But I think we should change the fiscal year to either 1 January or 1 October. Or we could keep start our fiscal year on Diwali, the way Stock market begins it’s new year.
But why should we change it? Because majority of development work at center, state and municipality level happens between January to March, the last quarter. That is when everyone wakes up and decides that it’s time work needs to be done. This is how the fiscal planning and execution goes at all 3 levels –
By February or March, a budget is allocated by the elected representatives.
The new budget is enforced from 1 April. First quarter starts. But not much work is initiated in the first quarter because June to September is a rainy season in India. And rainfalls interrupt all infrastructure work. So 4 months, no work. 2nd quarter just goes by waiting for rains to end. As soon as rainy season ends, the festival season starts in India. It starts with Navratri, Dusshera and ends with Diwali. Everyone is in a festive mood so labor goes back to their villages to spend time with family. Bureaucrats don’t want to spend much time at office. By November/December, everyone is back at work and then decide what needs to be done. Third quarter also goes by. The development work starts in January, 4th Quarter.
Also, many government agencies don’t use the funds allocated to them till November. They start using the funds in January, 4th quarter, because unless they can show they have used their old funds, they can’t apply for more funds in next fiscal year. So they initiate lot of projects in January, which might or might not finish by May. If they don’t finish by June, there is a 4 month break after which work resumes in November.
So basically the execution work happens in 4th quarter. Just like students wait till January to study properly for their final exams in April.
So what if the fiscal year starts on 1 January, lets evaluate:
- The budget will need to be presented in the assembly by November, which means everyone in the government is busy from October. Bad timing for festival season.
- Budget is enforced on 1 January. Government has 2 quarters to finish the work. They have 6 months to use the funds.
- Majority of the nations have fiscal year on 1 January.
What if fiscal year starts on 1 October:
- Budget to be presented by September. Government is busy preparing the budget in August September.
- By September we already know the rainfall which has a major impact on stock markets and budgeting, since India is a agrarian economy. This might be positive for budget planning
- Budget is enforced on 1 October, which coincides almost with Diwali.
- Our financial year will start with US fiscal year.
- Departments have 9 months (from October to May) or the first 3 quarters to use the funds without any interruption from rains.
- When development work stops in June, we can take stock of the situation and start planning from June to September, in 4th quarter.
What if fiscal year starts on 1 July:
- Budget to be presented by June.
- Budget enforced on 1 July.
- Many countries including Australia have their financial year starting on 1 July.
- Departments cannot start infrastructure work in July, but they can start making purchases in the first quarter. We would still have 9 months or 3 quarters to finish the work.
I am saying this purely from the point of view to implement infrastructure and development works. I am sure corporate sector will also benefit in this age of globalization and aligning their fiscal year with their counterparts in other countries. This might not work well for agriculture.
Other option could be that states should be allowed to choose their own fiscal year. But I think that is highly impossible.