Introduction

The Fiscal Health Index (FHI) initiative by NITI Aayog, launched in 2025, is a composite tool that measures states’ fiscal performance across revenue, expenditure, debt, and deficit indicators. It provides a benchmark for inter-state comparison and guides policy towards fiscal sustainability. 

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Role of the FHI in Assessing States’ Fiscal Performance

• Measures Fiscal Sustainability: The FHI evaluates how well states manage deficits and debt relative to GSDP. This indicates whether states are pursuing growth with long-term stability or risking unsustainable borrowing.
• Assesses Quality of Expenditure: FHI highlights whether states prioritise capital investment over routine revenue spending. This shows if public money is being channelled into long-term growth rather than short-term consumption.
• Tracks Revenue Mobilisation Efficiency: The index captures states ability to raise their own tax and non-tax revenues. Efficient mobilisation reflects stronger fiscal autonomy, enabling more development spending.
• Highlights Debt Servicing Capacity: By monitoring interest payments relative to revenue, FHI shows whether states are locked into debt traps. States with healthier ratios have more fiscal space for social and infrastructure investment.
• Enables Inter-State Benchmarking: FHI ranks states on fiscal health, making performance transparent. This comparative assessment motivates states to replicate best practices for growth-oriented fiscal management.
• Supports Policy Corrections Over Time: Since the index can be tracked annually, it identifies slippages or improvements in fiscal indicators. This allows governments to take timely corrective measures that align fiscal policy with development priorities.

Ways in which FHI Encourages Prudent and Sustainable Fiscal Policies

• Guiding States Towards Fiscal Prudence: By flagging states with high deficits or debt, FHI makes the costs of fiscal profligacy visible. This encourages governments to adopt more disciplined budgeting for stable growth.
• Pushing Focus on Developmental Expenditure: The index rewards states that prioritise capital outlay over routine spending. This nudges policies towards infrastructure and productive investment, which fuel long-term economic growth.
• Encouraging Sustainable Borrowing: FHI highlights risks of excessive borrowing. This motivates states to adopt prudent loan policies and channel funds into productive sectors.
• Incentivising Better Revenue Practices: A low FHI score reflects weak revenue mobilisation, prompting states to strengthen tax administration and diversify income sources. This widens fiscal space for development spending.
• Fostering Healthy Inter-State Competition: Comparative rankings creates competitive pressure to adopt reforms that improve efficiency and development outcomes.
• Linking Fiscal Health with Inclusive Development: The index shows how sound finances lead to more resources for welfare, education, and healthcare. This encourages states to align fiscal policies with inclusive and sustainable development goals.

Conclusion

The Fiscal Health Index serves as both a diagnostic and prescriptive tool, enabling states to align their fiscal policies with sustainability goals. By encouraging discipline, efficiency, and transparency, it can ensure that fiscal management becomes a driver of long-term inclusive growth.

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