Why in the News?

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

What’s in Today’s Article?

• Fiscal Health Index (Purpose, Indicators, etc.)
• 2025 Report (Key Highlights, Top Performers, Challenges, Recommendations, etc.)

Understanding the Fiscal Health Index:

• The Fiscal Health Index (FHI), introduced by NITI Aayog, provides a systematic framework to evaluate the fiscal performance of 18 major Indian states.
• This initiative highlights critical aspects of state finances, emphasizing the importance of transparency, revenue mobilization, and sustainable public financial management.
• The FHI assesses states using five sub-indices:
  • Quality of Expenditure,
  • Revenue Mobilization,
  • Fiscal Prudence,
  • Debt Index, and
  • Debt Sustainability
• These metrics offer a comprehensive view of fiscal health, aiding policymakers in identifying areas for improvement and fostering best practices across states.

Key Highlights from the FHI Report 2025 (2022-23 FY):

• Top Performers:
  • Odisha: Ranked first with an FHI score of 67.8, Odisha excelled in Debt Index and Debt Sustainability due to its low fiscal deficit, strong debt management, and effective capital expenditure strategies.
  • Chhattisgarh: Achieved the second rank with strengths in Debt Index and revenue growth from mining activities.
  • Goa: Positioned third, excelling in Revenue Mobilization due to high tax efficiency and non-tax revenue generation.
• Aspirational States:
  • States like Punjab, Kerala, and West Bengal faced challenges in debt sustainability and revenue mobilization, highlighting the need for fiscal reforms.

Sub-Index Insights:

• Quality of Expenditure:
  • States like Madhya Pradesh and Chhattisgarh prioritized social and economic services, allocating substantial portions of their expenditure to health and education.
  • However, states such as Punjab and Rajasthan lagged in capital expenditure, impacting long-term developmental goals.
• Revenue Mobilization:
  • Odisha, Goa, and Chhattisgarh led in revenue mobilization, leveraging non-tax revenues from mining and industrial activities.
  • States like Bihar and West Bengal struggled with low own-tax revenues, relying heavily on central transfers.
• Fiscal Prudence:
  • Odisha and Jharkhand maintained fiscal prudence with lower fiscal deficits, enabling better allocation of resources toward development.
  • States with persistent revenue deficits, such as Kerala and Andhra Pradesh, faced constraints in managing fiscal stability.
• Debt Index:
  • Maharashtra and Gujarat demonstrated robust debt management practices, maintaining low debt-to-GSDP ratios.
  • Conversely, Punjab and Haryana grappled with rising debt burdens and high interest payments.
• Debt Sustainability:
  • Odisha and Chhattisgarh showcased sustainable debt management by ensuring economic growth outpaced interest payment growth.
  • In contrast, states like West Bengal and Punjab exhibited growing fiscal stress due to persistent deficits.

Challenges and Recommendations:

• Revenue Diversification: States need to enhance their revenue base by tapping into non-tax sources and improving tax compliance.
• Capital Expenditure Focus: Prioritizing investments in infrastructure, health, and education is crucial for long-term growth.
• Debt Management: Adopting a comprehensive debt sustainability framework is essential for reducing fiscal stress.
• Transparency: Enhanced reporting mechanisms and adherence to fiscal responsibility norms will bolster accountability and public trust.

Conclusion:

• The Fiscal Health Index serves as a vital tool for benchmarking state performance and identifying areas for fiscal improvement.
• While states like Odisha and Chhattisgarh exemplify strong fiscal discipline, others must adopt targeted strategies to overcome challenges.
• By fostering fiscal prudence, enhancing revenue mobilization, and ensuring debt sustainability, states can contribute to India's economic resilience and inclusive growth.
• Under NITI Aayog’s guidance, the FHI sets the stage for transformative fiscal reforms, ensuring a balanced and sustainable future for the nation.