The financial year debate: Jan-Dec FY is in line with Indian realities that require prompt budgetary support for farmers

In the recent NITI Aayog Governing Council meeting, the Prime Minister voiced his intent to change the Indian financial year. In support, he reasoned “…in a country where agricultural income is exceedingly important, budgets should be prepared immediately after the receipt of agricultural incomes for the year. ….there have been suggestions to have the financial year from January to December”. The emphasis being that the present financial year does not effectively suit the nation’s socio-economic character, where agriculture occupies a central space.

Interestingly, it is not the first time this concern is being raised. The current April-March financial year was adopted in 1867. However, this was not what experts had advised originally. In 1865, the Government of India had set-up a Commission of Enquiry into Indian Accounts under Foster and Whiffen. A part of their study mandate was to advise on a suitable financial year. Based on the Commission’s assessments, they recommended the January to December cycle. The then Secretary of State considered this suggestion. However, he opted for April to March instead, primarily to align the Indian financial year with that of the British. That was the start of the current practice.

But since then, demands to change the financial year have continued and more so during drought years or years when the monsoon was significantly inadequate. Historically, the most important factor driving this demand was that the financial year timing, and consequently the budgetary process, did not allow the government to take into account the impact of the monsoon. This is how it impacts the overall development process:

Consider Budget timelines first. Before FY 2017-18, the Union Budget was typically presented by the end of February annually. This meant the Budget proposals had to be finalised by January. After the Budget speech, detailed Parliamentary discussions on budgetary proposals took a few months more and hence the Appropriation Bill (Finance Act) was typically passed by May-end, every year. As a result, the budgetary allocations could reach the implementing departments only by June — almost two months after the start of the financial year. Coming to the monsoon next, the country experiences broadly two monsoon seasons. South-West monsoon, covering the period from June to September, typically accounts for more than 70 per cent of rainfall. The North-East monsoon, covering the period from October to December, accounts for a majority of the balance rainfall, with its geographical spread mainly limited to south-eastern coastal areas. These timelines impose many limitations.

For instance, say for any given year, the South-West monsoon (June to September) is significantly less than normal, it will directly hit agricultural output, thereby impacting the rural populace, especially farmers. Appropriate policy interventions will provide relief to farmers. However, given the timelines, such interventions will reach farmers only after Budget approvals i.e around June 2018. By then, new monsoons are about to set in and possibly some of those measures may no longer be needed in the manner envisaged. One could argue here that the government can take mid-course corrective actions. But that is still a reactionary response.

By ensuring that the Budget is approved before April 1, the government has now reduced such delays. However, there are still some gaps in dealing with inadequate monsoons effectively. Switching to a January-December cycle would mean that the Budget is presented sometime around November, taking the monsoon status into account. This will not only improve the quality of interventions, but allocations may also flow as early as January. Despite this, the fact that the agriculture sector contributes to less than 20 per cent of GDP is often used to argue against changing the financial year. True, but that still does not diminish its socio-economic importance. The following observations substantiate this point (Source: NITI Aayog’s detailed Note on ‘Changing India’s Financial Year’ published by the same authors):

a) ~40 per cent of the entire rural households in the country rely on agriculture for their principal source of income;

b) ~50 per cent of the entire workforce is accounted for by the agriculture sector;

c) More than 50 per cent of agriculture in the country is still dependent on monsoon rainfall;

The agriculture sector also impacts other sectors through its inter-linkages with inflation, rural demand and demand for input industries. Not taking monsoons into account, therefore clearly compromises the efficacy of Budget interventions, more particularly of those directed towards the rural population. Prime Minister Narendra Modi desires to correct this given his clear vision to double farmers’ incomes by 2022. A change in the financial year could completely re-orient the Budget formulation exercise. It will give the government clear space to tackle rural issues proactively. This could accelerate rural transformation, leading to superior social, economic and political outputs.

The new financial year has several other advantages, including achieving uniformity in statistics and data collection periods and aligning with international practices. If implemented, this change could cause short-term dislocations. However, these should not matter, considering the long-term transformative advantages .

The authors are economists with Niti Aayog.  They tweet @bibekdebroy and @kishore1810. Views are personal.