Mineral-rich Odisha, Chhattisgarh, Goa and Jharkhand bagged the top slots in a new comprehensive annual index launched by the Niti Aayog to gauge the fiscal health of state governments. The index placed debt-ridden Punjab at the bottom of the rankings, followed by Andhra Pradesh, West Bengal and Kerala.
The move by the think tank comes ahead of the Union Budget FY26, which is expected to articulate the Centre’s medium-term fiscal policy with greater clarity. While the government’s commitment to fiscal consolidation is amply clear, in the FY25 Budget speech, finance minister Nirmala Sitharaman indicated that from FY26 onwards, the endeavour would be “to keep the fiscal deficit each year such that the Centre’s debt will be on a declining path as percentage of the Gross Domestic Product (GDP).”
In 2017, the NK Singh Committee recommended a ceiling for general government debt of 60% –40% for the Centre and 20% for states. The general government debt, however, zoomed to 89.5% of the GDP in FY21, as the pandemic constrained revenues and necessitated higher welfare spending. It has since come down, but was still much higher than the prescribed cap in FY24 (81.6%).
The Centre’s fiscal deficit is estimated to be 4.9% of GDP in the current fiscal year, and is projected to reach below 4.5% next year. State governments contained their combined fiscal deficit within 3% of GDP during 2022-23 and 2023-24. In FY25, states have budgeted a combined deficit of 3.2% of GDP.
The new Fiscal Health Index Ranking by the Niti Aayog assesses a state’s health on five key parameters: quality of expenditure (capital expenditure), revenue mobilisation, fiscal prudence, debt index and debt sustainability. Odisha’s composite score was 67.8, followed by Chhattisgarh with 55.2. Among the states at the bottom of the ranking, Punjab’s score was just 10.7, followed by Andhra Pradesh (20.9) and West Bengal (21.8).
According to 2022-23 (the latest period) ranking as against the average of 2014-15 to 2021-22, three states have seen notable improvement: Chhattisgarh (moved up 5 places), Jharkhand (6), and Rajasthan (3). On the other hand, Karnataka rank moved down seven places while Andhra Pradesh by four places.
Achiever states like Odisha, Chhattisgarh, Goa, Jharkhand and Gujarat have higher capital outlay of around 4% of GSDP as against the prudential level of 3% while aspirational states like Punjab, West Bengal, Andhra Pradesh and Kerala were struggling to meet the fiscal and revenue deficit targets. These states were also suffering from low revenue mobilization (tax and non-tax) and growing debt burden (rising debt ratio and negative debt sustainability).
The publication of the new report ahead of the Union Budget on February 1 amid the government’s strive to bring down general government debt assumes importance as post-pandemic globally debt vulnerability of emerging countries have worsened. As per the FRBM Act 2018, which replaced the FRBM Act 2003, the aim was to bring down the central government debt to 40% of GDP by FY25.
The Niti Aayog report flagged that the debt-to-GSDP ratio for Punjab has been consistently increasing from 41% in 2018-19 to 46% in 2022-23, indicating rising debt levels.
Even though states have in aggregate contained their fiscal deficit below 3%, Punjab’s fiscal deficit-to-GSDP ratio increased significantly from 3.1% in 2018-19 to 5% in 2022-23 and was mainly financed through market borrowings. Its revenue deficit-to-GSDP ratio rose from 2.5% in 2018-19 to 3.8% in 2022-23.
Odisha topped the debt index with 99 score and debt sustainability with 64. The state has maintained low fiscal deficits, a good debt profile, and an above average capital outlay/GSDP ratio. Thanks to robust non-tax revenues from the mining sector, Odisha’s fiscal deficit stood at 2% in 2022-23 while debt-GSDP between 2018-19 to 2022-23 for ranged between 15% to 24%, within the target of 25% set by FRBM.
“By promoting sound fiscal practices, enhancing financial resilience, and encouraging effective policy coordination, we aim to foster a collaborative environment where the fiscal autonomy of states is balanced. This approach is central to our mission of creating a more robust and sustainable economic framework to achieve Viksit Bharat 2047,” Niti Aayog CEO BVR Subrahmanyam said commenting on the utility of the index.
This index will serve as a crucial tool for evaluating fiscal discipline and management, with a focus on key parameters: Fiscal Prudence, Revenue Mobilization, Quality of Expenditure and Debt Sustainability.
The index offers valuable insights that help policymakers identify gaps in fiscal management, enabling them to refine strategies for improved governance, more efficient resource allocation, and effective fiscal consolidation, said Pravakar Sahoo, programme director at Niti Aayog.