Fiscal Health Index 2026

NITI Aayog’s Fiscal Health Index (FHI) 2026 provides a composite, data-driven assessment of state finances for FY 2023–24, covering 18 major states and, for the first time, a separate group of 10 North-Eastern and Himalayan states. It highlights stark divergences between fiscally prudent states like Odisha and debt-stressed states such as Punjab and West Bengal, with implications for growth, welfare delivery, and macroeconomic stability.

What is the Fiscal Health Index 2026?

FHI 2026 is the second edition of NITI Aayog’s index, aimed at systematically benchmarking state finances to support better fiscal policymaking. It uses audited data (primarily from the Comptroller and Auditor General – CAG) to generate comparable scores and ranks for states on multiple fiscal dimensions.

The index covers the fiscal year 2023–24 and is particularly important because states account for nearly one-third of India’s general government debt and are primary providers of public services and capital expenditure. In this edition, the coverage has been expanded to include 10 North-Eastern and Himalayan states, which are ranked separately to account for their structural constraints.

Core Evaluation Pillars of FHI 2026

NITI Aayog evaluates states on five key sub-indices, each capturing a critical aspect of fiscal health.

1. Quality of Expenditure

   • Tracks the share of capital expenditure (capex) in total developmental spending versus committed expenditure such as salaries, pensions, and interest.

   • States like Odisha and Gujarat allocate a relatively higher share of developmental expenditure to capex, while states such as West Bengal and Punjab allocate lower proportions, limiting long-term growth returns.

2. Revenue Mobilisation

   • Assesses a state’s capacity to generate its own tax and non-tax revenues, thereby reducing dependence on Union transfers.

   • High-performing states show strong own-tax effort and diversified non-tax revenues, whereas fiscally stressed states rely heavily on central devolution and grants.

3. Fiscal Prudence

   • Evaluates fiscal deficit and revenue deficit as a percentage of Gross State Domestic Product (GSDP), and adherence to FRBM norms.

   • States with fiscal deficits well within the 3% of GSDP threshold, and lower revenue deficits, are rated more favourably.

4. Debt Index

   • Captures the level of outstanding liabilities and interest burdens relative to GSDP and revenue receipts.

   • High interest-to-revenue ratios signal reduced budgetary flexibility and crowding out of productive spending.

5. Debt Sustainability

   • Examines whether debt dynamics are sustainable in the medium to long term, considering growth, primary balances, and rollover risks.

   • States with declining debt-to-GSDP ratios and manageable interest burdens perform better on this pillar.

Together, these pillars provide a structured, composite score used to classify states into four performance categories.

State Categories and Rankings (18 Major States)

FHI 2026 groups 18 major states into Achiever, Front Runner, Performer, and Aspirational based on their composite scores.

Category-wise classification

The classification helps policymakers identify both best practices and areas requiring urgent correction, especially in Aspirational states with persistent stress.

Key Findings on Debt and Budgetary Performance

Leading fiscal performers

• Odisha has emerged as the top-ranked state in FHI 2026 among major states for the second consecutive year.
• The NITI Aayog report links Odisha’s performance to:
  • A fiscal deficit within the 3% FRBM norm, around 1.7–2% of GSDP.​
  • Significant reduction in debt-to-GSDP from over 23% in 2019–20 to around the mid-teens by 2023–24 (e.g., 14–15%).​
  • High share of own-tax revenue (often exceeding 60% of revenue) and strong mining-linked non-tax revenues.​
  • Capital outlay around 4–5% of GSDP focused on infrastructure, health, and education, supporting growth and social outcomes.

Gujarat and Maharashtra also maintain relatively low debt levels and contained interest burdens, reinforcing their position in the upper tiers of the index.

States under fiscal stress

• Punjab and West Bengal rank at the bottom among major states, with some of the highest debt-to-GSDP ratios, often in the range of 40–45% or more.

• These states face:

  • Weak revenue mobilisation and high dependence on central transfers.​

  • Large interest payments consuming a significant share of revenue receipts, sometimes exceeding 20%.

  • Low capital expenditure relative to developmental spending, limiting long-term growth and returns from borrowing.

Other Aspirational states such as Kerala, Andhra Pradesh, and Tamil Nadu also exhibit elevated debt-to-GSDP levels and tight fiscal headroom.

Emerging pressures and downgrades

• Karnataka and Telangana have moved down from higher categories (such as Front Runner) to Performer, reflecting rising fiscal pressures despite relatively strong economies.​
• Tamil Nadu has slipped into the Aspirational group, with concerns over high committed expenditure and increasing debt ratios.

These shifts underscore how quickly fiscal positions can deteriorate if spending and borrowing are not aligned with sustainable revenue paths.

Inclusion of North-Eastern and Himalayan states

For the first time, FHI 2026 evaluates 10 North-Eastern and Himalayan states separately, using refined indicators suited to their structural features.​

• Arunachal Pradesh and Uttarakhand emerge as top performers in this group.​
• The index adjusts for factors like difficult terrain, sparse population, limited own-revenue capacity, and higher committed expenditure, alongside heavy reliance on Union transfers.​

This differentiated approach makes the assessment more representative of India’s diverse fiscal landscape.

Why Fiscal Health of States Matters

The fiscal health of states is crucial for several reasons:

• States collectively shoulder a large share of public investment in infrastructure, health, and education, impacting growth and human development.
• Weak fiscal positions can lead to cutbacks in capex, delays in welfare schemes, and higher borrowing costs, affecting citizens directly.
• Rising state debt also has implications for macro-stability, especially when combined with off-budget liabilities and contingent guarantees.

For UPSC, FHI 2026 links the topics of fiscal federalism, FRBM, debt sustainability, and cooperative federalism in public finance.

Policy Recommendations in FHI 2026

NITI Aayog suggests a range of reform measures to improve states’ fiscal resilience.

1. Strengthen Revenue Mobilisation

   • Broaden the GST base, improve tax administration, and reduce leakages.

   • Enhance own non-tax revenues where feasible, especially through better pricing and management of public assets.

2. Improve Quality of Expenditure

   • Rationalise committed expenditure on salaries, pensions, and subsidies to create space for capex.

   • Prioritise capital expenditure that crowds in private investment and yields long-term growth dividends.

3. Enhance Transparency and Accountability

   • Eliminate or strictly limit off-budget borrowings and quasi-fiscal liabilities, bringing them onto the budget.

   • Ensure timely auditing and publication of financial data by CAG and improve disclosure on guarantees and public enterprises.​

4. Strengthen Debt Management and Sustainability

   • Align borrowing programmes with realistic revenue projections and medium-term fiscal frameworks.

   • Monitor debt indicators (interest-to-revenue, debt-to-GSDP) and adopt corrective measures early in states exhibiting persistent stress.

These recommendations position FHI as both a diagnostic and a reform roadmap for states.

UPSC-Relevant Takeaways

For exam purposes, candidates should remember:

• FHI is released by NITI Aayog, second edition in 2026, referencing FY 2023–24.
• It uses five pillars: Quality of Expenditure, Revenue Mobilisation, Fiscal Prudence, Debt Index, Debt Sustainability.
• States are grouped into Achiever, Front Runner, Performer, Aspirational.
• Odisha tops among major states; Punjab, West Bengal, Kerala, Andhra Pradesh, Tamil Nadu are in the Aspirational group.
• Separate ranking introduced for NE and Himalayan states, with Arunachal Pradesh and Uttarakhand as top performers.

FAQs on Fiscal Health Index 2026