Description

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Picture Courtesy: PIB

Context

NITI Aayog has released the second edition of the Fiscal Health Index (FHI) 2026, which evaluates and benchmarks the fiscal performance of states based on data from FY 2014-15 to FY 2023-24.

What is the Fiscal Health Index?

Purpose: To assess and compare the fiscal performance of states using a standardized framework.
Data Source: The index relies on data verified by the Comptroller and Auditor General (CAG), ensuring high accuracy.
Five Key Pillars: States are evaluated across the following five parameters:

Quality of Expenditure
Revenue Mobilisation
Fiscal Prudence
Debt Index
Debt Sustainability

Scope Expansion: For the first time, the 2026 edition includes a separate ranking for 10 North-Eastern and Himalayan states to address their unique fiscal challenges.

Key Highlights of the FHI 2026 Report

The report classifies states into four categories: Achievers, Front-Runners, Performers, and Aspirational, to rank fiscal management across India.

Ranking of 18 Major States
Category	States	Key Characteristics
Achievers (Top Performers)	Odisha, Goa, Jharkhand	Strong fiscal discipline; own-tax revenue shares above 60%, capital outlay of 4–5% of GSDP, fiscal deficits below 3% of GSDP, debt levels under 25% of GSDP.
Front-Runners	Gujarat, Maharashtra, Chhattisgarh, Telangana, Uttar Pradesh, Karnataka	Maintain sound finances but lag the top tier on certain indicators.
Performers	Madhya Pradesh, Haryana, Bihar, Tamil Nadu, Rajasthan	Show mixed results. Bihar has shown improvement while Karnataka and Tamil Nadu have slipped in rankings.
Aspirational (Bottom Performers)	West Bengal, Kerala, Andhra Pradesh, Punjab	High debt-to-GSDP ratios (35-45%); Committed expenditure (salaries, pensions, interest) consumes 50-60% of revenue receipts; Interest payments exceed 15-20% of revenues, constraining development spending.

Ranking of North-Eastern & Himalayan States

Achievers: Arunachal Pradesh and Uttarakhand.

Aspirational: Himachal Pradesh, Manipur, and Nagaland. These states struggle with weak revenue bases and high debt levels of around 40-50% of GSDP.

What are the causes of poor fiscal health in states?

Revenue Mobilisation Challenges

Many states have low own-tax revenue generation and depend heavily on central transfers, making them vulnerable to fund fluctuations.

Unsustainable Expenditure

A major problem is rising "committed expenditure" (salaries, pensions, interest payments), often worsened by populist spending on non-merit subsidies and freebies, which crowds out essential capital spending.

Lack of Transparency

The practice of off-budget borrowings by some states hides their true liabilities, undermining transparent fiscal management. The 16th Finance Commission has recommended discontinuing this practice.

Case Studies: Odisha vs Punjab

Odisha (Positive Case Study): Odisha enacted its FRBM Act in 2005 and, through disciplined spending and improved revenue, transformed from a fiscally stressed state into a model of fiscal prudence with a consistent revenue surplus and reduced debt.

Punjab (Negative Case Study): Punjab's severe fiscal challenges, stemming from power subsidies, pension costs, and high interest payments, are limiting developmental investment, with debt about ₹4.17 lakh crore in March 2026.

Way Forward to Strengthen State Finances

Boost Revenue Mobilisation

Broaden the GST base, improve tax compliance, and strengthen the collection of own-tax revenues like property and motor vehicle taxes.

Rationalise Expenditure

Control committed expenditure and reduce non-essential subsidies, especially unconditional cash transfers.

Enhance Spending Effectiveness

Prioritize capital expenditure to create long-term assets. The Centre's scheme for Special Assistance to States for Capital Investment (50-year interest-free loans) is a key enabler.

Improve Fiscal Frameworks

Strictly adhere to FRBM targets. The N.K. Singh Committee recommended a combined debt-to-GDP ratio of 60% (40% for the Centre, 20% for states) and a fiscal deficit target of 3% for states.

Strengthen Transparency

Eliminate off-budget borrowings and ensure all financial data is audited by the CAG for greater credibility.

Conclusion

The Fiscal Health Index is a key diagnostic tool for states, driving reforms essential for India's macroeconomic stability and achieving "Viksit Bharat @2047." It promotes fiscal discipline, boosts revenue, prioritizes productive spending, narrows regional gaps, and strengthens cooperative federalism.

Source: PIB

Attempt Daily Quiz

PRACTICE QUESTION

Q. With reference to the Fiscal Health Index (FHI), recently in the news, consider the following statements:

1. It is published annually by the Department of Economic Affairs, Ministry of Finance.

2. The index ranks states based on five pillars.

3. The index exclusively uses data provided by the Reserve Bank of India (RBI) State Finances Report.

How many of the statements given above are correct?

(a) Only one

(b) Only two

(d) None

Answer: a

Explanation:

Statement 1 is incorrect: The Fiscal Health Index is published by NITI Aayog, not the Department of Economic Affairs or the Ministry of Finance. It was launched to provide a data-driven framework to evaluate the fiscal performance of states.

Statement 2 is correct: The index evaluates states based on five key sub-indices (pillars): Quality of Expenditure, Revenue Mobilisation, Fiscal Prudence, Debt Index, and Debt Sustainability.

Statement 3 is incorrect: The index primarily uses data sourced from the Comptroller and Auditor General of India (CAG), rather than exclusively relying on the RBI State Finances Report.

Frequently Asked Questions (FAQs)

The Fiscal Health Index is a tool developed by NITI Aayog to assess and compare the fiscal performance of Indian states. It uses CAG-verified data to evaluate states on five key pillars: Quality of Expenditure, Revenue Mobilisation, Fiscal Prudence, Debt Index, and Debt Sustainability.

Among the 18 major states, Odisha, Goa, and Jharkhand are ranked as 'Achievers' (top performers). Among the North-Eastern and Himalayan states, Arunachal Pradesh and Uttarakhand are the 'Achievers'.

The primary causes include low own-tax revenue generation, high dependency on central transfers, ballooning 'committed expenditure' (salaries, pensions, interest), populist spending on non-merit subsidies, and a lack of transparency through off-budget borrowings.