Rolling budget: will it rock?
The 13th Finance Commission has proposed a change to three-year rolling budget from the current annual fixed budget. What are the pros and cons of the proposal?

Amidst all the events making news over the last few months, one non-descript reporting really caught my fancy. According to news reporting, the 13th Finance Commission has suggested to the Indian government to shift to a three-year rolling budget model in future. The report itself is still confidential. It has been submitted to the Prime Minister and the government is yet to officially put it before the Parliament. It is not known for sure whether the government will actually table this proposal, though it is believed that the Prime Minister himself is quite supportive of this proposal. Given that Dr Singh himself is a well accomplished economist in his own right, that does mean a lot.

However, not much is known about the exact nature of the proposed rolling budget model that has been suggested in the Indian context. My outlook on this issue till this point is thus merely academic, regarding the basic notion of rolling budgets, especially vis-à-vis annual budgets, which are static in nature.

Preparing a budget is an exercise undertaken by any economic entity, in which it takes stock of its revenues and builds the road map for future expenditures and expected revenues. Starting from an individual or a family, corporates and governments too engage in such exercises. In case of a government engaged in running the economy of the country as a whole, these decisions become policies, which affect all other units operating in the economy. Thus, the government’s budget announcement has overbearing on everyone else’s budget planning, and therefore assumes a lot of importance.

The Indian government till date has been practising annual budgets. The finance minister announces the budget annually, at the start of the fiscal year. It takes into account the governments collections and revenue earnings, and earmarks expenditure on future projects and allocations for different activities etc. Of most importance perhaps to us plebeians, are the tax rate announcements — whether cereals or pulses are going to cost us dearer, whether the car we have been fancying for so long is going to attract higher VAT, whether income tax rates (or exemptions) are being raised. We live in anticipation every March only to sigh in relief or pain when the next day's newspapers arrive at our doorsteps, with a column depicting all that is going to be costlier and cheaper, giving us in a gist of what the minister had been saying throughout the previous day. Some of the smarter amongst us follow it live on TV, with expert comments flying high and fast in the lower scrolls.
You must have surely noticed that just before the budget, we have a plethora of ‘offers’ in consumer goods or other services. ‘Pre-budget offers’ are essentially offers at the outgoing rates, because no one knows what the new policy will be. There is thus an element of uncertainty, revisited annually by everyone; sellers, buyers, producers etc. This is an uncertainty in our activities on account of the uncertainty pertaining to the governments budget practices.

Imagine now, not having to deal with such uncertainties. Individual households have to make long-term budget planning in many cases. For some major activities like purchasing a car or a house, we have to plan much in advance. In case of an EMI-based bank loan, we have to commit ourselves for the next three or five years, and have to plan our expenditures accordingly. Big decisions usually entail a longer time period. This is especially true for larger corporate activities, where business outlooks have to take into account a farther time horizon. Big activities usually require so much of planning and preparations that one-year time frame of operations is often too less. If the broader policies, based on which such economic entities have to plan their activities too follow a longer time horizon, things certainly would become easier.

Incidentally, the logic of larger economic activities requiring longer time frames best applies for government activities, whose scope and sphere of operations is by far the largest of any economic entity. Of course, one must keep in mind that government works with a broader framework. The Five Year Plan documents are essentially the vision document of a government for its activities. While the plan documents give the broader perspective, the budget in a sense provides it with the road map to achieve the same. Till date we have been following the practice of annually laying out our activities. What a longer-timeframe budget means is that the roadmap too is to be broadened, thereby developing greater synergy with the vision document. It must be noted that the proposal is not only for a longer timeframe, but also entails the concept of ‘rolling’, as opposed to the static budget model we have been following.

What exactly is this rolling budget? Suppose in 2010 the government plans out its roadmap for three years, ie till 2013. In 2011, there will be stocktaking and accordingly adjustments will be made. However, the new planning will be not be for upto 2013, but 2014, ie by the end of one year, another year is added in the timeframe such that in 2011 you are planning for three years in advance as well. What you are doing thus is starting with an initial long-term perspective, and then every year making adjustments, based on ex-post experiences, while at the same time carrying forward the long-term perspective.

An important aspect is the annual or periodic stock-taking, which will replace the current budget announcement activity. Usually, quarterly results are used for such stock-taking for corporates. In case of government activities, given the size of activity, there is usually a time lag. By the time a quarter’s report comes, we are almost through the next! However, given the huge scale of government operations, this is quite natural. What a three-year rolling budget will do is raise the timeframe of reviewing and stocktaking as well. Instead of a 12-month time frame with three month quarterly reviews, we will now have a 36 month rolling period with at least 6 to 12 month's review period, which definitely gives more breathing space. The longer time frame does stand to offer greater efficiency in planning and execution, and is perhaps the prime reason behind the Finance Commission’s suggestion.

What is of interest is how much of the entire policy planning is pre-committed, and how much will be left for adjustments. A common reaction to the proposal of three-year rolling budget has been that tax rates etc are not going to be changed abruptly, which will help all economic entities plan their activities. It presupposes that such policies will be pre-committed, ie the framework decided at the start of the three-year budget period is almost fixed. There may be tweaking here and there, but the policy framework more or less remains constant.

One major problem of planning in advance is keeping provisions for exigencies. If we had embarked on a three year budget in 2006, for example, we would not have envisioned the financial crisis that hit us. All growth projections and expectations would not only have to be revisited, but a new roadmap would have to be redrawn in a hurry. Or take into account the errant monsoon and the resulting food commodity-based high inflation. Issues like these often require a revisit of the entire planning process. If the government pre-commits too much in advance, it might sacrifice on its ability to make adjustments when such situations arise. On the other hand, the essence of shifting to a longer-timeframe for the budget is to essentially offer stability in government policies. Thus there is a fine balance that has to be maintained, and only when the exact proposal is made public can we judge the new idea for its merits.

As of now, the proposal does seem to promise well, at least in theory. Let us look forward to its details to verify whether it does truly deliver. In that sense, the new proposal is no different than the actual budgets!