Zero based budgeting – A move towards fiscal efficiency

Zero-Base budgeting stipulates that all the departments seeking financial allocations should justify their expenditures every year and hence becomes important in the present times when the Indian government is facing significant resource constraints.

By Anubhav Srivastava

July 01, 2009

Many economists have suggested that governments in India, both at the centre and the states, should adopt zero-based budgeting for planning their annual expenditures. Even the past governments at the centre agreed in principle that zero-based budgeting should be adopted in all the government departments.

This technique of budgeting was developed by Peter Phyrr and was first implemented at Texas Instruments in the 1960s. 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.

Zero-based budgeting is a method of budgeting in which all budgetary allocations are set to nil at the beginning of a financial year. It stipulates that all the departments seeking financial allocations should justify their expenditures every year.

Money is thus allocated to the concerned departments on the basis of merit of their policy goals and no consideration is given to the sum of money allotted in the previous year to achieve them. Hence each financial year begins with a clean slate for every department and they cannot assume that they will get the same budgetary grant that they got in the previous year.

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.

Also, for every target set by the government, several options on the programme front (called “Decision Packages”) are evolved and the best among them is selected. By way of zero-based budgeting, more resources get allocated to the areas needing immediate attention.

The clear-cut advantage that zero-based budgeting offers over the traditional way of budgeting are –

The wasteful and unnecessary expenditures of the government agencies can be identified and eliminated.
It improves the fiscal position of the government by increasing efficiency.
It helps to channelise monetary resources from low priority to high priority areas.
It enhances the accountability and credibility of the government machinery.
It puts a curb on the instances of different departments spending money on same activity.

The critics of zero-based budgeting, however, say that the system is difficult to implement in the India on the following grounds –

The paperwork involved in zero-based budgeting has been found unmanageable by most organisations.
It is difficult to complete review and analysis of all the expenditure within a limited time frame.
Inter-departmental rivalry may crop up if savings of one department are transferred to any other department.
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.
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.
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.

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.

The author is Editor, Policy Proposals For India.

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