Fiscal Health Index 2025 | 30 Jan 2025

Source: PIB 

Why in News?  

In a bid to enhance fiscal governance, National Institution for Transforming India (NITI Aayog) launched its inaugural Fiscal Health Index (FHI) 2025.  

• The Index provides a comprehensive evaluation of the fiscal health of 18 major Indian states for 2022-23, offering data-driven insights that will guide policy interventions at the state level.  

What is the Fiscal Health Index (FHI)? 

• About: The Fiscal Health Index (FHI) is an assessment tool to evaluate the fiscal health of Indian states and highlights specific areas for improvement. 
• Parameter: FHI ranks states based on five key sub-indices. 
  • Quality of Expenditure: Measures the proportion of spending on long-term growth (developmental) vs. routine operations (non-developmental). 
    • Assesses capital investments as a share of economic output. 
  • Revenue Mobilization: Reflects a state’s ability to generate its own revenue and cover its expenditures independently. 
  • Fiscal Prudence: Tracks deficits (fiscal and revenue) and borrowing relative to economic output, signaling fiscal health. 
  • Debt Index: Assesses the state’s debt burden, focusing on interest payments and liabilities relative to economic size. 
  • Debt Sustainability: Compares Gross State Domestic Product (GSDP) growth to interest payments, with a positive difference indicating fiscal sustainability. 

• Aim: Guide policymakers in formulating targeted reforms for sustainable economic growth, fiscal consolidation, and better resource management at the state level.  
  • Encourage healthy competition among states, aligning their fiscal strategies with national economic objectives. 
• Key Findings of FHI 2025: 
  • Top Performers: Odisha leads with the highest overall FHI score of 67.8, followed by Chhattisgarh (55.2), Goa (53.6), Jharkhand (51.6), and Gujarat (50.5), with strengths in Debt Index, Revenue Mobilization, and Fiscal Prudence. 
  • Revenue Mobilization: Goa, Telangana, and Odisha lead in Revenue Mobilization and Fiscal Prudence.  
    • Odisha, Jharkhand, Goa, and Chhattisgarh excel in non-tax revenue, with Odisha heavily relying on mining-linked premiums and Chhattisgarh benefiting from coal block auctions. 
    • Punjab and West Bengal lag in Revenue Mobilization, highlighting disparities in fiscal management and economic resilience. 
    • Aspirational States like Punjab, West Bengal, Andhra Pradesh, and Kerala face significant fiscal challenges.  
      • Punjab and Kerala struggle with Debt Sustainability and Quality of Expenditure, while Andhra Pradesh faces high Fiscal Deficits. 
  • Capital Expenditure: Madhya Pradesh, Odisha, Goa, Karnataka, and Uttar Pradesh allocate 27% to Capital Expenditure, enhancing long-term investments.  
    • States like West Bengal, Andhra Pradesh, Punjab, and Rajasthan allocate only 10%, impacting long-term growth. 
  • Debt Management: Top states like Odisha and Goa manage debt effectively, with low risk of default, while bottom states like West Bengal and Punjab show growing debt burdens, raising concerns about debt sustainability. 

Read more: RBI Report on State Finances 2024-25