Zero Based Budgeting (ZBB)

6.1 Concept and Origin

As asked in 2021 Q46 and 2023 Q45:

Traditional incremental budgeting takes previous year's budget as base and adds a small percentage increase — without questioning whether existing expenditure is justified. This creates budget inertia — outdated programmes continue just because they existed.

ZBB (Zero Based Budgeting) requires each department/programme to justify every rupee of expenditure from scratch in every budget cycle, as if starting from zero. Even existing programmes must prove their necessity.

Originated: Peter Pyhrr at Texas Instruments, USA, 1969. President Jimmy Carter implemented ZBB across the US Federal Government (1977-79). In India:

• 1969: Peter Pyhrr introduces ZBB at Texas Instruments, USA.
• 1977: US President Jimmy Carter mandates ZBB across all federal agencies.
• 1983: India's Finance Ministry recommends ZBB for select Central Government departments.
• 1987: Rajasthan becomes the first Indian state to adopt ZBB in a significant way.
• 2000s: Outcome Budget (2005-06) incorporates ZBB principles at the Central level.

6.2 Process of ZBB

1. Decision packages: Each department identifies all activities as separate "decision packages" — each package describes: what the activity does, what resources it needs, what outcomes it produces, and alternatives.
2. Priority ranking: Decision packages are ranked by importance — from most critical to least critical.
3. Resource allocation: Budget is allocated starting from the highest-ranked packages downward, until the budget limit is reached. Lower-ranked packages may not get funded.
4. Review and approval: Approved budget reflects only activities that have been justified.

6.3 Features of ZBB (as asked in 2023 Q45 — four features)

1. Zero as base — every budget cycle starts from scratch; no automatic carryover
2. Justification required — every expenditure item must be justified on its merits
3. Decision packages — activities grouped as separate packages with cost-benefit analysis
4. Priority ranking — managers rank packages in order of importance; lower-priority ones may be cut
5. Cost-effectiveness focus — eliminates inefficient or outdated programmes
6. Time-consuming but comprehensive — requires detailed analysis of every activity

6.4 Advantages and Disadvantages of ZBB

Dimension	ZBB	Incremental Budgeting
Base	Zero — every rupee justified	Previous year's budget + increment
Efficiency	High — eliminates outdated programmes	Low — inefficiencies perpetuated
Time required	Very high — extensive analysis	Low — simple percentage increase
Suitable for	Cost reduction, efficiency drives	Stable, routine expenditure
Risk	May cut essential programmes if poorly ranked	Funds committed to old, unnecessary schemes
India adoption	Rajasthan (1987), partial Central Government	Default method for most departments

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