disadvantage of the existing `April – March` financial year cycle. If availability of data on agricultural output from harvesting of kharif and rabi crops are to be taken as determinants to decide on the change, there is apparently no advantage from the alteration in the existing year cycle. As against data on kharif crops harvested, completely ascertainable under the present budget cycle, rabi crop output  data will be available for use as inputs in budget formulation under the changed financial period suggested. The vagaries of the monsoon impact kharif output more than that of rabi. To that extent, agricultural output is more realistically assessable in the present system with comprehensive kharif harvesting data factored in, than would be likely under the proposed financial year cycle.
Agriculture contributes only 20 % to the gross domestic product of India. Therefore, reckoning agriculture data preponderantly in the budget formulation process may not be appropriate.  However, in regard to this data also, it does not appear that  a `January – December` financial year, with budget preparation taking place in November-December, will  enable more wholesome computation of the Governments` fiscal measures with agriculture production inputs. No discernible  advantageous impact of the proposed change of the financial year period, is anticipated on budget formulation, and management of receipt and expenditure of the Governments vis-à-vis the secondary and tertiary sectors. There is also a possibility that the string of religious festivals and holidays during the October – December months which affects productivity, may not enable optimal reflection of the national output in the last quarter of the changed financial year. However, the impact of deceleration in output in the October – December quarter would get leveled out in the next quarter. Therefore, no decisive improvement in management of Government finances, are likely with the proposed change.
The presentation of the annual budget of the Union Government has been advanced from February end to second quarter of January, from this year. The budget preparation exercise has consequently been preponed by about two months to December – January. If the financial year is to start on 1st January, the budget preparation exercise may have to be further advanced to  August – September.  It may not be realistic to expect a comprehensive assessment within the Government  of the country`s productive and transactional phenomena for the entire year `January – December` during the window period of `August – September`. This is because, the impact of the monsoon on agricultural production, supply of hydel  power (dependent to an extent on monsoon water flows and storage in the dam reservoirs)  for agricultural and industrial use, is not comprehensively  assessable before September, as withdrawal of the south-east monsoon occurs after that month only. If the Union Government is keen and already inclined to change the financial year cycle, it should have decided on this issue simultaneously with the advancing of the presentation of the Union budget. The entire impact of both the measures,  then could have been viewed holistically and the related processes optimized.
Another crucial issue is whether, the Union and State Governments will harmonise their perceptions and decisions in the matter. First and foremost, for stability of management of government finances as a whole,  all the States have to switch over to the `January – December` financial year. Unless this is done, there would be huge complications in fund flows between the Union and the States, and accounting  of the resources of the States dependent on periodic transfers from the Centre. Over-estimation or under-assessment of quarterly transfers from the Centre to the States, will affect the States`  budget  formulation and expenditure planning. There are problems even under the existing system when fund transfers  between the two tiers of Government, sometimes do not get reflected within the same quarter. This problem will get compounded if transfers of devolved funds do not get accounted for in the same quarter at both ends ie. at the Central and State Finance Departments and respective accounts keeping levels, because of dissimilar financial year cycles.
In the fitness of things, such decisive changes in financial structures and systems should be based on professional approach and recommendations of institutions and expertise already available within the government. Finance Ministry and Niti Aayog  should have articulated the requirement based on a consensus of the Union and State  Governments with the objectives to be achieved clearly spelt out. Thereafter, the Union Government should have requested C&AG and CGA to suggest changes and alternatives best suited to achieve the objectives specified by the former. This would have been in consonance with our polity and the parameters of our Constitution. Change of institutional arrangements without well-defined objectives, consensus of stakeholders and without professional advice may not yield proper outcomes.
(The author is a retired IDAS officer, who has served in senior positions of the Central Government)