Why in the News?
NITI Aayog launched the second Annual Edition of Fiscal Health Index (FHI).
About Fiscal Health Index (FHI) 2026
- It provides a comprehensive and comparable assessment of the fiscal performance of Indian states.
- States account for nearly one-third of India's general government debt, making their fiscal trajectory central to national fiscal sustainability.
- Methodology: It has been calculated for 18 major states and 10 North Eastern (NE)/Himalayan States for FY 2023-24 using data from the Comptroller and Auditor General (CAG).
- The first edition of the Index (FHI 2025) focused only on 18 major states.
- Categorization of states: Achiever; Front Runner; Performer and Aspirational based on FHI score.
- NE/Himalayan States have been ranked separately and classified into 3 groups (no Front Runner category)
- 5 Key pillars of FHI 2026:
- Quality of Expenditure: Reflects how effectively a state deploys its resources, with emphasis on productive spending such as capital investment, health, education, and infrastructure relative to salaries, pensions, and interest payments.
- Revenue Mobilization: Captures a state's capacity to generate its own tax and non-tax revenues, measured through tax efficiency, buoyancy, base expansion, and collection practices.
- Fiscal Prudence: Assesses the discipline with which a state manages its deficits and adheres to fiscal responsibility (FRBM) norms.
- Debt Index: Assesses the size, composition, and burden of a state's outstanding liabilities, including market borrowings and other obligations.
- Debt Sustainability: Evaluates a state's long-term ability to service debt without creating fiscal stress, based on indicators such as interest payments relative to revenues, primary balance trends, and projected debt.
- Sub-Indicators have been refined for NE states to capture unique characteristics like difficult terrain, sparse population density, limited own revenue capacity, elevated committed expenditures, greater reliance on Union transfers.
Key Highlights of States' performance for 2023-24
Classification | Performance of Major States (General Category) | Performance of North Eastern (NE) and Himalayan States |
Achiever | Odisha followed by Goa and Jharkhand. | Arunachal Pradesh followed by Uttarakhand. |
Front Runner | Gujarat followed by Maharashtra and Chhattisgarh, Telangana, Uttar Pradesh and Karnataka. |
|
Performer | Madhya Pradesh followed by Haryana, Bihar, Tamil Nadu and Rajasthan. | Tripura followed by Meghalaya, Assam, Mizoram and Sikkim. |
Aspirational | Kerala followed by West Bengal, Andhra Pradesh and Punjab. | Nagaland followed by Himachal Pradesh and Manipur. |
How FHI Encourages prudent and Sustainable Fiscal Policies?
- Promotes Competitive Federalism: Public ranking of states creates healthy competition.
- Evidence-based fiscal policymaking: By identifying gaps and highlighting best practices, the Index supports policymakers in strengthening fiscal governance.
- Tailored Policy Frameworks: By capturing the distinct structural characteristics of different regions (such as the distinct fiscal portfolios of North-Eastern and Himalayan states), the FHI provides context-specific insights.
- Enabling Targeted Interventions: It outlines each state's fiscal strengths, weaknesses, and overall profile, offering tailored insights to support improvements in their fiscal position.
- Promote development: Strengthening fiscal management in NE and Himalayan regions can accelerate the success of initiatives like the National Infrastructure Pipeline, the North East Special Infrastructure Development Scheme, and the Green Growth Mission.
Key recommendations for states
- Improving revenue mobilisation: It can be done primarily through broadening GST bases and enhancing own-tax capacity, while curbing committed expenditure to restore fiscal flexibility.
- Contain deficits and stabilise debt trajectories: By rationalising subsidies, adopting standard expenditure heads, improving the quality and composition of capital spending, and adopting medium-term fiscal plans.
- Targeted consolidation measures for states with persistent stress: Like tighter control of off-budget borrowings and better cash and debt management.
- Support Evidence-based decision making: Through enhanced public financial management systems, greater transparency using CAG-verified data, and peer benchmarking tools like FHI.
Conclusion
Given the scale of state expenditure responsibilities and their role in delivering key public services, systematic assessment of state finances is essential to ensure fiscal discipline, efficient resource allocation, and long-term macroeconomic stability. The report also stresses the need for stronger public financial management systems, greater transparency in fiscal data and closer monitoring of off-budget borrowings.
