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Fiscal Health Index 2025
Context:
The Fiscal Health Index (FHI) initiative, introduced by NITI Aayog, is designed to evaluate and understand the financial stability of Indian states.
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- This index covers eighteen major states, which significantly contribute to the country’s GDP, public expenditure, revenue generation, and overall fiscal discipline.
- Odisha emerges as the frontrunner in the latest index, followed by Chhattisgarh, Goa, Jharkhand, and Gujarat.
- Given that Indian states account for nearly two-thirds of public spending and one-third of total revenue, their fiscal management plays a crucial role in maintaining national economic stability.
Objectives of the Fiscal Health Index
The FHI aims to:
- Provide a comparative assessment of fiscal health across states using standardised metrics.
- Identify strengths and areas of concern in state fiscal management.
- Promote transparency, accountability, and prudent financial governance.
- Assist policymakers in enhancing fiscal sustainability and resilience.
Key Indicators Evaluated
The Fiscal Health Index 2025 is built upon a comprehensive set of indicators categorised into five broad areas:
- Tax Buoyancy: This measures the responsiveness of tax revenue growth to economic activity, evaluating states’ efficiency in revenue mobilisation.
- Debt-to-GSDP Ratio: This metric compares a state’s total debt with its Gross State Domestic Product (GSDP), reflecting its debt repayment capability.
- Expenditure Management and Prioritisation: Assesses how efficiently states allocate expenditures, particularly in capital outlays and fiscal discipline.
- Debt Management: Examines states’ debt sustainability, including interest payment burdens and overall debt portfolio health.
- Fiscal Deficit Management: Measures fiscal deficit as a percentage of GSDP and adherence to statutory limits.
Key Findings
- Top Performers: Odisha leads the Fiscal Health Index with a score of 67.8, excelling in Debt Index (99.0) and Debt Sustainability (64.0). Its fiscal prudence is reflected in a low fiscal deficit and a robust capital outlay to GSDP ratio.
- Chhattisgarh (55.2) and Goa (53.6) rank second and third, excelling in debt sustainability and revenue mobilisation, respectively.
- Strong Non-Tax Revenue States: Odisha, Jharkhand, Goa, and Chhattisgarh have effectively leveraged non-tax revenue sources, averaging 21% of total revenue.
- Odisha benefits from mining premiums, while Chhattisgarh capitalises on coal block auctions.
- States Facing Fiscal Challenges: Punjab, Andhra Pradesh, West Bengal, and Kerala struggle with high fiscal deficits, poor debt sustainability, and low-quality expenditure.
- Capital Expenditure Allocation: States like Madhya Pradesh, Odisha, Goa, Karnataka, and Uttar Pradesh allocate around 27% of their Developmental Expenditure to Capital Expenditure, whereas West Bengal, Andhra Pradesh, Punjab, and Rajasthan allocate only 10%.
- Debt Sustainability Concerns: West Bengal and Punjab face rising debt-to-GSDP ratios, highlighting the risk of unsustainable debt burdens.
Sustainability of Debt Portfolios
Debt sustainability is critical to a state’s ability to meet financial obligations without requiring external bailouts. The FHI evaluates this by analysing solvency and liquidity indicators:
- Top Performers: Odisha, Chhattisgarh, and Goa lead in Debt Index, Debt Sustainability, and Revenue Mobilisation.
- Debt Index and Interest Payment Ratios: The ratio of Interest Payments to Revenue Receipts (IP/RR) indicates how much of a state’s revenue is allocated for debt servicing.
- Challenges for Aspirational States: Punjab, Andhra Pradesh, West Bengal, and Kerala struggle with high fiscal deficits and mounting debts, threatening their long-term fiscal health.
