Explain how the Fiscal Health Index (FHI) can be used as a tool for assessing the fiscal performance of states in India. In what way would it encourage the states to adopt prudent and sustainable fiscal policies?
1. The Fiscal Health Index (FHI)
The Fiscal Health Index (FHI), released by NITI Aayog in 2025, ranks states’ fiscal health using composite indicators.
2. It assesses five sub-indices: quality of
It assesses five sub-indices: quality of expenditure, revenue mobilization, fiscal prudence, debt index and liabilities index.
3. FHI scores states on fiscal discipline
FHI scores states on fiscal discipline, enabling comparison of performance in managing revenues and debt.
4. States are grouped as achievers
States are grouped as achievers, front-runners, performers and aspirants; Odisha and Chhattisgarh led in 2025.
5. As a diagnostic tool
As a diagnostic tool, FHI highlights weak revenue collection, high committed expenditure and rising debt burdens.
6. It encourages prudent policies through reputational
It encourages prudent policies through reputational incentives and competitive benchmarking among states.
7. Peer comparison spurs better tax effort
Peer comparison spurs better tax effort, expenditure quality and restraint on subsidies and guarantees.
8. Complementing FRBM rules and Finance Commission
Complementing FRBM rules and Finance Commission transfers, FHI promotes transparency and fiscal accountability.
9. Its success depends on reliable data
Its success depends on reliable data, periodic updates and linking rankings to incentives like additional borrowing.
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