NITI Aayog’s Fiscal Health Index (FHI) has ranked Odisha as the best in fiscal performance while Punjab is at the bottom of the list. Building on this, it can develop a macroeconomic performance index for states, with GSDP and price stability among the other indicators, suggests Debashis Acharya
How is the FHI constructed?
The composite Fiscal health index (FHI) sources data on budgetary transactions for 18 states for FY2022-23 from the Comptroller and Auditor General (CAG). It’s an aggregate of five major sub-indices, namely quality of expenditure, revenue mobilisation, fiscal prudence, debt index and debt sustainability. Each major sub-index has a few minor sub-indices. The nine minor sub-indices fall in two categories i.e., improvement index and deprivation index. The minor sub-indices under quality of expenditure, revenue mobilisation and debt sustainability are the improvement indices and those under fiscal prudence and debt index are the deprivation indices. The higher values of the variable under improvement index and lower values of the variable under deprivation index are rewarded. For example, Odisha is rewarded in the debt index with a score of 99.0 since its total debt has been declining since 2019-20, and its outstanding liabilities to GSDP ratio has been within the 25% target set by the FRBM. The arithmetic mean of the five major sub-indices yields the final composite FHI.
Significance of the major and minor sub-indices
The quality of expenditure index contains ratios of total development expenditure to total expenditure and total capital outlay to gross state domestic product (GSDP). This shows how much the states spend on development projects. The two ratios — state own revenue to GSDP and state own revenue to total expenditure — are used to construct the revenue mobilisation sub-index, which reflects the ability of states to generate their own revenue and meet their expenditure out of such revenue. The fiscal prudence sub-index captures whether states are overspending by using the ratios of gross fiscal deficit to GSDP and revenue deficit to GSDP. Are interest payments eating up revenue receipts? The debt index answers this by combining the ratios of interest payments to revenue receipts and outstanding liabilities to GSDP. Debt sustainability is measured as GSDP growth rate less growth rate of interest payments. The states having positive difference are the ones managing their debt relatively well and the states having negative difference are the fiscally stressed ones.
How have the states fared?
The criteria for selection of states include their contribution to India’s GDP, demography, total public expenditure, revenues, and overall fiscal stability. The states with top FHI scores are classified as achievers and the rest are classified as front runners, performers, and aspirational states in descending order of the FHI scores. Odisha tops the list with FHI of 67.0 and Punjab is at the bottom with 10.7 in the aspirational category.
What worked
Odisha’d good performance is attributed to its low fiscal deficits, good debt profile, and an encouraging capital outlay to GSDP ratio. Chhattisgarh’s quality of expenditure, Goa’s revenue mobilisation, and Jharkhand’s fiscal prudence take them to the achievers’ list. Overall, effective fiscal management seems to be the feature of the top states with high debt index and debt sustainability scores. To move higher in their ranks in future, Kerala needs to work on its quality of expenditure, West Bengal on revenue mobilisation, Punjab on fiscal prudence and debt index, and Andhra Pradesh on debt sustainability.
Lessons from the findings
The report also compares the average FHI scores of the states for FY14-15 with that of FY22-23. The consistent performers in this comparison are Odisha, Chhattisgarh, Goa, and Gujarat. Jharkhand significantly improved its rank from 4 to 10. Punjab, Kerala and West Bengal have witnessed difficult times across most fiscal parameters which have impacted their rankings.
Given the crucial role of states in the country’s development, ensuring overall fiscal stability requires strengthening their fiscal health. The FHI is a major addition to the macro policy toolkit, emphasising subnational performance. This detailed report serves as a SWOT analysis, offering valuable insights for states. Building on existing literature, the Aayog could develop a comprehensive macroeconomic performance index for states, with fiscal health as one component. Other key subnational macro indicators may include GSDP, price stability, and more.
The writer is professor, School of Economics, University of Hyderabad.
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