Strengthening State Finances in India: Lessons from Fiscal Health Index 2026
Introduction :
Context: NITI Aayog released the second edition of the Fiscal Health Index (FHI) 2026, which evaluates the fiscal performance of Indian states for FY 2023ā24. The index provides a comprehensive assessment of the fiscal strength, vulnerabilities and sustainability of state finances.
Significance: Since state governments account for nearly one-third of Indiaās general government debt, their fiscal stability is crucial for maintaining national macroeconomic stability and supporting long-term development.
About the Fiscal Health Index
Meaning: The Fiscal Health Index is a framework developed by NITI Aayog to evaluate the fiscal soundness of Indian states by analysing multiple aspects of revenue, expenditure, deficit and debt management.
Objective: It aims to provide a comparative and data-driven evaluation of state finances, helping policymakers identify fiscal strengths and weaknesses and adopt appropriate reforms.
Key Evaluation Parameters
Quality of Expenditure: This pillar assesses the proportion of developmental and capital expenditure compared to committed spending such as salaries, pensions and interest payments.
Revenue Mobilisation: It evaluates the ability of states to generate own tax and non-tax revenues, reducing excessive dependence on central transfers.
Fiscal Prudence: It examines how effectively states manage fiscal deficits and adhere to the Fiscal Responsibility and Budget Management (FRBM) norms.
Debt Index: This indicator measures the size and burden of outstanding public debt in relation to the state economy.
Debt Sustainability: It assesses whether states have the long-term capacity to service their debt without fiscal distress.
State-wise Performance in FY 2023ā24
Top Performing States:
Odisha ranked first with a score of 73.1, reflecting strong revenue stability and prudent fiscal management.
Goa ranked second with 54.7, followed by Jharkhand with 50.5.
Gujarat and Maharashtra secured the fourth and fifth positions respectively.
Lowest Performing States:
Punjab ranked 18th, followed by Andhra Pradesh (17th), West Bengal (16th) and Kerala (15th), largely due to rising debt levels and fiscal stress.
Major Findings of the Report
Expanded Coverage: The 2026 edition expanded its scope to include 10 North-Eastern and Himalayan states, acknowledging their unique fiscal and geographical constraints.
Strong Fiscal Discipline: Odisha maintained its top position due to stable revenue generation and controlled fiscal deficits, while Arunachal Pradesh performed best among NE and Himalayan states due to high-quality expenditure.
Persistent Fiscal Stress: States such as Punjab, Kerala and West Bengal continue to face fiscal pressure because of high debt burdens, large fiscal deficits and weak revenue growth.
Changing Expenditure Trends: Several states have increased emphasis on capital expenditure and social sector spending, indicating a shift towards long-term developmental investment.
Macroeconomic Importance: The report highlights that state finances play a crucial role in Indiaās overall fiscal stability, as their borrowing significantly influences national debt levels.
Key Fiscal Challenges
High Committed Expenditure: A large share of revenue is spent on salaries, pensions and interest payments, leaving limited funds for development.
For instance, Punjabās committed expenditure reached nearly 80 percent of its revenue receipts in 2023ā24.
Weak Own Revenue Mobilisation: Many states rely heavily on central transfers rather than internal revenue sources.
In Bihar, the stateās own revenue accounts for less than one-third of total receipts, increasing fiscal vulnerability.
Breaching Fiscal Deficit Limits: Persistent overspending leads to non-compliance with FRBM deficit targets.
For example, Andhra Pradesh recorded a fiscal deficit of 4.35 percent of GSDP in 2023ā24, exceeding the 4 percent ceiling.
Rising Interest Burden: Growing debt leads to high interest payments that absorb a large share of revenue.
West Bengal spends more than 20 percent of its revenue receipts on interest payments.
Structural Geographic Constraints: States with difficult terrain face higher infrastructure and service delivery costs.
For instance, Himachal Pradesh experiences fiscal stress due to mountainous terrain and rising pension liabilities.
Way Forward
Strengthening Revenue Capacity: States must broaden their tax base and improve GST compliance to enhance fiscal self-reliance.
Rationalising Expenditure: Governments should control committed expenditure and inefficient subsidies, particularly in sectors such as power.
Enhancing Capital Investment: Increasing high-quality capital expenditure can create productive assets and promote long-term economic growth.
Adopting Medium-Term Fiscal Frameworks: Structured multi-year fiscal planning can help manage deficits and stabilise debt levels.
Improving Fiscal Transparency: Greater use of CAG-verified data, fiscal monitoring and benchmarking tools such as the FHI can support evidence-based policymaking.
Conclusion
The Fiscal Health Index 2026 highlights that strong and sustainable state finances are essential for Indiaās long-term economic growth and macroeconomic stability. While some states demonstrate strong fiscal discipline, others face structural challenges requiring targeted reforms. Strengthening fiscal governance and improving revenue capacity will be critical to achieving the vision of Viksit Bharat by 2047.
Source : PIB