Source: PIB
Subject: Economics
Context: NITI Aayog released the second annual edition of the Fiscal Health Index (FHI) 2026, which evaluates the fiscal performance of Indian states for FY 2023–24.
About Fiscal Health Index 2026:
What it is?
- The Fiscal Health Index is a comprehensive framework designed by NITI Aayog to evaluate and compare the fiscal soundness of Indian states. It moves beyond simple deficit indicators to provide a structured assessment of fiscal strengths and vulnerabilities across states.
About the Report
- Published By: NITI Aayog, Government of India.
- Criteria Used: The index is built on five core pillars:
- Quality of Expenditure: Focuses on developmental and capital spending versus committed outlays.
- Revenue Mobilisation: Measures the capacity to generate internal tax and non-tax revenues.
- Fiscal Prudence: Assesses deficit management and adherence to FRBM norms.
- Debt Index: Evaluates the size and burden of outstanding liabilities.
- Debt Sustainability: Analyzes the long-term ability to service debt without fiscal stress.
- Ranking (State-wise for 2023-24):
Top Performers
- Odisha – Rank 1 (Score: 73.1)
- Goa – Rank 2 (Score: 54.7)
- Jharkhand – Rank 3 (Score: 50.5)
- Gujarat – Rank 4
- Maharashtra – Rank 5
Bottom Performing States
- Punjab – Rank 18
- Andhra Pradesh – Rank 17
- West Bengal – Rank 16
- Kerala – Rank 15
Summary of the Report:
- Expanding Coverage: This edition expanded its scope to include 10 North-Eastern and Himalayan States, recognizing their unique structural and geographic fiscal constraints.
- Top Performers: Odisha maintained its leadership due to stable revenues and controlled deficits, while Arunachal Pradesh led the NE/Himalayan category with high expenditure quality.
- Persistent Stress: States like Punjab, Kerala, and West Bengal continue to face fiscal stress due to rising debt, high deficits, and low revenue growth.
- Expenditure Shifts: Recent years have seen a greater emphasis on capital expenditure and social sector spending across several states.
- Macro-Fiscal Linkage: State finances now account for roughly one-third of India’s general government debt, making their fiscal health critical for national macroeconomic stability.
Challenges Associated:
- High Committed Expenditure: Fixed costs like salaries and pensions limit funds for development.
Example: In Punjab, committed expenditure reached 80% of revenue receipts in 2023-24, severely restricting discretionary spending.
- Weak Own-Revenue Mobilization: Many states rely heavily on central transfers rather than internal taxes.
Example: In Bihar, the state’s own revenue contributes less than one-third of total receipts, leaving it vulnerable to transfer volatility.
- Breaching Fiscal Deficit Targets: Persistent spending beyond income leads to non-compliance with FRBM norms.
Example: Andhra Pradesh‘s fiscal deficit reached 4.35% of GSDP in 2023-24, exceeding the prescribed 4% ceiling.
- Rising Interest Burdens: Increasing debt leads to higher interest payments that consume revenue.
Example: West Bengal consistently spends more than 20% of its revenue receipts on servicing debt.
- Structural Geographic Constraints: Difficult terrain increases service delivery costs for specific regions.
Example: Himachal Pradesh faces structural stress due to the high cost of maintaining infrastructure in mountainous regions combined with rising pension liabilities.
Way Ahead:
- Broaden Tax Bases: States must enhance own-tax capacity and broaden the GST base to increase fiscal self-reliance.
- Rationalize Expenditures: Curbing committed spending and rationalizing subsidies (especially in sectors like power) is essential to restore fiscal flexibility.
- Improve Capital Outlay Quality: Prioritize high-quality capital spending that creates assets and promotes long-term growth.
- Adopt Medium-Term Fiscal Plans: Implement structured, multi-year fiscal frameworks to stabilize debt trajectories and contain deficits.
- Enhance Transparency: Use CAG-verified data and peer benchmarking tools like the FHI to support data-driven and transparent decision-making.
Conclusion:
The Fiscal Health Index 2026 underscores that the financial resilience of states is indispensable for India’s long-term growth and macroeconomic stability. While some states have shown exemplary discipline, others face deep-rooted structural challenges that require targeted reforms. Strengthening fiscal governance at the state level is a vital pillar for achieving the national vision of Viksit Bharat @2047.
