Modern budgeting is a method called Zero-Based Budgeting (Zero-Based Budgeting) which requires setting up the budget every financial year on a zero base. In sharp contrast to the traditional budgeting practices, under Zero-Based Budgeting, all expenses must be warranted and this has the effect of ensuring that the allocation of funds is in tandem with the prevailing priorities vis-a-vis historical trends. It improves efficiency since it cuts down any wasteful spending and promotes decisions that are performance-based. It has been in use in India since the 1980s although its use is currently restricted. Zero-Based Budgeting also focuses on activities based planning and is therefore appropriate to carry out optimization of resources and accountability.

Key Points for RAS Mains

Context

• Zero-Based Budgeting was brought to India in 1983 in the Department of Science and Technology and was advocated in the Seventh Five-Year Plan.
• It was important as an effective and economical, performance centered alternative to traditional budgeting.
• It has had limited adoption because it is too complex and resource demanding.

What is Zero-Based Budgeting?

• Definition: Zero-Based Budgeting is a budgeting method in which all spending should be justified in every new period and starts with a zero base.
• Strategies: The functions need to be analyzed in respect of their needs and costs and priority budgets assigned not on historical allocations being assigned.
• Goal: To enhance efficiency, reduce wastefulness, and resource allocation depending on the relevance and cost-effectiveness of the program.

Aspects of Zero-Based Budgeting

• Each year we begin at a zero level of budgeting with no bearing on past budgets or budgets previously made.
• Expenditures are also compiled into decision packages and ranked under priority.
• Every department is supposed to explain their expenses again to receive funds.
• Enables prompt re-allocation depending on varied requirements.
• Ensures that organizational objectives are aligned to the unit-level goals.

Traditional Budgeting vs. Zero-Based Budgeting

Benefits of Zero-Based Budgeting

• Efficient Resource Allocation: Yokes resources into organizational headings and reasonable returns.
• Better Cost Management: Provokes close examination of all the costs.
• Decreases Duplication: It helps to notice and remove unproductive programs or departments.
• Fosters Accountability: Makes the culture of accountability and initiative.
• Budget Discipline: Eliminates arbitrary increase and fosters excellent spending knowledge.

Limitations of Zero-Based Budgeting

• Time consuming and complicated: Takes a large amount of time, manpower and proficiency to execute it.
• Unnecessary Paperwork: Unfriendly to the big departments or the government entities.
• Short-Term bias: zeroing in on current returns may overlook long-term requirements.
• Resource-Intensive: Zero-Based Budgeting is not completely effortless to put in place in all the departments.
• Insufficient Training: Has to use unskilled managers who have to make budget proposals and defend them in the respect.

Zero-Based Budgeting in India

• Initiated in 1983 by the department of science and technology.
• Formally accepted in the year 1986 to provide systematic control of expenditure.
• Propagated in the Seventh Five-year plan.
• All the programs should be reviewed and reassessed by ministries.
• The situation is limited in current use because the work processes are problematic.

Conclusion for RPSC

Zero-Based Budgeting is providing a clear, normative and necessity approach in allocation of resources, and this provision would assist in ensuring that government expenditures are in line with national interests. Although it is complex to implement, it increases the accountability and removes inefficiencies. In the case of a developing economy, such as India, Zero-Based Budgeting has a potential as long as it is supported by trained staff and institutional aid.

Also Read: What are Economic Activities?