Why Modi Shouldn’t Flirt With A Fiscal Year Change; It’s Too Disruptive

Most countries follow a January-December fiscal year. India follows an April-March calendar. Last month, the Modi government set up a four-member committee headed by former Chief Economic Advisor Shankar Acharya to examine the feasibility and desirability of changing the financial year from April-March to January-December.

Any change like that would have major implications.

First, it would change the budget presentation month from February to October.

Second, companies may also need to change their accounting years to be in line with this.

Third, tax filing dates for companies and individuals would change.

And, lastly, during the period of the changeover, we would have at least one financial year that is less than or more than 12 months— at the time of the changeover.

Since this change will be disruptive, it would make sense only if the benefits outweigh the costs by a significant margin. Let’s also note that this is not the first time such a move has been planned. In 1984, the Congress government appointed a committee under L.K. Jha to examine the same idea, but it was never implemented. So, the reasons for not doing it then may well be valid today, too.

The prime reason for the proposed changeover, when Jha examined the issue, was the monsoon. It was argued that in February, the government has no idea how the monsoon will fare, and so the budget will be presented without knowing anything about a big part of the economy.

But, this argument does not make much sense for budgets are presented for the next year. In October, you may know how the last monsoon has fared, but not the next one, which will impact the economy in the second half of the financial year for which the budget is to be presented. At best, the Finance Minister will know how the last kharif season has fared by October, and factor in the rabi prospects— which are usually more stable.

But, is this such a big deal? With every passing decade, the share of agriculture in the GDP has been falling, and to decide budgets based on monsoons gives us no specific advantage.

In any case, whatever be the financial year, governments have to act if farm distress is going to happen, or if industries are struggling to find their feet. The budget cannot anticipate everything, and good financial management means responding to the needs of the economy— as and when they arise. Trying to do it all in one budget will not work in a globalised economy where shocks or pleasant surprises can come anytime.

Another point worth noting is the introduction of Goods and Service Tax (GST) from next year. The GST will be disruptive in its initial years, since millions of business taxpayers have to be shifted from their current systems to a fully online system of invoice-uploading and tax payments. It may not be worth having two disruptions running simultaneously— one for GST, and another for a fiscal year change.

The Finance Ministry’s job is to manage both revenues and expenditure effectively in a dynamic environment. This challenge will remain. Once the GST comes into being, there will be little need to tinker with tax rates year after year, which means revenues will be more or less on autopilot, and expenditure is what needs better management.

Going forward, budgets need to be made less secretive. Which means that fiscal issues need discussion throughout the year, and not just at the time of the budget. A more important reform should be to shift to accrual-based budgeting which means all incomes and expenses for a financial year— whether incurred or to be incurred— are taken into account while presenting the budget. Right now, we follow a cash-in-cash-out system which means the budget numbers are fictitious. Just because a subsidy has not be paid by 31 March, it does not mean the expense will not be incurred. An accrual-based system will end this kind of fiscal misrepresentation.

What needs changing is our budgetary practices, and not the financial year itself. Whatever financial year you choose will bring some benefits and some losses. Exchanging one for another is a wasteful exercise when the government’s focus should be on getting the economy out of the ditch. A change in the financial year would be needlessly disruptive at a time when fixing the economy should be the priority.

This article was first published in DB Post.