Home / Opinion / Columns /  Opinion | The case for a second budget and switch to a new fiscal year

There is a strong case building up for finance minister Nirmala Sitharaman to present a second budget in October this year. Her last one, passed less than three months ago, was stillborn due to the covid-19 lockdowns that followed. Since then, we have had an economic collapse, followed by slow recovery from May, and a 20 trillion “relief package", with heavy monetary and fiscal implications.

While governments everywhere have done similar things, India’s case is different. The US, European Union (EU), Japan and China can do almost anything they please with their economies, and the world will not lose faith in them. India, on the other hand, is vulnerable to global trends in risk-aversion, capital flows, commodity prices and trade winds. We cannot afford to have fiscal and monetary policies that do not have an embedded plan for the morning after, when all our bills come due.

That is why we need a second budget for 2020-21, or a completely new one for calendar 2021. We cannot operate on the assumption that every stimulus, every gap between revenue and expenditure, can be addressed on the go. We need a roadmap that only a full budget can provide. October is a good month for it, for by then we will know how successfully we have seen off the covid-19 challenge, and what more we should do to revive the economy.

The case of a fiscal year change is as strong as the one for a second full budget. Normally, it would not matter how a fiscal year runs; April-March is just as good as January-December or October-September. In most cases, history (in our case, colonial history) determines the fiscal year. The US follows a messy system, where the federal government uses an October-September fiscal year, most companies follow a calendar year, and a majority of states follow a July-June pattern. The EU, China, Russia, Indonesia and many others follow the calendar year.

The reason why we should consider a change is obviously covid-19. If we now assume that most of calendar 2020 will be devoted to fire-fighting on two fronts—economic and health—it is only by the third quarter (October-December) that we will know how the interplay between the contradictory goals of containing covid and boosting economic activity is going to impact budgetary revenues or spends.

Pandemics are a once-in-a-century occurrence (the last one, the Spanish flu, happened in 1918), and thus cause economic upheavals of the kind that did not happen even during the world wars. Wars often boost economic activity (World War II helped end the Great Depression), but uncontrolled pandemics do the opposite by engendering fears of economic contact. In a world that largely depends on high-touch services for growth (both agriculture and manufacturing have peaked in most parts of the world), a pandemic that requires people to stay away from one another retards economic activity. While digitization reduces the need for humans to be in physical contact, it cannot be avoided altogether. But technology is a double-edged sword: it impacts jobs in the short term.

The main benefits of a shift to a January-December fiscal year would be the following: One, it will allow us to segregate the 2020 calendar year’s fiscal performance from the relatively regular years of the future; two, it will let us integrate better knowledge of our agricultural performance, as we will know what happened with the kharif crop; three, the traditional start of the busy season in October-March will coincide with the new budget dates, which means that any post-covid stimulus plan will have a multiplier effect on demand; and given the recent trend of having general elections in April-May, a new government will have enough time to prepare a full budget by October after the polls. A July budget after election results in May leaves very little time for a new government to present its proper set of priorities to the people who voted it to power.

The Narendra Modi government set up a panel under former chief economic adviser Shankar Acharya to submit a report on whether it made sense to change India’s financial year or not, but whatever recommendation the committee made has now been overtaken by events that suggest that a shift to January-December would be optimum.

Will such a changeover be tough? For government accounts, possibly not. But even for the corporate world, it will be no big deal. Most multinational companies anyway need to meet two sets of accounting standards (and years), one for their home country and another for India. In any event, since quarterly reporting of numbers is the norm, the redesignation of quarter 1 as quarter 2 is hardly going to cause any loss of sleep for most corporations. In any event, companies can be given the choice of following their own financial years, and so can most states.

The real issue is this: 2020 is going to be unlike any other year in the past, and so whether the fiscal year is changed or not, the budget numbers, if they have to have any meaning, will need revision by October, once a fuller picture of the economic impact of the pandemic will be clear and reasonable guesses can be made about government revenues and expenditures up ahead.

R. Jagannathan is editorial director, ‘Swarajya’ magazine

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