Context:
NITI Aayog released the Fiscal Health Index (FHI) 2026, evaluating the fiscal performance of Indian states (FY 2023–24) and highlighting inter-state variations in financial stability.
Key Highlights:
- About the Index
- Developed by NITI Aayog to assess fiscal soundness of states.
- Moves beyond deficit metrics to a multi-dimensional evaluation framework.
- Core Pillars of Assessment
- Quality of Expenditure – Focus on capital vs committed spending.
- Revenue Mobilisation – Internal tax and non-tax generation.
- Fiscal Prudence – Deficit control and FRBM compliance.
- Debt Index – Size and burden of liabilities.
- Debt Sustainability – Ability to service debt over time.
- Rankings (2023–24)
- Top Performers: Odisha (1st), Goa (2nd), Jharkhand (3rd), Gujarat (4th), Maharashtra (5th).
- Bottom States: Punjab (18th), Andhra Pradesh (17th), West Bengal (16th), Kerala (15th).
- Expanding Coverage
- Includes North-Eastern and Himalayan states considering structural constraints.
- Arunachal Pradesh leads among these states.
- Fiscal Trends
- Shift toward capital expenditure and social sector spending.
- State finances account for ~1/3rd of India’s public debt → critical for macro stability.
Relevant Prelims Points:
- Fiscal Health Index (FHI):
- Composite index by NITI Aayog.
- Evaluates state-level fiscal performance.
- FRBM Act (2003):
- Aims to ensure fiscal discipline.
- Sets limits on fiscal deficit and debt.
- Fiscal Deficit:
- Gap between government expenditure and revenue.
- Committed Expenditure:
- Includes salaries, pensions, interest payments.
- GSDP (Gross State Domestic Product):
- Measure of state-level economic output.
Relevant Mains Points:
- Importance of State Finances
- States are key drivers of infrastructure, welfare, and development spending.
- Fiscal stress impacts national macroeconomic stability.
- Key Challenges Identified
- High committed expenditure reduces fiscal flexibility.
- Weak own-revenue mobilisation increases dependence on Centre.
- FRBM breaches due to persistent deficits.
- Rising interest burden crowds out development spending.
- Geographic constraints increase costs in hill/NE states.
- Structural Concerns
- Subsidy-heavy policies distort fiscal priorities.
- Informal economy limits tax base expansion.
- Policy Implications
- Need for fiscal discipline and efficient spending.
- Importance of data-driven governance and benchmarking.
- Way Forward
- Broaden tax base and improve GST compliance.
- Rationalize subsidies and committed expenditure.
- Prioritize productive capital expenditure.
- Adopt medium-term fiscal frameworks.
- Enhance transparency and accountability using tools like FHI.
UPSC Relevance:
- GS Paper 3: Indian economy, fiscal federalism, public finance.
- GS Paper 2: Governance, role of NITI Aayog.