Context

• The 16th Finance Commission Chairman, Dr. Arvind Panagariya, unveiled the inaugural issue of NITI Aayog's “Fiscal Health Index (FHI) 2025.” This index evaluates the fiscal performance of 18 major Indian states, offering a systematic framework to analyze their financial health and highlight key areas for improvement. The FHI underscores the importance of fiscal transparency, efficient revenue mobilization, and sustainable public financial management.

Understanding the Fiscal Health Index

• The FHI assesses states across five sub-indices, providing comprehensive insights into fiscal health:

1. Quality of Expenditure

2. Revenue Mobilization

3. Fiscal Prudence

4. Debt Index

5. Debt Sustainability

These metrics aid policymakers in identifying inefficiencies and fostering fiscal best practices nationwide.

Key Highlights from FHI 2025 (2022-23 FY)

1. Top Performers:

• Odisha: Scored 67.8, leading in debt index and sustainability due to low fiscal deficits and effective debt management.
• Chhattisgarh: Ranked second, benefiting from mining revenues and fiscal prudence.
• Goa: Ranked third, excelling in revenue mobilization through high tax efficiency.

2. Aspirational States:

• Punjab, Kerala, and West Bengal face challenges in debt sustainability and revenue mobilization, emphasizing fiscal reforms.

Sub-Index Insights

Challenges and Recommendations

1. Revenue Diversification: States must broaden revenue sources by improving tax compliance and leveraging non-tax revenue from industrial and mining activities.
2. Capital Expenditure Focus: Investments in infrastructure, education, and health are crucial for fostering long-term growth.
3. Debt Management: A debt sustainability framework must be adopted to alleviate fiscal stress in states like Punjab and West Bengal.
4. Transparency: States should adhere to fiscal responsibility norms, improving reporting mechanisms to enhance accountability.

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