Fiscal Health Index (FHI) 2025

Fiscal Health Index (FHI) 2025

NITI Aayog launched the Fiscal Health Index (FHI) 2025, an initiative designed to evaluate the fiscal health of 18 major Indian states for the year 2022-23. The index aims to provide comprehensive, data-driven insights that will guide policymakers in formulating reforms to ensure sustainable economic growth, fiscal consolidation, and better resource management at the state level. It also encourages healthy competition among states to align their fiscal strategies with national economic objectives.

Key Features of FHI 2025:

1. Quality of Expenditure:
   • Assesses the proportion of spending on long-term developmental projects versus routine operational expenses.
   • It also evaluates capital investments as a share of the state’s economic output, with the goal of ensuring that spending is directed toward growth.
2. Revenue Mobilization:
   • Reflects the state’s capacity to generate its own revenue and independently cover its expenditures.
   • A key metric, it helps identify fiscal resilience and the ability to reduce reliance on external funding.
3. Fiscal Prudence:
   • Measures fiscal and revenue deficits as well as borrowing levels in relation to the state's economic output.
   • Ensures that states do not borrow excessively, signaling poor fiscal health.
4. Debt Index:
   • Examines the state's debt burden, considering interest payments and liabilities in relation to the state’s economic size.
   • It highlights the sustainability of a state’s debt position.
5. Debt Sustainability:
   • Compares the state’s Gross State Domestic Product (GSDP) growth to its interest payments on debt.
   • A positive difference indicates that the state can sustain its debt over time, while a negative gap suggests vulnerability.

Key Findings of FHI 2025:

1. Top Performers:
   • Odisha leads with the highest overall FHI score of 67.8, followed by Chhattisgarh (55.2), Goa (53.6), Jharkhand (51.6), and Gujarat (50.5).
   • These states show strengths in debt management, revenue mobilization, and fiscal prudence.
2. Revenue Mobilization:
   • Goa, Telangana, and Odisha lead in revenue generation and fiscal prudence.
   • States like Odisha, Jharkhand, Goa, and Chhattisgarh excel in non-tax revenue, with Odisha benefiting heavily from mining-linked premiums and Chhattisgarh from coal block auctions.
3. Aspirational States:
   • States like Punjab, West Bengal, Andhra Pradesh, and Kerala are facing significant fiscal challenges.
   • Punjab and Kerala struggle with Debt Sustainability and Quality of Expenditure, while Andhra Pradesh faces high Fiscal Deficits.
4. Capital Expenditure:
   • Madhya Pradesh, Odisha, Goa, Karnataka, and Uttar Pradesh allocate around 27% of their budgets to capital expenditure, focusing on long-term investments that contribute to sustainable growth.
   • In contrast, West Bengal, Andhra Pradesh, Punjab, and Rajasthan allocate only 10% to capital expenditure, which negatively impacts long-term economic growth.
5. Debt Management:
   • States like Odisha and Goa manage their debt well, with low default risk and more sustainable debt trajectories.
   • However, states like West Bengal and Punjab are facing rising debt burdens, indicating potential risks to their fiscal sustainability.

Key Takeaways
The FHI 2025 serves as a comprehensive assessment tool for policymakers, highlighting fiscal strengths and areas requiring reform across Indian states. It aims to guide fiscal management strategies, promote healthy competition, and foster long-term economic growth while ensuring efficient resource allocation and better governance.

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