Zero based budgeting (Financial Administration)

CREATION

This technique of budgeting was developed by Peter Phyrr and was first implemented at Texas Instruments in the 1960s.The then President Jimmy Carter introduced this Budgeting system in USA

STATUS IN INDIA

In India, the System was first implemented in the Department of Science and Technology in the year 1983. The need for zero-based budgeting was also emphasized in the seventh five-year plan. However not much has happened on this front since. 

What actually is Zero Based Budgeting ?

Zero Based Budgeting (ZBB) is a technique of making plans and taking decisions, which overturns the working procedure in traditional budgeting. In case of Zero Based Budgeting, the function of each and every department is analyzed and evaluated in a comprehensive manner, and all expenses increase only after such approvals. When discrepancies arise, Zero Based Budget requires detailed justification from every divisional manager, starting from the lowest levels, called the Zero-base. The Zero-base is however, least bothered about the overall increase or reduction of the budget. 

How is it different from the generally used incremental  budgeting technique ?

Zero Based Budgeting (ZBB) is basically a tool for financial planning. In traditional incremental budgeting, only the increase over the previous year?s budget and actual expenditure is required to be justified whereas in ZBB every activity and function is required to be comprehensively reviewed and requirement of funds worked out starting from the Zero-base, which may eventually result in increase or decrease over the previous year’s budget. 

Why should it be implemented in India ?

The system of zero-based budgeting, if adopted by the Indian government, would be beneficial in several ways considering the cost overruns, inefficiency, resource crunch and corruption in the government departments. The functioning of zero base budgeting involves justifying each and every item of expenditure.

What are the advantages and disadvantages of Zero Based Budgeting ?

Advantages	Disadvantages
The wasteful and unnecessary expenditures of the government agencies can be identified and eliminated.	The paperwork involved in zero-based budgeting has been found unmanageable by most organisations.
It improves the fiscal position of the government by increasing efficiency.	It is difficult to complete review and analysis of all the expenditure within a limited time frame.
It helps to channelise monetary resources from low priority to high priority areas.	Inter-departmental rivalry may crop up if savings of one department are transferred to any other department.
It enhances the accountability and credibility of the government machinery.	Zero-based budgeting will have to be applied separately to plan and non-plan expenditure of the government despite a chance of duplication of expenditure.
It puts a curb on the instances of different departments spending money on same activity.	The whole exercise will be futile if the excess manpower is not retrained and redeployed much like the monetary and material resources. Some part of manpower may have to be retrenched which is difficult in the Indian situation.
It is also regarded as a greater legislative control over the executives. It detects Inflated Budget. Identifies the absolute source for outsourcing.	There is a lack of availability of trained personnel who are aware of the concept of zero-based budgeting. Training people could turn out to be a cumbersome process.

What should the Government of India do taking into consideration the these merits and demerits?

Considering the pros and cons of zero-based budgeting, there is a need to implement this method in a staggered manner with constant reviews and analysis to remove its shortcomings. Government should make efforts to ensure that it does not prove to be time-consuming exercise due to heavy documentation involved.

The government in India should try out zero-based budgeting as a Pilot Project in a few departments and constant modifications should be carried out to overcome its shortcomings. The advantages of zero-based budgeting far outweigh the drawbacks. Hence the precedent-driven Indian governments should find out novel ways to implement zero-based budgeting for a healthier economy. 

Some points from the Indian Express article...

Zero-based budgeting is useful 

1.    In 1986, Rajiv Gandhi eager to take India into the 21st century, wished to adopt zero-based budgeting (ZBB). The traditional approach to budgeting is mainly incremental through ad hoc increases over the previous year, whereas ZBB insists on in-depth analysis of the need of each activity.

2.   ZBB is thus an integrated planning-cum-budgetary exercise with the active involvement of managers at the executive level. Significantly, by the mid-eighties, the concept had already been abandoned in the West. Little wonder then that in India little was achieved beyond a few seminars. The concept was a non-starter due to the in-built resistance of various departments.

3.   The Railways is the best suited for implementation of ZBB — with suitable zodifications — not merely because its finances are at an all-time low but because of the inherent strength of the organisation, which already has well laid down procedures for identification of projects after detailed scrutiny.

4.   Today, with ready access to electronic data, software packages can be designed to facilitate decision-making. It therefore makes sense to give ZBB a chance, despite the prophets of gloom.

5.   At the same time, any blind application of the tenets of ZBB without regard to Indian conditions could be self-defeating. The zeal for undertaking the exercise has to be duly tempered with a pragmatic appreciation of ground realities. ZBB should not be oversold, nor expectations be raised too high.

Trivia

Maharashtra government renamed and used it as Development based budget.