Fiscal Health in India: Analysis and Insights

The assessment of fiscal performance in India typically focuses on tax policy and the deficits and debt of the Union government. However, the recent NITI Aayog report on the Fiscal Health Index (FHI) shifts attention to the financial health of Indian states, which is crucial given their significant role in providing social and economic services.

Key Components of the Fiscal Health Index (FHI)

• The FHI evaluates the fiscal health of 18 major states using data from the Comptroller and Auditor General (CAG).
• It combines five sub-indices, each assigned equal weight:
   
  • Quality of Expenditure: Measured by the share of development expenditure in total expenditure and the share of capital expenditure in Gross State Domestic Product (GSDP). 
  • Revenue Mobilisation: Assessed by the share of states’ own revenue to GSDP and to total expenditure. 
  • Fiscal Prudence: Evaluated through the fiscal and revenue deficit ratios to GSDP. 
  • Debt Index: Calculated using the ratio of interest payments to revenue receipts and outstanding liabilities to GSDP. 
  • Debt Sustainability: Measured by the difference between the growth rate of nominal GSDP and the growth rate of interest payments.

Challenges and Limitations

• There is no indicator for the volume of services provided, which is essential for assessing public service adequacy.
• Conceptual and measurement issues exist, requiring refinement for policy application.

Broader Implications and Recommendations

Understanding the fiscal health of states is vital for effective fiscal policy calibration. However, there needs to be clarity on what is measured and data accuracy to ensure reliability.

• The report highlights discrepancies with the data on GSDP, emphasizing the need for standardized data from the Ministry of Statistics and Programme Implementation.
• Adjustments are required in Budget data to accurately reflect the economic and functional revenue and expenditure positions.

Case Examples

• States like Odisha, Chhattisgarh, and Jharkhand rank high on fiscal indices but struggle with adequate staffing and resources in essential services like education and healthcare.
• Issues with public enterprises operated by states, such as Punjab Roadways, where budget figures are overstated.