The Fiscal Health Index (FHI) initiative by NITI Aayog evaluates the fiscal health of eighteen major states through a composite index using data from the CAG, covering the Financial Year 2022-23.
FHI as a tool to assess fiscal performance of states
FHI uses uniform metrics-Tax Buoyancy, Debt-to-GSDP, Fiscal Deficit, Capex Share-allowing objective comparison across states.
Multi-dimensional Evaluation – Covers five pillars and reveal structural strengths and weakness
Measures states’ ability to mobilise resources through Own Tax Revenue (OTR) and Own Non-tax Revenue (ONTR). Eg – Higher OTR-to-GSDP ratio reflects stronger fiscal autonomy.
Measures Quality of Expenditure – FHI differentiates between capital expenditure and revenue expenditure. Eg – States like Gujarat and Karnataka show higher capex ratios.
Tracks Debt Sustainability – Assesses Debt-GSDP ratio, interest payment burden, and future liabilities. Eg – FHI flags high-debt states such as Punjab, Kerala, Rajasthan, and West Bengal.
Monitors Fiscal Deficit and Compliance with FRBM Limits – Shows whether states adhere to 3% fiscal deficit glide path.
Identifies Risk from Off-Budget Borrowings – Captures liabilities from power sector guarantees, state PSUs, and special purpose vehicles.
Highlights Best Practices – Eg- Top states-Odisha (67.8 score), Chhattisgarh, Goa-show strong non-tax revenue, low fiscal deficits, and high capital outlays
Role of FHI in Encouraging prudent and sustainable fiscal policies
Promotes Fiscal Discipline – Poor rankings push states to reduce deficits and unsustainable borrowing.
Incentivises Capital Spending – Encourages a shift from populist revenue expenditure towards productive capital outlay.
Supports Long-Term Planning – Aligns state finances with sustainable development goals and resilience-building.
Revenue Reforms-Stimulates states to improve tax buoyancy, and non-tax revenue mobilisation
Drives Structural Reforms like subsidy rationalization, reduction in revenue leakages etc.
Transparency & Accountability – Public scrutiny builds pressure on governments for fiscal prudence
Encourages Inter-State Competition – Rankings foster a competitive spirit to achieve stronger fiscal performance.
Strengthens Cooperative Federalism – Helps in Centre-State dialogue on shared fiscal risks and sustainability.
Boosts Investor Confidence – Strong fiscal performance signals creditworthiness, attracting investment.
Promotes Sustainable Borrowing Practices and enhances creditworthiness as better FHI improves a state’s credit rating.
Challenges
Data Gaps – CAG data of Financial Year 2022-23 used
Off-budget borrowings not fully captured in FHI.
Miss qualitative aspects such as governance quality, efficiency of welfare delivery etc.
Inter-State Structural Variations are not fully captured – Eg- Resource-rich states (Odisha, Chhattisgarh) naturally perform better in non-tax revenues
Competitive Populism reduces focus on fiscal discipline. Eg- farm loan waivers
Weak Enforcement – FHI rankings have no binding effect on policy behaviour.
By encouraging disciplined, sustainable, and quality spending, FHI can help realise the vision of Viksit Bharat@2047