On January 24, 2025, Niti Aayog released the first edition of the “Fiscal Health Index (FHI) 2025.” The report presents a detailed analysis of the fiscal health of 18 major states, assessing their performance based on five key sub-indices: Quality of Expenditure, Revenue Mobilisation, Fiscal Prudence, Debt Index, and Debt Sustainability.
It also provides insights into the unique financial challenges faced by each state and suggests areas that need improvement.
Importance Of State Finances
Fiscal Well-being
- The financial health of states is crucial for long-term fiscal stability and economic growth.
Public Spending and Revenue
- States contribute two-thirds of public expenditure and generate one-third of total revenue.
Development Responsibilities
- The Indian Constitution assigns states major roles in infrastructure and development, making their fiscal performance vital.
Impact on National Stability
- Differences in fiscal performance between states and the central government influence the country’s overall fiscal stability.
Mixed Fiscal Landscape
- Some states show progress, while others face challenges, making it important to monitor financial conditions.
Monitoring Need
- Tracking state finances helps maintain financial stability, support sustainable growth, and ensure effective governance.
Resource Allocation
- Evaluating fiscal health ensures proper distribution of funds to key sectors like healthcare, education, and infrastructure.
Role Of The Fiscal Health Index (FHI)
Support for Policymakers
- FHI helps policymakers understand state fiscal conditions and identify areas needing intervention.
Policy Formulation
- The index aids in designing fiscal policies and reforms for better financial management.
Encouraging Fiscal Discipline
- By assessing state performance, FHI promotes responsible financial practices.
National Economic Goals
- Improved fiscal management at the state level strengthens economic resilience and supports equitable development.
Five Major Sub-Indices Of The Fiscal Health Index
The data for calculating the Fiscal Health Index comes from the Comptroller and Auditor General (CAG). Budgetary transactions of all states for the financial year 2022-23 are used for analysis.
The Fiscal Health Index is formed by aggregating five key sub-indices.
1. Quality of Expenditure
- Developmental Expenditure: Government spending aimed at long-term economic growth, such as building schools, hospitals, and infrastructure.
- Non-Developmental Expenditure: Routine government expenses like salaries and operational costs.
- Total Developmental Expenditure/Total Expenditure: Measures the share of total spending allocated to development projects, reflecting budget priorities.
- Total Capital Outlay/GSDP: Assesses how much of the state’s economic output is used for infrastructure and long-term investments.
2. Revenue Mobilisation
- State Own Revenue/GSDP: Indicates a state’s ability to generate revenue without relying on central transfers, reflecting financial sustainability.
- State Own Revenue/Total Expenditure: Shows how much of the state’s spending is covered by its own revenue, indicating fiscal independence.
3. Fiscal Prudence
- Fiscal Deficit: Occurs when government expenditure exceeds revenue, requiring borrowing.
- Revenue Deficit: Happens when revenue income is insufficient to meet operational expenses, leading to additional borrowing.
- Gross Fiscal Deficit/GSDP: A high ratio suggests heavy borrowing relative to economic size, raising concerns about debt sustainability.
- Revenue Deficit/GSDP: A high ratio signals that the state lacks sufficient revenue to cover operational expenses and depends on deficit financing.
4. Debt Index
- Interest Payments/Revenue Receipts: Shows the percentage of revenue used for interest payments on outstanding debt. A high ratio indicates financial strain.
- Outstanding Liabilities/GSDP: Measures the state’s debt burden in relation to its economic output. A high ratio signals excessive indebtedness.
5. Debt Sustainability
- Growth Rate of GSDP – Growth Rate of Interest Payments: A positive gap suggests manageable debt levels, while a negative gap signals financial distress.
Findings Of The Fiscal Health Index
Top Performing States
- Odisha: Ranked highest in fiscal health with an index score of 67.8. It leads in the Debt Index (99.0) and Debt Sustainability (64.0) while performing well in Quality of Expenditure and Revenue Mobilization. The state maintains low fiscal deficits, a stable debt profile, and a strong Capital Outlay/GSDP ratio.
- Chhattisgarh & Goa: Ranked second and third with scores of 55.2 and 53.6, respectively. Chhattisgarh excels in the Debt Index, while Goa performs well in Revenue Mobilization. Both states effectively balance expenditure and revenue, ensuring Fiscal Prudence.
- Leaders in Revenue Mobilization & Fiscal Prudence: Goa, Telangana, and Odisha perform the best in these areas.
Revenue Mobilization Insights
- Effective Non-Tax Revenue Mobilization: Odisha, Jharkhand, Goa, and Chhattisgarh have effectively mobilized non-tax revenue, averaging 21% of Total Revenue. Odisha benefits from mining-linked premiums, while Chhattisgarh gains from coal block auctions.
- Low Revenue Mobilization: Punjab and West Bengal perform poorly in this area, showing disparities in states’ revenue-generating capabilities and fiscal policy effectiveness.
States Facing Fiscal Challenges
- Aspirational States: Punjab, Andhra Pradesh, West Bengal, and Kerala face major fiscal difficulties.
- Kerala & Punjab: Struggle with low Quality of Expenditure and Debt Sustainability.
- West Bengal: Has issues with Revenue Mobilization and the Debt Index.
- Andhra Pradesh: Suffers from high Fiscal Deficits.
- Haryana: Faces challenges due to a poor debt profile.
- Debt Concerns: West Bengal and Punjab experience rising debt-to-GSDP ratios, raising concerns about their ability to sustain debt levels.
Capital Expenditure Trends
- Higher Capital Expenditure (27% of Developmental Expenditure): Madhya Pradesh, Odisha, Goa, Karnataka, and Uttar Pradesh allocate a higher share of spending towards long-term investments.
- Lower Capital Expenditure (10% of Developmental Expenditure): West Bengal, Andhra Pradesh, Punjab, and Rajasthan invest less in capital projects, affecting long-term economic growth.
- Fluctuations in Capital Expenditure: Madhya Pradesh and Karnataka show inconsistent trends in long-term investment.
Debt Index and Debt Sustainability
- Top States in Debt Management: States ranking high in Debt Index and Debt Sustainability show strong fiscal management and low risk of default.
- States with Growing Debt Burden: West Bengal and Punjab have increasing debt-to-GSDP ratios, raising concerns about sustainability.
State-wise Performance Over Time
- Consistently Strong Performers: Odisha, Chhattisgarh, Goa, and Gujarat have maintained strong fiscal health across all periods.
- Improving States: Jharkhand has significantly improved, ranking 4th in 2022-23, up from 10th in 2015-19 to 2021-22, driven by better Revenue Mobilization, Fiscal Prudence, and Debt Sustainability.
- Declining Performance: Karnataka dropped from 3rd place (2014-15 to 2021-22) to 10th in 2022-23, mainly due to weaker Quality of Expenditure and Debt Sustainability.
- Strong Revenue Mobilization: Goa, Telangana, and Maharashtra have consistently demonstrated strong tax collection and resource mobilization.
- States Facing Persistent Fiscal Challenges: Punjab, Kerala, and West Bengal have struggled for the past nine years, dealing with high debt, large interest payments, weak revenue generation, and inefficient capital expenditure. Their reliance on non-tax revenue has negatively impacted their rankings.
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