Mains Practice Questions

Introduction:

Fiscal health reflects a state’s ability to mobilise revenue, manage expenditure, and sustain debt, directly affecting its developmental resilience — maintaining welfare spending and handling economic shocks. The Fiscal Health Index (FHI) by NITI Aayog evaluates the fiscal health of 18 major states, considering their GDP contribution, demography, public expenditure, revenues, and overall fiscal stability

Body :

Challenges in Bridging the Fiscal Capacity–Performance Gap

• Unequal Revenue Bases: Industrialised states like Gujarat generate higher tax revenue than agrarian states like Jharkhand, limiting fiscal flexibility.
• Dependence on Central Transfers: States like Bihar rely heavily on Finance Commission grants and GST compensation, reducing fiscal autonomy.
• Inefficient Expenditure Management: Poor planning in a few states like Uttar Pradesh increases debt without improving service delivery.
• Populist Schemes: Excessive subsidies in West Bengal strain finances, affecting sustainable development.
• Debt Burden: High borrowing for recurring expenditure in Kerala limits capital investment in infrastructure and welfare programs.

Role of Fiscal Health Index (FHI)

• The FHI helps bridge the Fiscal Capacity–Performance Gap by acting as a diagnostic and policy tool.
• FHI ranks states based on five key sub-indices:
  • Quality of Expenditure: Measures the proportion of spending on long-term growth (developmental) vs. routine operations (non-developmental).
    • Assesses capital investments as a share of economic output.
  • Revenue Mobilisation: Reflects a state’s ability to generate its own revenue and cover its expenditures independently.
  • Fiscal Prudence: Tracks deficits (fiscal and revenue) and borrowing relative to economic output, signalling fiscal health.
  • Debt Index: Assesses the state’s debt burden, focusing on interest payments and liabilities relative to economic size.
  • Debt Sustainability: Compares Gross State Domestic Product (GSDP) growth to interest payments, with a positive difference indicating fiscal sustainability.

Conclusion:

The Fiscal Health Index (FHI) provides a framework to align fiscal capacity with performance. By benchmarking states, promoting transparency, and incentivising reforms, FHI strengthens fiscal federalism and enhances developmental resilience. States adopting FHI-driven reforms can achieve efficient spending, sustainable borrowing, and strategic investments in human and physical capital, fostering equitable and resilient development across India.