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.
It asks 2 things — 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 (January 2025) scores 18 major States on five sub-indices; Odisha topped it with 67.8, ahead of Chhattisgarh and Goa, at a time when States' outstanding liabilities (28.5% of GDP, end-March 2024) still exceed the pre-pandemic level.
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, the FHI can anchor the RBI's call for a transparent, time-bound glide path for debt consolidation at the tier of government that spends most of India's public money, making State fiscal prudence a shared pillar of Viksit Bharat @2047.
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”
- FHI 2025: Odisha topped with 67.8, followed by Chhattisgarh (55.2) and Goa (53.6).PIB, NITI Aayog — NITI Aayog launches the Fiscal Health Index 2025 (24 January 2025) ↗“With a cumulative score of 67.8, Odisha tops the ranking in fiscal health among 18 major States, followed by Chhattisgarh and Goa with scores of 55.2 and 53.6, respectively.”
- FHI 2026 (second edition): North-Eastern and Himalayan States ranked separately; most of the 18 major States recorded moderated scores in 2023-24.PIB, NITI Aayog — NITI Aayog launches second annual edition of the Fiscal Health Index (2026) ↗“To account for structural differences across regions, the Northeastern and Himalayan states have been evaluated and ranked separately from the major states. The analysis reveals significant variation in fiscal outcomes across states. Among the 18 major States, most recorded moderated FHI scores in 2023-24 compared to the previous year, reflecting evolving fiscal pressures.”
- RBI State Finances 2024-25: States' outstanding liabilities fell from 31.0% of GDP (end-March 2021) to 28.5% (end-March 2024), still above the pre-pandemic 25.3% (end-March 2019).RBI press release, State Finances: A Study of Budgets of 2024-25 (19 December 2024) ↗“States' total outstanding liabilities declined from 31.0 per cent of GDP at end-March 2021 to 28.5 per cent at end-March 2024 but remain above the pre-pandemic level (25.3 per cent at end-March 2019).”
- RBI State Finances 2024-25: States' capital expenditure rose from 2.4% of GDP (2021-22) to 2.8% (2023-24), budgeted at 3.1% in 2024-25.RBI press release, State Finances: A Study of Budgets of 2024-25 (19 December 2024) ↗“The improvement in the quality of expenditure was sustained, with capital expenditure rising from 2.4 per cent of GDP in 2021-22 to 2.8 per cent in 2023-24 and budgeted at 3.1 per cent of GDP in 2024-25.”
- RBI (2024) recommends a risk-based fiscal framework, a medium-term expenditure framework, a time-bound glide path for debt consolidation and disclosure of off-budget borrowings and guarantees.RBI press release, State Finances: A Study of Budgets of 2024-25 (19 December 2024) ↗“State government finances would benefit from the adoption of a risk-based fiscal framework with provisions for counter-cyclical fiscal policy actions; a prudent medium-term expenditure framework; a clear, transparent and time-bound glide path for debt consolidation; and enhanced data dissemination and communication policies, including on reporting of outstanding liabilities, off-budget borrowings and guarantees.”
Question: UPSC's CS (Main) 2025, GS Paper III — paper ↗. Approach: Minimalist IAS, checked 3 Oct 2026 (how we verify) — UPSC publishes no model answers. ·
Model answer· 369words · Minimalist IAS
NITI Aayog's Fiscal Health Index (January 2025) scores 18 major States on five sub-indices; Odisha topped it with 67.8, ahead of Chhattisgarh (55.2) and Goa (53.6). It arrives when States' outstanding liabilities, 28.5% of GDP at end-March 2024, still exceed the pre-pandemic 25.3% (RBI, State Finances 2024-25).
How the FHI assesses the fiscal performance of States
- Five sub-indices: quality of expenditure, revenue mobilisation, fiscal prudence, debt index and debt sustainability, so annual flows and the debt stock are both scored.
- Diagnosis, not just rank: each sub-index exposes a State's weak spot: committed spending on salaries, pensions and interest, low own-tax effort, or debt rising faster than revenue.
- Common yardstick: the Union, the Finance Commission, lenders and citizens read every State the same way; the 2026 edition ranks the North-Eastern and Himalayan States separately for fairness.
- Trend tracking: the second edition found most major States' scores moderating in 2023-24, an early warning that a single budget would not show.
| Sub-index | Healthy sign | Warning sign |
|---|---|---|
| Quality of expenditure | Rising capital outlay (States: 2.8% of GDP, 2023-24) | Subsidies crowding out capex |
| Revenue mobilisation | Growing own-tax share | Dependence on Union transfers |
| Debt sustainability | Debt falling against GSDP | Off-budget borrowing, guarantees |
How it encourages prudent and sustainable fiscal policies
- Competitive federalism: a public ranking creates reputational stakes; rating agencies and bond markets read the signal, which can affect borrowing costs.
- Performance-linked transfers: the Index can inform Finance Commission and Union decisions on incentive grants and extra borrowing space tied to reforms.
- Right choices nudged: capital expenditure over populist transfers, better tax effort, and disclosure of off-budget borrowings and guarantees, which the RBI also urges.
- Teeth for FRLs: State fiscal responsibility legislations set the limits; the FHI shows whether they are honoured in spirit, year after year.
Limits to keep in view
- Design: data lags, uniform weights across very different States, and the structural handicaps of special-category States.
- Not a stick: rankings must not justify pro-cyclical cuts in welfare or capital spending.
Used as a mirror, the FHI can anchor the RBI's call for a transparent, time-bound glide path for debt consolidation at the tier of government that spends most of India's public money, making State fiscal prudence a shared pillar of Viksit Bharat @2047.
Prepared by Minimalist IAS to the answer standard of Shivam Singh (mentor, 7 years) · facts checked against official sources (how we verify) · updated 3 Oct 2026. UPSC publishes no model answers: compare your structure and coverage with this, then write your own.
