Explain how the Fiscal Health Index (FHI) can be used as a tool for assessing the fiscal performance of states in India. In what way would it encourage the states to adopt prudent and sustainable fiscal policies?
Approach · directive: “explain / in what way”
What it asks · Explain how NITI Aayog’s FHI measures State finances and how its rankings can push States towards prudent, sustainable fiscal policy.
The question has 2 parts — answer each
- Explain how the Fiscal Health Index can be used as a tool for assessing the fiscal performance of States
- Explain in what way it would encourage States to adopt prudent and sustainable fiscal policies
Open with · NITI Aayog’s Fiscal Health Index, first released in January 2025, ranks 18 major States on a composite of five sub-indices, turning scattered fiscal data into a comparable scorecard.
Cover
- Design: quality of expenditure, revenue mobilisation, fiscal prudence, debt index and debt sustainability — capturing both annual flows and accumulated debt.
- Diagnosis: shows each State’s weak spot — high committed spending, low own-tax effort, rising debt — so reform can be targeted.
- Benchmarking: the 2025 edition ranked Odisha first (67.8), followed by Chhattisgarh and Goa; a second edition followed in 2026.
- Peer pressure: public rankings build competitive federalism and reputational incentives; lenders and rating agencies read the signal.
- Policy leverage: can inform Finance Commission and Union decisions on performance-linked grants and extra borrowing limits tied to reforms.
- Nudges: capital expenditure over populist transfers, better tax and non-tax collection, disclosure of off-budget borrowings and contingent liabilities.
- Limits: data lags, uniform weights, special-category constraints and dependence on Union transfers; it must not become a tool to squeeze welfare.
Close with · Used as a mirror rather than a stick, the FHI can institutionalise fiscal responsibility at the level of government that spends most of India’s public money.
Add value (verified)
- NITI Aayog’s FHI 2025 assesses 18 major States on five sub-indices. PIB, NITI Aayog — NITI Aayog launches the Fiscal Health Index 2025 (24 January 2025) ↗“The report provides a comprehensive assessment of the fiscal health of 18 major States, based on five key sub-indices: Quality of Expenditure, Revenue Mobilisation, Fiscal Prudence, Debt Index, and Debt Sustainability”
Question: UPSC's CS (Main) 2025, GS Paper III — paper ↗. Approach: Minimalist IAS, checked 30 Sept 2026 (how we verify) — UPSC publishes no model answers. ·
Model answer · 286 words (UPSC limit 250) · Minimalist IAS
NITI Aayog's Fiscal Health Index, first released in January 2025, ranks 18 major States on a composite of five sub-indices, turning scattered fiscal data into one comparable scorecard.
FHI as a tool for assessing State finances
- Design: five sub-indices — quality of expenditure, revenue mobilisation, fiscal prudence, debt index and debt sustainability — capture both annual flows and the stock of accumulated debt.
- Diagnosis, not just a score: each sub-index shows a State's weak spot — high committed spending on salaries, pensions and interest, low own-tax effort, or debt growing faster than revenue — so reform can be targeted.
- Benchmarking: the 2025 edition ranked Odisha first (67.8), followed by Chhattisgarh and Goa; a second edition followed in 2026, allowing States to be tracked over time.
- Comparability: a common yardstick lets the Union, the Finance Commission, lenders and citizens read State finances the same way.
How it encourages prudent, sustainable policy
- Peer pressure: public rankings create competitive federalism and a reputational stake; rating agencies and bond markets read the signal, which can affect borrowing costs.
- Policy leverage: it can inform Finance Commission and Union decisions on performance-linked grants and additional borrowing space tied to reforms.
- Nudges the right choices: capital expenditure over populist transfers, better tax and non-tax collection, and disclosure of off-budget borrowings and contingent liabilities such as guarantees.
- Limits: data lags, uniform weights across very different States, special-category constraints and dependence on Union transfers; it must not become a stick to squeeze welfare or an excuse for pro-cyclical cuts.
Used as a mirror rather than a stick, the FHI can institutionalise fiscal responsibility at the level of government that spends most of India's public money — and make sustainable finances a matter of State pride.
Written by Minimalist IAS from facts checked at source (how we verify) — a little fuller than exam length, so every part of the question is covered; in the hall, keep the structure and trim the detail. UPSC publishes no model answers: compare your structure and coverage with this, then write your own.