Fiscal Health Index

Why in News ?

The NITI Aayog recently released the second annual edition of the Fiscal Health Index (FHI) 2026 in New Delhi.

The index evaluates the fiscal performance and financial sustainability of Indian states, providing a comprehensive framework to compare fiscal management practices across the country.

It aims to promote data-driven fiscal reforms and responsible budgeting among states.

Background: Need for Assessing Fiscal Health of States

India’s fiscal structure is based on cooperative federalism, where both the Union and states share responsibilities for taxation and public expenditure.

State governments play a critical role in financing key sectors such as:

• Healthcare
• Education
• Infrastructure
• Welfare programmes

However, many states face challenges such as:

• Rising public debt
• Persistent fiscal deficits
• Limited revenue generation capacity

To address these concerns and encourage fiscal discipline, the NITI Aayog introduced the Fiscal Health Index as a structured mechanism to measure and compare fiscal performance across states.

What is the Fiscal Health Index (FHI) ?

The Fiscal Health Index (FHI) is a data-driven framework designed to evaluate the fiscal soundness of state governments in India.

It provides a systematic and comparable assessment of fiscal performance, helping policymakers understand strengths, weaknesses, and areas requiring reform.

The index covers:

• 18 major Indian states
• 10 North-Eastern and Himalayan states

By analysing fiscal indicators across states, the index seeks to:

• Encourage fiscal transparency
• Promote evidence-based policymaking
• Strengthen financial sustainability of state governments

Key Pillars of the Fiscal Health Index

The index evaluates fiscal performance using five major pillars.

1. Quality of Expenditure

This pillar measures how effectively states allocate spending toward productive and development-oriented sectors such as infrastructure, education, and health.

Higher-quality expenditure indicates efficient use of public resources.

2. Revenue Mobilisation

This assesses a state’s ability to generate its own revenue through:

• Taxes
• Non-tax revenue sources

States with strong revenue mobilisation are less dependent on central transfers and enjoy greater fiscal autonomy.

3. Fiscal Prudence

This indicator measures how well states manage their budget deficits and expenditure levels.

It reflects adherence to fiscal discipline, including compliance with the Fiscal Responsibility and Budget Management (FRBM) framework.

4. Debt Index

This pillar evaluates the level and structure of state government debt, including debt-to-GSDP ratios.

Higher debt levels can constrain future fiscal flexibility.

5. Debt Sustainability

This assesses whether a state can service its debt without compromising developmental spending.

Sustainable debt management ensures long-term fiscal stability.

Classification of States in the Index

The Fiscal Health Index categorises states into four performance tiers.

Achievers

These states demonstrate:

• Strong fiscal discipline
• High own-tax revenues
• Low fiscal deficits
• Sustainable debt levels

They represent the best performers in fiscal management.

Front Runners

These states maintain generally sound fiscal conditions, though they may fall short of top-tier performance in certain indicators.

Performers

States in this category show mixed results across the five pillars, indicating moderate fiscal health with room for improvement.

Aspirational States

These states face significant fiscal stress, characterised by:

• Persistent deficits
• High debt levels
• Limited revenue generation capacity

They require targeted reforms to improve fiscal sustainability.

Key Highlights of Fiscal Health Index 2026

According to the latest report released by NITI Aayog:

Top Performing States (Achievers)

The states classified as Achievers include:

• Odisha
• Goa
• Jharkhand

These states demonstrated strong fiscal discipline and efficient financial management.

Movement in State Rankings

Some states experienced changes in their performance tiers:

• Karnataka and Telangana moved from Front Runner to Performer category.
• Kerala and Tamil Nadu slipped further into the Aspirational category, indicating growing fiscal pressures.

Performance of North-Eastern and Himalayan States

Among the North-Eastern and Himalayan states, the top performers include:

1. Arunachal Pradesh – Rank 1
2. Uttarakhand
3. Tripura
4. Meghalaya
5. Assam
6. Mizoram

These rankings highlight the fiscal performance of states with smaller economies and challenging geographical conditions.

Significance of the Fiscal Health Index

1. Strengthening Fiscal Federalism

The index promotes competitive and cooperative federalism by encouraging states to improve fiscal performance.

2. Evidence-Based Policy Formulation

By using a data-driven framework, the index helps policymakers identify fiscal weaknesses and design targeted reforms.

3. Encouraging Fiscal Discipline

Regular evaluation motivates states to maintain sustainable borrowing and responsible spending practices.

4. Improving Public Financial Management

The index encourages states to improve budget planning, transparency, and financial accountability.

5. Supporting Long-Term Economic Stability

Sound fiscal management at the state level is crucial for macroeconomic stability and sustainable development.

Challenges in State Fiscal Management

Despite improvements in fiscal monitoring, several structural challenges remain:

• Rising debt levels in some states
• Increasing welfare expenditure
• Dependence on central transfers
• Volatility in tax revenues

Addressing these issues requires balanced fiscal reforms and stronger revenue systems.

Way Forward

Improving fiscal health across states requires a combination of institutional reforms and policy innovation.

Key priorities include:

• Strengthening tax administration and revenue mobilisation
• Improving efficiency of public expenditure
• Ensuring compliance with FRBM targets
• Promoting transparent fiscal reporting
• Encouraging sustainable borrowing practices

Such measures will help states maintain fiscal stability while supporting economic growth.