New Delhi: On 24 January 2025, the inaugural issue of NITI Aayog’s report titled “Fiscal Health Index (FHI) 2025” was launched.
The report provides a comprehensive assessment of the fiscal health of 18 major States. The assessment is based on five key sub-indices: Quality of Expenditure, Revenue Mobilisation, Fiscal Prudence, Debt Index, and Debt Sustainability.
The report also comes with insights into state-specific challenges and areas for improvement.
The Fiscal Health Index (FHI) initiative by NITI Aayog is aimed at evolving an understanding of the fiscal health of states in India.
The FHI analysis covers 18 major states that drive the Indian economy in terms of their contribution to India’s Gross Domestic Product, demography, total public expenditure, revenues, and overall fiscal stability.
As states are responsible for approximately two-thirds of public spending and one- third of total revenue, their fiscal performance is important for the country’s overall economic stability.
The FHI offers a systematic approach to assess a state’s fiscal health, identify areas for improvement, and promote the best practices across states.
The report objectively evaluates each state’s fiscal health through a composite index, facilitating comparisons and benchmarking against best practices.
The composite FHI has been developed using data from the Office of the Comptroller and Auditor General (CAG), focusing on five sub-indices: Quality of Expenditure, Revenue Mobilization, Fiscal Prudence, Debt Index, and Debt Sustainability.
Furthermore, based on the five key sub-indices, a comprehensive state-wise analysis is reported, to bring out state-specific fiscal health issues.
This analysis is supported by graphs that illustrate the trends of major fiscal indicators from the financial year 2014-15 to 2022-23.
The analysis clearly highlights that strong revenue mobilization, effective expenditure management, and prudent fiscal practices are critical determinants of success.
The top five high-performing states are Odisha, Chhattisgarh, Goa, Jharkhand, and Gujarat, while the aspirational five are Haryana, Kerala, West Bengal, Andhra Pradesh, and Punjab.
However, the states’ performance varies across the five subcategories.
For instance, Uttar Pradesh and Bihar have a good score under Quality of Expenditure, but they rank lower with regard to Revenue Mobilization.
According to the report, Karnataka performs well across most indices but it ranks amongst the three aspirational states in Debt Sustainability.
Odisha and Chhattisgarh have performed well under Revenue Mobilization, with their Own Non-Tax Revenue growing significantly due to high revenue collection from mining.
However, regarding Debt Sustainability, Chhattisgarh ranks lower compared to some other states.
What about Karnataka?
The report has done a State-wise analysis based on five-indices. Let us have a look at what it says about Karnataka:
The report says: “Karnataka may focus on reallocating expenditure toward education and health. It may need to focus on increasing the revenues of the state.”
It also observes that: Spending on economic services rose from 36.5% in 2018-19 to 36.8% in 2022-23, while spending on social services dropped from 39.4% to 34.5%.
General services spending increased from 21.4% to 26.6% for the same period. Increase in Capital Expenditure has been mainly towards roads and bridges and power projects, whereas investment in education and health has declined.
It further says: “Of Karnataka’s spending on education (11.6%) and health (4.5%) as a ratio of total expenditure was lower than other major states’ average. High Committed Expenditure (79% of total Revenue Expenditure) limits its fiscal
flexibility. Within the Non-Committed Expenditure, there is an increasing
trend of subsidies, which grew from 9.4% of the total Revenue Expenditure in
2018-19 to 10.6% in 2022-23.”
On revenue mobilization, the report said: “The state’s Own Tax Revenue primarily through GST remains the largest source of Total Revenue Receipts (63% of Revenue Receipts) which indicates that its fiscal position is largely influenced by its own resources.
From 2018-19 to 2022-23, Revenue Receipts grew from ₹1,64,979 crore to ₹2,29,080 crore, with an average annual growth rate of 7%. The revenue buoyancy of the State with respect to GSDP was positive in all the years
except 2020-21, it added.
On the issue of fiscal prudence, the NITI Aayog report states: “In 2022-23, Revenue Surplus was 0.6% indicating the State has achieved the target. Fiscal Deficit was 2.1% as against the limit of 3.5% stated under the Fiscal Responsibility and Budgetary Management (FRBM) Act. 51
In conclusion The report further concludes by saying that only by fostering a culture of fiscal prudence and accountability can states stabilize their economies and elevate the quality of life for their citizens, ensuring a resilient and prosperous future.
High and persistent deficits and varying fiscal performances among states underscore the urgency for reform and targeted interventions. The journey towards fiscal sustainability is complex, but with concerted efforts, it can lead to transformative outcomes that benefit all.
