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 Context:

Arvind Panagariya, Chairman of the 16th Finance Commission, has launched the Fiscal Health Index 2025.

About the Fiscal Health Index (FHI)

It is a comprehensive framework developed by NITI Aayog to assess the fiscal performance of states. It evaluates the fiscal health of 18 major states based on five key sub-indices:

• Quality of Expenditure: It measures the efficiency and focus of government spending.
• Revenue Mobilization: It assesses the capacity to generate tax and non-tax revenues.
• Fiscal Prudence: It evaluates the management of fiscal deficits.
• Debt Index: It examines debt levels relative to revenue.
• Debt Sustainability: It determines the ability to maintain debt levels without fiscal stress.

Data for the Index was sourced from the Comptroller and Auditor General (CAG) to ensure a comprehensive analysis of fiscal trends from 2014-15 to 2021-22.

State Performance in the index

Odisha ranked as the top performers in the Fiscal Health Index 2025 with an overall index score of 67.8. The state showed strong fiscal management, revenue generation, and sustainable debt practices, securing high scores in debt sustainability, revenue mobilization, and capital expenditure.

States categorized as 'Achievers'  

Odisha, Chhattisgarh, Goa, Jharkhand, and Karnataka led the rankings due to:

• Higher Capital Outlay: Up to 4% of Gross State Domestic Product (GSDP).
• Revenue Surplus: A result of effective non-tax revenue mobilization.
• Low Interest Payments: Constituting less than 7% of revenue receipts.
• Debt Management: Achieving sustainable debt-to-GSDP ratios and maintaining low fiscal deficits.

Odisha ranked top in the Debt Index (99.0) and Debt Sustainability (64.0), along with an above-average capital outlay-to-GSDP ratio.

States categorized as "Front-Runners and Performers"

States like Maharashtra, Uttar Pradesh, Telangana, Madhya Pradesh, and Karnataka were categorized as ‘Front-Runners’, showcasing:

• High developmental expenditure (up to 73% of total expenditure).
• Consistent growth in own tax revenue.
• Improved fiscal management and debt sustainability with an average debt-to-GSDP ratio of 24%.

Tamil Nadu, Bihar, Rajasthan, and Haryana were listed as ‘Performers’, demonstrating moderate fiscal stability and scope for improvement.

Aspirational States

Punjab, Kerala, West Bengal, and Andhra Pradesh were flagged for fiscal vulnerabilities:

• High fiscal deficits and growing debt burdens.
• Challenges in revenue mobilization and expenditure quality.
• Weak debt sustainability, which creates risks to long-term fiscal health.

Recommendations for the states to improve financial health

States should focus on revenue diversification by utilizing non-tax sources, such as fees, charges, and public-private partnerships, alongside improving tax compliance to reduce dependency on a single revenue source and strengthen financial stability.

Prioritize investments in infrastructure, health, and education to boost long-term economic growth and improve the quality of life for citizens, ensuring sustainable development.

Manage debt effectively by adopting a comprehensive debt sustainability framework to evaluate, manage, and reduce fiscal stress while ensuring long-term sustainable fiscal health.

States should improve reporting mechanisms and strictly follow fiscal responsibility standards so that citizens can stay informed and participate in decision-making and implementation.

Way Forward

The FHI provides a systematic framework for policymakers to evaluate fiscal performance and identify areas for improvement. It highlights best practices in fiscal management, which allow underperforming states to learn from top performers like Odisha and Chhattisgarh. By focusing on fiscal discipline, revenue mobilization, and debt sustainability, states can adopt targeted strategies to strengthen their financial health and contribute to the goals of Atmanirbhar Bharat and Viksit Bharat @2047.

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Source: 

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