30 August 2017

Economy

Diving into Trending Themes

Will India have two budgets in 2018?
Probable change in financial year more a tweak than a reform
 A change in financial year from April-March to January-December has been discussed within the government,
and we believe it could happen as soon as next year. If so, India would have two budgets in 2018 – on February
1, 2018 (for truncated FY19; ending December 2018) and another on November 1, 2018 for the full year ending
December 2019.
 A NITI Aayog study indicates that an April-March financial year seriously limits the government’s ability to
account for uncertain monsoons. Further, it leads to a suboptimal utilization of the working season. While the
advancement of the Union Budget by a month has already resolved the latter issue, it is argued that
commencing the financial year from January is the best alternative to address the former issue.
 A change in financial year has been argued unsuccessfully since the 1870s. Its effectiveness today is debatable,
however, given the reduced importance of the agricultural sector. Moreover, the need for structural reforms in
agriculture, or otherwise, is independent of the financial year. While the government might be convinced of
the merits of changing the financial year, if it happens, we believe it would be more of a tweak than a
structural reform.

India’s current financial year (running from April of the Exhibit 1 on the next page presents the timelines
preceding year to March; FY18 starts from April 2017 and associated with the budget process in consonance with a
ends in March 2018) was adopted in 1867, so as to align budget presentation date of early-February: Budget
the Indian financial year with that of the British estimates are finalized a month before presentation by
government. Since then, there have been questions late-December or early-January. (The original timeliness
surrounding the appropriateness of this practice with is provided as per end-February Budget presentation by
suggestions for change coming in from multiple quarters. Ministry of Finance. However, with presentation
Previous governments chose to maintain status quo on advanced by a month this year, we have also advanced
this issue. However, given this government’s interest in timeliness of budget-related activities by a month).
the matter, the economy could see the change
happening next year. Since it is not possible to have reliable estimates of the
ensuing South-West (SW) monsoon by this time, the
If so, there would be two budgets in 2018 – on February government is unable to factor in the coming monsoon
1, 2018 for the truncated 9-month year ending while formulating the budget. Thus, it cannot account for
December 2018 and on November 1, 2018 for full year the impact of good/poor rainfall on receipts or factor in
ending December 2019. In this note, we assess the any additional expenditure owing to drought/flood relief.
arguments presented in favor of (a) changing the Besides, the government’s responsiveness towards poor
financial year, and (b) a January-December financial year. rainfall in the recently concluded monsoon is also
affected, because by the time it releases fresh
Monsoons key consideration behind the need to change allocations, the impact of the previous SW monsoon is
financial year well over (6-7 months past).
NITI Aayog’s discussion note enlists the main
considerations behind the suggestion to change the
financial year. The main reason is that the government is The main argument for changing the
not able to account for the impact of monsoon rains in financial year is that the government is
its budget in the April-March year. not able to account for the impact of
monsoon rains in its budget in the
April-March financial year
Nikhil Gupta – Research Analyst (Nikhil.Gupta@MotilalOswal.com); +9122 3982 5405
Rahul Agrawal – Research Analyst (Rahul.Agrawal@motilaloswal.com); +9122 3982 5445
Investors are advised to refer through30 Augustimportant
2017 disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Exhibit 1: Budget-related key activities and typical timelines (assuming budget presentation as on early-February)
Jul Aug Sep Oct Nov Dec January February March April
List of Key Activities W1 W2 W3 W4 W1 W2 W3 W4 W1 W2 W3 W4 W1 W2 W3 W4 W1 W2 W3 W4
Issue of Budget Circular to all
Min/Dept
Co-ordination with Min/Dept for
receipts budget and scrutiny of
estimates including Pre-Budget
meetings
Communication of ceilings of
expenditure (Plan & Non-Plan
RE and Non-Plan BE)
Closure of estimations of tax
and non-tax revenues
Discussions and closure of all
receipts and expenditure
estimates
Printing of Budget Documents
PM and Cabinet approval
followed by Budget
presentation in Parliament
Laying of Budget documents in
Parliament
Passing of Appropriation (Vote
on Account) Bill by Parliament
Considerations and discussions
on Appropriation (Main) Bill and
Finance Bill - As per Parliament's
Business
President's assent to the
Appropriation Bill and Finance
Bill
W stands for week Source: Budget Manual 2010 – Ministry of Finance, MOSL

Why commencing financial year from January and be known at this stage, which would defeat the entire
not October? purpose of changing the financial year.
Given that it is not possible to accurately forecast the
That leaves the alternative of a financial year
monsoon, the L K Jha Committee on Change in Financial
commencing on 1st January because a financial year
Year (1985) had argued that the later in the financial year
commencing on 1st July would be not only no
the South-West monsoon comes, the lower would be its
improvement over the current practice but would also
impact on the budgeted estimates for that year.
lengthen the post-monsoon period. Exhibit 2 on the next
Accordingly, it had recommended that the financial year
page lists out the various options for the financial year
be fixed such that the post-monsoon period in the year
and the associated milestones. With financial year
was as short as possible. This would imply that the major
aligning with calendar year, the budget would need to be
part of the financial year would be subject to the effects
finalized by early October (or late September), by when
of the monsoon in the preceding year, which would be
the full impact of monsoon and kharif prospects would
known and thus, could be factored into the budget
be available. Consequently, both the L K Jha Committee
preparation. Besides, it would also restrict the impact of
as well as the NITI Aayog discussion note recommend
the upcoming monsoon to a minimum.
that the financial year should commence from 1st
January.
Going by these arguments, the Committee stated that a
financial year commencing on 1st October would be
The Committee stated that a financial year
ideal. However, the current budget calendar requires the
commencing on 1st October would be ideal…
budget to be presented two months in advance (Exhibit
…however, the impact of SW monsoon would
2 on the next page). In other words, for all practical
not be known at this stage, defeating the
purposes, the budget has to be finalized almost a quarter entire purpose of changing financial year
before the commencement of the financial year. For a
financial year commencing on 1st October, thus, the
budget would have to be finalized by early July (or late-
June). However, the impact of SW monsoon would not

30 August 2017 2
Exhibit 2: Important milestones for Budget preparations under various options
Option 1
(Recommended)
Start date of financial year 1st January
Number of months in post-monsoon
3 6
period
Likely Budget Presentation Day Oct 31/1 Nov
Likely date of receipts and expenditure
By Oct 1st week
closure
Likely timelines of pre-budget meetings &
July-Sep
discussions
Likely dates by which SW Monsoon Mid Aug –
situation could be credibly known Sep 1st week
Concern of sub-optimal utilization of working
season already resolved
Notwithstanding regional variations, the 8-9 month
period between October and May/June is typically
considered as the working season in India, as
construction/ development-related activities slow down
during the SW monsoons (June/July-September). The
general argument against the current financial year is
that it leads to sub-optimal utilization of the working
season. The argument goes as follows:
Allocation for ongoing development works of the
government lapses at year-end on 31st March. With the
budget being presented at end-February, the
Appropriation Bill and Finance Bill are approved by the
President in early May, leading to a delay in the
authorization of fresh sanctions by mid-to-late-May.
Thereafter, the monsoon sets in, interrupting
development work for another 3/4 months. Hence, the
first two quarters of the year (roughly) get affected,
leading to a reduction in the working season from an
ideal 8-9 months to 6-7 months in the financial year.
Nevertheless, the concern – presented in both the L K
Jha Committee report and NITI Aayog note – has already
been resolved by advancing the budget by a month. With
the budget now being presented on 1st February rather
than end-February, fresh sanctions are approved by late-
March or early-April, mitigating the adverse impact on
With the budget now being presented
on 1st February rather than end-
February, fresh sanctions are approved
by late-March or early-April, mitigating
the adverse impact on the utilization of
the working season
30 August 2017
Option 2 Option 3 Option 4
(Current) (Retrograde) (Ideal)
1st April 1st July 1st October
9 0
Jan 31/1 Feb 30 April/1 May 30 July/1 Aug
By Jan 1st week By April 1st week By July 1st week
Sep – Nov Dec-Feb Mar-May
Mid Aug – Mid Aug – Mid Aug –
Sep 1st week Sep 1st week Sep 1st week
Source: NITI Aayog discussion note, MOSL
the utilization of the working season. Not surprisingly,
the central government spending has increased
tremendously in 1QFY18.
Need to align with international practices
It is also argued that most governments across the world
use the calendar year (January-December) as their
financial year. These include most of the European
countries (except the UK), Asian countries (except Japan,
Thailand, India, Pakistan), and South American countries.
Besides, the tax year coincides with the calendar year in
almost all countries – even where the financial year is
different from the tax year (US, Singapore). Therefore,
moving from April-March to January-December would
also align India with international practices.
Implications on presentation of national accounts
Detailed discussions with the Central Statistical Office
(CSO) were also undertaken by both committees to
understand the implications of a change in financial year
on the presentation of national accounts. As per the NITI
Aayog discussion note, “…the CSO does not think that this
particular issue poses any serious limitations to the
quality/efficacy of the data for the purposes of statistical
reporting in the national accounts…”. The L K Jha
Committee provided a detailed list of frequency-wise 35
important basic statistical series published by the CSO.
Notably, 11 series are already complied on calendar year
basis, and only 10 on financial year basis. Another 11
series are available on monthly/quarterly basis, which
could be conveniently converted into financial/calendar
year (please see Appendix at the end of the report). It was
mentioned in the Jha Committee report, “…Of the 22
series on financial year basis, conversion from financial
year to calendar year will not pose any problem in respect
of 11 series for which data are available either monthly or
3
quarterly. But, for the remaining 11 series, the statistical
returns currently being used for collection of requisite data
will have to be slightly amended for effecting the change
over from financial year to calendar year…”.
Accordingly, the NITI Aayog note concludes that “…it is
clearly possible for the CSO to align the existing statistical
period with that of the existing UN reporting standards –
which being the calendar year and that it seems
preferable as well…”.
Why was the recommendation disregarded earlier?
Recommendations for changing the financial year had
begun as early as 1870s, when the current practice
began. It is then interesting to note what stopped
various governments from accepting these
recommendations. Three key arguments presented for
maintaining the status quo:
1. The advantages arising out of the change would only
be marginal in view of the innumerable
considerations in the formulation of budget policies;
2. Change in the financial year would upset the
collection of data and it might take a long time to
return to normalcy in this regard; and
3. The change would create a large number of
problems, as extensive amendments to tax laws and
systems, financial procedures relating to expenditure
authorization and other matters would become
necessary, and in that process, the administrative
machinery would get diverted to problems of
transition instead of concentrating on improving tax
collection.
Previous governments were of the view
that the advantages arising out of the
change would only be marginal in view
of the innumerable considerations in
the formulation of budget policies
30 August 2017
Change in financial year, if done, would be more of
a tweak than a reform
We believe changing the financial year from April-March
to January-December is unlikely to yield significant
benefits and do not see this move as a reform measure
(in line with the arguments presented by the
government to maintain status quo).
The government has already subverted the argument for
changing the financial year owing to sub-optimal
utilization of the working period by advancing the Union
Budget by a month (from 28th February to 1st February).
This has resulted in early disbursement of funds to the
ministries and is reflected in the change in spending
pattern; the center has spent 30.3% of BE during April-
June 2017 (1QFY18) against an average of 23.4% in the
last five years and a previous high of 26.4% in 1QFY08.
We believe that the demand to align India’s financial
year with most other countries also does not necessitate
a change, as a “global standard” financial year does not
exist. Countries such as the US and the UK have non-
calendar financial years.
This leaves the primary argument that the present
financial year does not allow the government to factor in
the impact of monsoons in its budget. This argument is
also a weak one such that:
1. The relative importance of agriculture in the Indian
economy has lessened over the years. The share of
agriculture & allied sectors in GDP has declined from
over 50% in the early 1950s to ~15% in FY17 (Exhibit
3). The share of agriculture in total employment has
also been declining over the years; Exhibit 4 shows
that the share of rural population employed in
primary activities (mainly agriculture & allied
activities) has declined over the years.
We believe that the demand to align
India’s financial year with most other
countries also does not necessitate a
change, as a “global standard”
financial year does not exist. Countries
such as the US and the UK have non-
calendar financial years
4
 Exhibit 3: Share of agriculture in GDP has declined over the Exhibit 4: Share of agriculture in employment has also
years declined continuously
%age employed in the primary
Share of agriculture and allied activities in GDP (%)
NSS Survey period sector in rural areas
52
Male Female
January-December 1983 77.5 87.5
January-December 1992 75.7 86.2
15 January-December 1997 75.8 88.5
January-December 2003 70.8 85.2
July 2007-June 2008 66.5 83.5
FY51
FY55
FY59
FY63
FY67
FY71
FY75
FY79
FY83
FY87
FY91
FY95
FY99
FY03
FY07
FY11
FY15
July 2011-June 2012 59.4 74.9
Source: State budget documents, MOSL

2. Government receipts are a function of multiple (September) or in the ensuing period (October-
factors such as the performance of various economic December). Given that the monsoon cannot be
activities, efficiency of tax collections, inflation, forecasted 8-9 months in advance, this fiscal
changes in taxation rates and duties, etc. It is not response would continue to be reactionary despite a
possible to establish the impact of monsoons on the change in the financial year.
government’s receipts in isolation – NITI Aayog
acknowledges this in the discussion paper on Given that the monsoon cannot be
changing the financial year. Hence, the argument forecasted 8-9 months in advance, the
that poor monsoons impact government revenues fiscal response would continue to be
(and thus the need to change the financial year to reactionary despite a change in the
account for the monsoon in the budget) rests on financial year
weak grounds.

3. Likewise, the argument that uncertain monsoons 4. Finally, the structural reforms needed to delink the
may lead to unexpected expenditure (on droughts or agricultural sector from fiscal support are
floods) is also not very convincing. The government independent of the financial year. It is ironic that
has multiple avenues to address such issues in the even after 70 years of independence, only about half
form of contingency fund, disaster relief funds, Prime of the area under total food-grains is irrigated. We
Minister’s relief funds, etc. The NITI Aayog believe that the government must continue to focus
discussion note counter-argues that such measures on making agriculture less dependent on rainfall by
are reactionary when contrasted with the quality of making sufficient capital investments in irrigation,
planning that ministries could potentially do if they water and soil conservation. Besides, diversification
have information about monsoons. of agriculture away from crops towards allied
activities would increase the resilience to monsoon
However, this problem would not be resolved even variations.
with a change in financial year. The real problem
here is the inability to forecast the upcoming Overall, we believe that even if the government
monsoon while preparing the budget. As mentioned changes the financial year to January-December, it
earlier, a switch to the January-December year would be more of a tweak than a structural reform.
would imply that three months would be left in the
post monsoon period (Exhibit 2). Any meaningful
fiscal response to the monsoon in the form of
flood/drought relief would have to be delivered
immediately towards the end of the monsoon

30 August 2017 5
 Appendix
Exhibit 5: List of Basic Statistical Series
Series on Calendar Year Basis Series on Financial Year Basis
1. Climate 1. Forests
2. Mining 2. Sericulture
3. Civil Aviation 3. Irrigation
4. Tourism 4. National Product
5. Trade Union 5. Income Tax
6. Crime Statistics 6. Local Bodies
7. Accident Statistics 7. Five Year Plans
8. Newspapers and periodicals 8. Insurance
9. Labour 9. Roads
10. Prices 10. Education
11. Public Health Statistics 11. Housing

Series on Agriculture Year Basis Series on Monthly/Quarterly basis

1. Crop Statistics 1. Joint Stock Companies
2. Cooperative Statistics 2. Trade
3. Balance of Payments
4. Railways
5. Posts and Telegraphs
6. Exchange, Coinage & Currency
7. Industry
8. Electricity
9. Motor Vehicles
10. Shipping
11. Banks
Source: L.K. Jha Committee on Change in Financial Year, MOSL

30 August 2017 6
 NOTES

30 August 2017 7
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citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject MOSL to any registration or
licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are
required to inform themselves of and to observe such restriction. Neither the Firm, not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or
consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. The person accessing this information specifically agrees to exempt MOSL or any of its affiliates or
employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSL or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOSL or any of its affiliates
or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays.
Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022-3980 4263; www.motilaloswal.com. Correspondence Address: Palm Spring Centre,
2nd Floor, Palm Court Complex, New Link Road, Malad (West), Mumbai- 400 064. Tel No: 022 3080 1000. Compliance Officer: Neeraj Agarwal, Email Id: na@motilaloswal.com, Contact No.:022-30801085.
Registration details of group entities.: MOSL: NSE (Cash): INB231041238; NSE (F&O): INF231041238; NSE (CD): INE231041238; BSE (Cash): INB011041257; BSE(F&O): INF011041257; BSE(CD); MSE(Cash): INB261041231;
MSE(F&O): INF261041231; MSE(CD): INE261041231; CDSL: IN-DP-16-2015; NSDL: IN-DP-NSDL-152-2000; Research Analyst: INH000000412. AMFI: ARN 17397. Investment Adviser: INA000007100. Motilal Oswal Asset
Management Company Ltd. (MOAMC): PMS (Registration No.: INP000000670) offers PMS and Mutual Funds products. Motilal Oswal Wealth Management Ltd. (MOWML): PMS (Registration No.: INP000004409) offers wealth
management solutions. *Motilal Oswal Securities Ltd. is a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs, Insurance and IPO products. * Motilal Oswal Commodities Broker Pvt. Ltd. offers Commodities Products. *
Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. offers Real Estate products. * Motilal Oswal Private Equity Investment Advisors Pvt. Ltd. offers Private Equity products

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