The Fiscal Health Index (FHI) initiative by NITI Aayog is a comprehensive diagnostic framework designed to benchmark, evaluate, and rank the sub-national public finances of Indian states across critical indicators of revenue mobilization, expenditure quality, deficit levels, and debt sustainability.

Role of the Fiscal Health Index in Assessing States’ Performance

• Evaluating Debt and Deficit Sustainability: Analyzes fiscal deficits, revenue deficits, and debt-to-GSDP ratios to assess whether state borrowings remain within the prudential boundaries defined under State FRBM Acts and Finance Commission recommendations.
• Assessing Quality of Public Expenditure: Evaluates the composition of state spending by measuring the share of capital outlay relative to revenue expenditure. This reveals whether borrowed resources finance growth-enhancing infrastructure or routine consumption.
• Tracking Own Revenue Mobilization: Measures states’ capacity to raise Own Tax Revenue (OTR) and Non-Tax Revenue, assessing their administrative tax efficiency and fiscal independence from central transfers.
• Monitoring Debt Servicing Capacity: Evaluates interest payments relative to total revenue receipts, identifying states approaching debt stress where debt-servicing limits allocations for healthcare and education.
• Transparent Inter-State Benchmarking: Ranks states on a standardized scale, providing comparative clarity and identifying specific structural fiscal weaknesses across general and special category states.

Incentivizing Prudent and Sustainable Fiscal Policies

• Promoting Fiscal Prudence: Comparative rankings create public accountability and political incentives for state governments to curb off-budget borrowings and avoid unsustainable populism.
• Encouraging Productive Capital Spending: States are nudged to shift budget allocations toward capital expenditure to achieve higher index scores, supporting long-term economic growth and asset creation.
• Incentivizing State Tax Reforms: A low revenue score motivates states to rationalize land stamp duties, revise non-tax user fees (water and mining royalties), and modernize GST audit machinery.
• Fostering Competitive and Cooperative Federalism: Encourages states to adopt fiscal best practices demonstrated by leading states in power-sector reforms, fiscal transparency, and expenditure management.
• Aligning Fiscal Policy with Inclusive Development: Emphasizes that long-term funding for targeted social safety nets relies on maintaining manageable interest burdens and disciplined public debt.

The Fiscal Health Index serves as both an assessment metric and a policy driver, encouraging states to combine financial discipline with sustainable development investments.