In fact: On switching FY cycle, some questions

Unlike the move to withdraw high-value currency notes announced on November 8 last year, the government has given adequate notice of its intent on this issue

Written by Shaji Vikraman | Published: May 4, 2017 12:13:31 am
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This should count as a standout case of speed in decisionmaking in a country known for its gradualism — barely weeks after Prime Minister Narendra Modi sounded out Chief Ministers on the desirability of switching over to a January-December financial year, the Madhya Pradesh cabinet has approved a proposal to make the change. In its enthusiasm, Madhya Pradesh — which goes to Assembly polls next year — chose to ignore Modi’s suggestion, put forward at a NITI Aayog meeting in mid-April, of a debate in both Parliament and the Assemblies on the desirability of walking away from a 150-year-old tradition, with its attendant potential for disruption.

Unlike the move to withdraw high-value currency notes announced on November 8 last year, the government has given adequate notice of its intent on this issue. Last year, it appointed a committee headed by the former Chief Economic Advisor, Shankar Acharya, to examine the suitability of moving to a new financial year cycle. The panel has submitted its report, but its contents are yet to be made public.

How strong is the case for a change where the tangible benefits do not appear to be clear? Well before the Acharya Committee finalised its report, a discussion note put out by NITI Aayog — written by its member, Bibek Debroy, and Kishore Desai — had listed several reasons: the primary one being that it would arm the government with levers to effectively and adequately reorient the budget formulation exercise.

Their point, citing recommendations of Administrative Reforms Commissions in the 1950s and other committees, including one headed by a former Secretary to the Prime Minister and RBI Governor, L K Jha, was that the April-March year prevented policymakers and the government from taking into account the monsoon situation — important because the Budget is an important tool to address socio-economic requirements, and the farm sector dominates the country’s socio-economic dynamics. They also pointed to the higher share of the farm sector in the output of some northern states.

There was also a mention of global practices — but there is no uniformity in that. China, Brazil, France and Germany follow the calender year; in the United States, the federal government’s fiscal year runs from October 1 to September 30. The tax year — defined by the US Internal Revenue Service for keeping records and reporting incomes and expenses — is the calender year. Most top US and European firms have the calender year as their business year — a practice that was followed by the Indian arms of many such multinationals, such as Hindustan Lever and Colgate, until recently.

The rationale for the change with regard to the potential impact on farm sector dynamics, too can be questioned. In fact, April-March may be better aligned to the agricultural season. By March-end, the rabi crop (wheat, mustard, chana) is due for harvesting, and agricultural operations are more or less complete in terms of crop growth — only harvesting and marketing remains. The January-December cycle could be like being caught in no-man’s land: the kharif crop would have been harvested by early December, but rabi sowings would still be on, and would continue until about mid-January. With the crop not even halfway through its growth period, any assessment of rabi production would be difficult.

From an agricultural standpoint, in fact, July-June would be the ideal financial year, as kharif sowings peak in July with the arrival of the monsoon a month earlier. By end-June, the rabi crop too would have been completely harvested and marketed; which would mean that we would actually be starting a new year. Seen this way, the April-March financial year may not be perfect, but may still be better than January-December. There is another, larger point — which is about whether the impact on a sector whose contribution to national income has declined to well below 20%, should be the driver for such a major change.

The L K Jha Committee submitted its report in the mid 80s. The government reviewed it, and came to the conclusion that while the advantages of a switch might be marginal, the problems it could lead to, including jeopardising data collection, could be major.

It is, in fact, discomfiting to see the absence of public debate preceding such an important change. Perhaps it would have been better to first adopt an accrual-based system of accounting, which better reflects the state of the government’s accounts. The Finance Commission had recommended this earlier — and a previous government had accepted it in principle and mandated the Government Accounting Standards Advisory Board, which works to improve standards of government accounting, to draw up a detailed roadmap. This would reflect more accurately the government’s assets and liabilities, and provide a far more comprehensive and transparent picture of its ‘balance sheet’.

After years, many of India’s corporates had switched to financial year reporting ending in March. As they prepare to equip themselves for the rollout of the Goods and Service Tax, they will have to start thinking of another disruption once the federal government too takes a decision to change the financial year. The transactional costs are going to be high. Debroy and Desai argue that the potential for longer-term gain make the discomfort and pain in the short term worth enduring. They have suggested a transitional financial year — like, say, from April 1, 2017 to December 31, 2017, and then a new financial year from January 1, 2018.

Article 150 of the Constitution, which deals with the content and form of accounts of the union government and the states, says the accounts shall be kept in such form as the President may, on the advice of the Comptroller and Auditor General of India, prescribe. It is not clear whether the state that has first rushed to carry out this change has followed the proper constitutional procedure.

Cooperative federalism is a mantra that the central government likes to chant frequently — especially in the context of transfer of funds to states, and the GST rollout. In a federal structure, the unilateral decision by one state to move to a new financial year can have implications — in terms of resource transfers and eligibility criteria for future Finance Commission awards — if all states do not play ball. What would be of greater interest is whether the switch to a new financial year at the central level might be a forerunner to holding simultaneous elections at the federal and state levels. Could that pave the way for a full Budget in 2019 with the offer of a Universal Basic Income, rather than an interim Budget?

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