Zero-based budgeting

Indian Economy glossary

Also called: ZBB · Topic: Government Budget, Fiscal Policy and FRBM · NCERT: Beyond NCERT

Meaning

Zero-based budgeting (ZBB) is a way of making a budget where every spending item starts at zero each year and must be justified again. It does not simply take last year's amount and add a little to it.

It matters because it makes each department prove why a scheme deserves money at all. This helps the government stop funding old, weak schemes and move money to better uses.

Explanation

How ZBB works

  • Starting point is zero. No item gets money just because it got money last year.
  • Every activity must be justified afresh. The department must answer: "Why spend anything on this at all?"
  • Step-by-step process (textbook form):
  • Decision units: the budget is split into small units, such as a scheme, a programme or an office.
  • Decision packages: for each unit, managers write down what it does, what it costs, and what would happen if it got less money or no money.
  • Ranking: all packages are ranked by importance.

  • Allocation: money goes down the ranked list until the available funds run out. Low-ranked items may get nothing.

  • Who devised it: Peter Pyhrr, in the 1970s.

ZBB vs incremental budgeting

  • Incremental budgeting (the usual method) takes last year's figure as the base and adds to it, for example "last year + 10%".

  • Problem: a scheme that stopped being useful still gets money every year. The base is never questioned.

  • ZBB questions the base itself.

  • Result: it can cut dead-weight schemes (schemes that use money but give little benefit).

Worked example (illustrative numbers):

  • A department spent ₹100 crore on Scheme X last year.
  • Incremental method: last year + 10% → 100 + 10 = ₹110 crore. No one asks whether Scheme X still works.
  • ZBB method: the department must justify Scheme X from ₹0.
  • Suppose it can show a clear need for only ₹60 crore of activities. The rest goes to programmes that no longer serve a purpose.
  • Allocation = ₹60 crore. The ₹50 crore saved (110 − 60) can go to a higher-ranked scheme.

Strengths and weaknesses

  • Strengths:
  • Removes waste and outdated schemes.
  • Links spending to present-day needs, not past habit.

  • Makes managers think about the cost and value of each activity.

  • Weaknesses:

  • Takes a lot of time and paperwork. Every item must be reviewed each cycle.
  • Needs trained staff and good data to rank activities fairly.
  • Some spending cannot really start from zero. Salaries, interest payments and legal commitments must be paid anyway.
  • Departments may justify their own schemes too strongly to protect them.

In India

  • ZBB was tried in India from 1986-87.
  • It is one of several budgeting innovations. All of them try to make public spending better, not just bigger:
  • Performance budget: recommended by the Administrative Reforms Commission (1968).
  • Outcome budget: introduced in 2005-06. From 2017-18, it has been tracked through an Output-Outcome Monitoring Framework with NITI Aayog's DMEO (Development Monitoring and Evaluation Office).

  • Gender budgeting: Gender Budget Statement from 2005-06.

  • Why it is relevant today: big spending items such as subsidies need regular review.

  • Total subsidies in 2026-27 (BE): ₹4,54,773 crore [2].
  • Food + fertiliser make up 87% of the subsidy bill (2026-27) [2].

  • A ZBB approach would ask whether each such scheme, and its method of delivery, is still the best use of that money.

  • Indian example of the ZBB idea: under DBT (Direct Benefit Transfer: benefits paid straight into bank accounts), removing ghost and duplicate names led to estimated cumulative savings of ₹3.48 lakh crore (2009-2024 data) [1]. This works like ZBB: instead of repeating old spending, it checks who should really get the money.

Don't confuse with

  • Incremental budgeting: starts from last year's figure and adds to it. ZBB starts from zero and justifies everything again.
  • Performance budget: shows spending by functions, programmes and activities, with targets (ARC, 1968). It measures how well money is used. It does not require starting from zero.
  • Outcome budget: links outlays to outputs (what is produced, e.g. 1,000 classrooms) and outcomes (the real change, e.g. better learning levels). It is about results. ZBB is about justifying the amount itself.
  • Participatory budgeting: citizens directly decide part of a budget (Porto Alegre, Brazil, 1989; Kerala People's Plan Campaign, 1996). It is about who decides, not about starting from zero.

Prelims Hooks

  • ZBB = every expenditure item is justified from zero each cycle. Last year's allocation is not the base.
  • ZBB was devised by Peter Pyhrr in the 1970s. It was tried in India from 1986-87.
  • Match the milestones: Performance budget → ARC (1968); Outcome budget → 2005-06; Output-Outcome Monitoring Framework with NITI Aayog's DMEO → 2017-18.
  • Trap: "Last year + 10%" is incremental budgeting, not ZBB.
  • Main drawback of ZBB: it takes a lot of time and paperwork. It does not raise the fiscal deficit by itself.
  • Trap: ZBB is about justifying spending, not about setting a zero fiscal deficit target.

Mains Points

  • ZBB and fiscal space (GS-III):
  • Many old schemes carry on only because they were funded last year.
  • ZBB can find and cut these dead-weight schemes.

  • This frees money for capital spending and helps meet FRBM deficit targets without cutting useful welfare.

  • Limits in practice:

  • A large part of government spending (salaries, pensions, interest) is fixed and cannot start from zero.

  • Full ZBB every year is costly in time and staff. A practical middle path is periodic, scheme-by-scheme review, together with outcome budgets that check results.

  • Budgeting for results:

  • ZBB, outcome budgets, gender budgets and green budgets together shift the question from "how much was spent" to "why spend, and what changed".
  • Subsidies (87% from food and fertiliser in 2026-27 [2]) and freebies are natural areas for this kind of review. The 16th Finance Commission's call to rationalise unconditional cash transfers follows the same idea.

Related concepts

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Sources

  1. 1India's DBT: Boosting Welfare Efficiency (PIB)pib.gov.in · tier 1
  2. 2Union Budget 2026-27 Analysis (PRS Legislative Research)prsindia.org · tier 1