NITI Aayog Fiscal Health Index: Five Sub-Indices and Flaws
Why in the news
Fiscal analysis in India mostly focuses on Union taxes, deficits and debt, so state finances get less attention. NITI Aayog’s Fiscal Health Index assesses states, but commentators say it needs refinement.
About the index
The FHI is built from five sub-indices with equal weights.
| Sub-index | What it measures |
|---|---|
| Quality of expenditure | Development and capital spending as a share of total spending and GSDP |
| Revenue mobilisation | Own revenue as a share of GSDP and of total expenditure |
| Fiscal prudence | Fiscal and revenue deficit relative to GSDP |
| Debt index | Interest payments to revenue receipts, and outstanding liabilities to GSDP |
| Debt sustainability | Gap between GSDP growth and interest rate; when growth exceeds the rate, the debt-GSDP ratio keeps falling |
Concerns
- No service delivery measure: states mainly provide social and economic services, yet the FHI ignores their volume and quality. Top-ranked Odisha, Chhattisgarh and Jharkhand still lack teachers, health workers and hospital medicines.
- GSDP data: estimates differ by state and are not strictly comparable; MoSPI supplies comparable figures for Finance Commissions but not annually.
- Public accounts transfers are treated as expenditure, needing reverse adjustment for clarity.
- State-run enterprises (transport, electricity, lotteries) inflate both revenue and spending.
- Off-budget liabilities in power distribution and infrastructure, such as KIIFB in Kerala, hide fiscal risk.
Way forward
- The FHI is a useful benchmark, but it needs upgrades to show states’ true financial health and capacity to deliver services.
Exam angle
- Issuer: NITI Aayog; number of sub-indices: five; data agency: MoSPI.