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Review: NITI Aayog’s Fiscal Health Index Highlights Wide Disparities Among States in Fiscal Management

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A Fiscal Health Index (FHI) has been developed by NITI Aayog to evaluate state finances, providing policymakers with insights into the fiscal condition of states. By assessing financial performance, the index aims to encourage sound fiscal management practices and greater accountability. The index highlights wide disparities among states in fiscal management. Here is a review.

Indian states play a crucial role in the country’s fiscal landscape, accounting for a significant share of government spending while generating a portion of overall revenues. Given their financial responsibilities, the economic stability of states directly influences macroeconomic conditions, business growth, and public service efficiency. However, concerns such as widening fiscal deficits, uneven spending patterns, and hidden liabilities underscore the need for stronger fiscal oversight and transparency. To address these challenges, a Fiscal Health Index (FHI) has been developed by NITI Aayog to evaluate state finances, providing policymakers with insights into the fiscal condition of states. By assessing financial performance, the index aims to encourage sound fiscal management practices and greater accountability.

In this analysis, we look at the methodology behind the FHI, its key findings, and what they reveal about the financial health of Indian states.

Fiscal Health Index

Several studies have examined the fiscal health of Indian states. Notable among them is the Confederation of Indian Industry’s 2019 report, which introduced a Fiscal Performance Index with six key sub-indices, including revenue and capital expenditure quality, fiscal prudence, and debt. Similarly, the Arun Jaitley National Institute of Financial Management (AJNIFM) developed a weighted index analysing state finances over a decade, categorizing states as major or vulnerable based on 23 parameters across six broad areas. Building on these and similar studies, the current Fiscal Health Index (FHI) has been developed.

Methodology

The composite Fiscal Health Index (FHI) is calculated using five key sub-indices listed below.

  • Quality of Expenditure
  • Revenue Mobilization
  • Fiscal Prudence
  • Debt Index
  • Debt Sustainability.

Additionally, nine minor sub-indices capture specific fiscal metrics and are categorized as either an Improvement Index or a Deprivation Index. This index is based on data from the Comptroller and Auditor General of India (CAG).

The Improvement Index rewards higher values, covering Quality of Expenditure, Revenue Mobilization, and Debt Sustainability. In contrast, the Deprivation Index rewards lower values and includes Fiscal Prudence and the Debt Index. Each major sub-index is derived from the arithmetic mean of its corresponding minor sub-indices, and the final FHI score is obtained by averaging the five major sub-indices.

Key findings

The report analyses Fiscal Health Index (FHI) scores across three time periods: 2022-23, 2014-15 to 2018-19, and 2014-15 to 2021-22. For 2022-23, Odisha has the best fiscal health with a top score of 67.8. It ranks highest in managing debt (99.0) and keeping debt levels sustainable (64.0), while also performing well in spending quality and revenue collection. Chhattisgarh (55.2) and Goa (53.6) follow closely, with Chhattisgarh doing well in debt management and Goa excelling in revenue collection.

Goa, Telangana, and Odisha are strong in collecting revenue and managing finances wisely. On the other hand, Punjab, Andhra Pradesh, West Bengal, and Kerala face major financial problems. Kerala and Punjab struggle with poor spending quality and high debt, West Bengal has issues with revenue collection and debt levels, and Andhra Pradesh has high fiscal deficits. Haryana also has a weak debt situation.

States with good scores in debt management are less likely to face financial risks. However, West Bengal and Punjab have rising debt burdens and increasing debt-to-GSDP ratios, raising concerns about their financial stability in the long run.

Only three states see decline in fiscal health: Karnataka, Bihar, and Andhra Pradesh

Comparing rankings from 2014-15 to 2021-22 and 2022-23, Odisha, Chhattisgarh, Goa, and Gujarat have consistently ranked among the top states in fiscal health. Jharkhand saw the most improvement, moving from rank 10 to rank 4, followed by gains in Chhattisgarh, Odisha, Goa, and Gujarat. Goa, Telangana, and Maharashtra have maintained strong revenue collection, benefiting from efficient tax systems and balanced spending.

On the other hand, Haryana, Kerala, West Bengal, and Punjab remained in the bottom five, struggling with high debt, large interest payments, weak revenue growth, and inefficient capital spending. These states continue to rely heavily on non-tax revenue.

Only Bihar, Andhra Pradesh, and Karnataka saw a decline in scores. Karnataka’s drop was minor (0.2 points) but led to a sharp fall in rank from 3rd to 10th place.

Y-o-Y trend in the FHI rankings

The report emphasizes that successful fiscal health depends on strong revenue mobilization, effective spending management, and prudent fiscal practices. The top five performing states are Odisha, Chhattisgarh, Goa, Jharkhand, and Gujarat, while the aspirational states—facing significant challenges—are Haryana, Kerala, West Bengal, Andhra Pradesh, and Punjab.

However, the performance of a state also varies across different financial categories, reflecting both progress and persistent issues. To ensure stability, states need to prioritize fiscal responsibility and transparency.

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