Fiscal Health Index 2025

The Chairman of the 16th Finance Commission, launched the inaugural issue of NITI Aayog’s report titled “Fiscal Health Index (FHI) 2025” in New Delhi recently.

About Fiscal Health Index (FHI) 2025

• It is the first report of its kind and released in January 2025  by NITI Aayog.
• Aim: To evolve an understanding of the fiscal health of states in India.
• Coverage: It covers eighteen major states that drive the Indian economy in terms of their contribution to India’s GDP, demography, total public expenditure, revenues, and overall fiscal stability.
  • Covers the financial year 2022-23 and assesses states on their contribution to India’s GDP, demography, public expenditure, revenues, and fiscal stability.
• Source used: The report uses data sourced from the Comptroller and Auditor General of India (CAG) to calculate the Fiscal Health Index.
• The FHI offers a systematic approach to assess the state’s fiscal health, identify areas for improvement, and promote best practices across states
• Evaluation Parameters: The FHI is based on five key indicators:
  • Expenditure Quality: Efficiency and focus on developmental spending.
  • Revenue Mobilisation: Tax and non-tax revenue generation capacity.
  • Fiscal Prudence: Ability to manage deficits.
  • Debt Index: Debt levels relative to revenue.
  • Debt Sustainability: Capacity to maintain debt levels without fiscal stress.

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Key findings from the Report

• State Categories
  • Achievers (Top Performers): Odisha, Chhattisgarh, Goa, and Jharkhand are categorized as top-performing states.
    • These states have a higher capital outlay of up to 4% of Gross State Domestic Product (GSDP).
    • They are revenue surplus states with low fiscal deficits.
    • They have low interest payments, which account for up to 7% of revenue receipts.
  • Front-Runners: Maharashtra, Uttar Pradesh, Telangana, Madhya Pradesh, and Karnataka are classified as front-runners.
    • These states have high developmental expenditure of up to 73%.
    • They demonstrate consistent growth in their own tax revenue.
    • They show balanced fiscal management and improved debt sustainability with a debt-to-GSDP ratio of 24%.
  • Performers: Tamil Nadu, Bihar, Rajasthan, and Haryana are placed in the performers’ category.
  • Aspirational States (Worst Performers): Punjab, Andhra Pradesh, West Bengal, and Kerala are categorized as aspirational states.
    • These states face significant fiscal challenges, including high fiscal deficits.
    • They exhibit low revenue mobilisation and an increasing debt burden, raising concerns about debt sustainability.
    • Kerala and Punjab struggle with low-quality expenditure and debt sustainability.
    • West Bengal faces challenges with revenue mobilisation and debt index management.
    • Andhra Pradesh has been identified as having a high fiscal deficit.

• Top-Performing State: Odisha
  • Best-performing state, with the highest overall index score of 67.8.
  • Ranks highest in the debt index with a score of 99.0 and also leads in debt sustainability with a score of 64.0.
  • Maintained low fiscal deficits and a strong debt profile.
  • Above-average capital outlay-to-GSDP ratio and demonstrates effective mobilisation of non-tax revenue.
• Challenges for Southern States
  • Telangana has emerged as the best performer among the southern states due to its strong revenue mobilisation and fiscal prudence.
  • Tamil Nadu faces challenges with high committed expenditure, which accounts for 52% of its revenue expenditure. 
    • This trend, which has been growing at an annual rate of 9.9% since 2018-19, has reduced the state’s flexibility for developmental spending.
  • Kerala struggles with low-quality expenditure and weak debt sustainability.
  • Andhra Pradesh faces challenges with a high fiscal deficit, making it one of the worst-performing states.

Significance of FHI

• Comprehensive Fiscal Assessment: The FHI will provide valuable, data-driven insights into the fiscal health of Indian states, aiding policymakers in informed decision-making and fostering economic stability across the country.
• Informed Decision-Making: It offers data-driven insights that help policymakers make better decisions, guiding states toward fiscal reforms and better governance.
• Promotes Fiscal Prudence & Sustainable Growth: By highlighting areas of improvement, the FHI encourages states to adopt sound financial practices, ensuring sustainable economic growth and fiscal discipline.
• Fosters Healthy Competition & Cooperative Federalism: The FHI’s rankings inspire states to improve their fiscal health while promoting collaboration between the Centre and states to address regional disparities and drive holistic development.

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About NITI Aayog

• NITI Aayog is a government think-tank that was formed via a resolution of the Union Cabinet, replacing the erstwhile Planning Commission.
• Establishment: The Planning Commission, which was established in 1950, was replaced by NITI Aayog (National Institution for Transforming India) on January 1, 2015.
• Composition
  • Chairperson: The Prime Minister.
  • Vice-Chairperson: Appointed by the Prime Minister.
  • Governing Council: Composed of the Chief Ministers of all states and Lt. Governors of Union Territories.
  • Regional Council: Composed of Chief Ministers and Lt. Governors, chaired by the Prime Minister or his nominee.
  • Part-time Members: A maximum of two members from leading universities, research organizations, and other relevant institutions, serving on a rotational basis.
  • Ex-Officio Members: A maximum of four members from the Union Council of Ministers, nominated by the Prime Minister.
  • Chief Executive Officer: Appointed by the Prime Minister for a fixed tenure, with the rank of Secretary to the Government of India.
  • Special Invitees: Experts and specialists with domain knowledge, nominated by the Prime Minister.
• Role: NITI Aayog provides critical directional and strategic input into the development process.
• Founding Principle: NITI Aayog is based on the principle of Cooperative Federalism, with an emphasis on a ‘Bottom-Up’ approach.
• NITI Aayog Hubs
  • Team India Hub: Acts as an interface between the States and the Centre.
  • Knowledge and Innovation Hub: Builds the think-tank acumen of NITI Aayog.

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