Budgetary process

The budget is prepared by the Finance Minister with the assistance of number of advisors and bureaucrats. The Finance Minister seeks the view of the industry captains and economists prior to preparation. Various accounting and finance related organisations send in their opinions and suggestions .The budgeting exercise in India remains mainly the domain of bureaucrats to participate and influence the outcomes.

Normally, the budget-making process starts in the third quarter of the financial year. The budget has four stages viz., (1) estimates of expenditures and revenues, (2) first estimate of deficit, (3) narrowing of deficit and (4) presentation and approval of budget.

Stage 1: Estimates of expenditures and revenues

Part A: Estimates of Expenditure

The process begins with various ministries providing initial estimates of plan and non-plan expenditures. The ministries discuss the plan expenditures with the Planning Commission. The Planning commission allocates resources for continuing plan programmes and decides on the new programmes that can be undertaken on the basis of a tentative estimate or resources available, that is provided to it by the finance ministry. The financial advisors of the ministries prepare the non-plan expenditures. The expenditure secretary consolidates them and after intensive discussion with financial advisors, budget estimates are set for the ensuing fiscal year.

The majority of the non-plan expenditure is accounted for by interest payments, subsidies (mainly on food and fertilisers) and wage payments to employees.

Part B: Estimates of Revenue

Apart from estimating the expenditure, an assessment of expected revenues likely to flow into the government treasury has to done as a concurrent exercise. Revenue receipts are of two types - capital and current receipts.

Capital receipts include repayment of loans given by the government, receipts from divestment of public-sector equity and borrowings - both domestic and external. Current receipts include mainly, tax revenues, receipts by way of dividends from public-sector units and interest payments on loans given out by the central government.

The amounts to be received by way of tax revenues is estimated on the basis of existing rates of taxation and taking into consideration the likely growth and inflation rate over the ensuing fiscal year.

On the capital receipts side, targeted amounts to be realised through divestment of public sector equity and amounts to be realised by way of repayments of loans is made. All the estimates are provided to the revenue secretary.

STAGE 2: First estimates of deficit

After the estimates of revenue and expenditure are made, they are matched together. This provides the first estimate of expected shortfall in revenue to meet projected expenditure. The government then, in consultation with the chief economic advisor, decides on the optimum level of borrowings to meet this deficit. The figure of external borrowings is known as much of the external borrowing by the government consists of bilateral and multilateral assistance which is known by the time budget exercises are undertaken. The level of domestic borrowing depends partly on the desired level of fiscal deficit that the government targets for itself. A part of the revenue gap is left unfilled to be met through the issue of ad hoc treasury bills.

STAGE 3: Narrowing of the deficit

After the targets for the fiscal deficits and the overall budget deficit is decided, any remaining shortfall is filled through a revision in tax rates if feasible , keeping in mind the fiscal incentive structure the government wishes to put in place to stimulate the growth in different sectors. Following the initial plans, if any changes need to be made adjustments are made to the expenditure; usually the plan expenditure has to be modified. The non plan expenditure comprises of interest payments, subsidies and administrative expenditure. Due to the political sensitivities involved in reducing subsidies, non-plan expenditure of the government is inflexible about changing it and it is the plan expenditures which get the axe after per-emption have already been made for non-plan expenditure.

STAGE 4: The Budget

The presentation of the Budget for the ensuing fiscal year (beginning April 1) is usually done on the last working day of February. The Indian constitution has made the Parliament supreme in financial matters. The Union government, under Article 112 of the constitution, is required to lay an annual financial statement of estimated receipts and expenditure before both Houses of Parliament. It can levy taxes or disburse funds only on approval in both houses of Parliament. However, the proposal for taxation or expenditure has to be initiated within the Council of Ministers--specifically by the Minister of Finance. The Finance Minister presents before the Parliament, a financial statement detailing the estimated receipts and expenditures of the central government for the forthcoming fiscal year and a review of the current fiscal year.

Under Article 114 of the Constitution, the government can withdraw money from the Consolidated Fund of India only on approval from Parliament and so it has to get the Appropriation Bills approved by Parliament. This authorises the executive to spend money. Article 265 of the Constitution prohibits the government from collecting any taxes without the authority of law. Therefore, the government comes up with the Finance Bill. The Bill may levy new taxes, modify the existing tax structure or continue the existing tax structure beyond the period approved by Parliament earlier. The bills are forwarded to the Rajya Sabha for comment. The Lok Sabha, however, is not obligated to accept the comments and the Rajya Sabha cannot delay passage of these bills. The bills become law when signed by the President. The Lok Sabha cannot increase the request for funds submitted by the executive, nor can it authorize new expenditures.

The proposals in the budget come into force on April 1. Between the presentation and effective date there is a gap of 1 month during which the Lok Sabha can review and modify the government's budget proposals. This does not happen most of the time and the Parliamentary scrutiny of proposals and the passage of the budget gets completed in May, well after the commencement of the new fiscal year. Since the proposed budget has to be effective from April 1, the government usually seeks an interim approval to meet emergent expenditures that have to be incurred pending the approval of the budget.

This is called the vote-on-account and the sanctions given by the passage of the vote-on-account get automatically overridden once the Budget is approved by Parliament.

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.