What Happened
- NITI Aayog released the second edition of the Fiscal Health Index (FHI) 2026, assessing states' fiscal performance for the financial year 2023-24.
- The Index ranked 18 major states and 10 North-Eastern and Himalayan states separately; Odisha topped the major states ranking with a score of 67.8, followed by Chhattisgarh and Goa.
- NITI Aayog urged all states to adhere to fiscal deficit norms under the FRBM Act — maintaining the 3% of GSDP limit — through disciplined expenditure, broadening the GST base, and enhancing own tax revenue capacity.
- States with widening revenue deficits were specifically advised to align revenue expenditure with sustainable revenue growth.
- Punjab, West Bengal, and Andhra Pradesh remained at the bottom of the index, grappling with high debt, rising interest payments, and limited fiscal space; among NE and Himalayan states, Arunachal Pradesh topped followed by Uttarakhand and Tripura.
Static Topic Bridges
Fiscal Health Index (FHI) — Design and Methodology
The Fiscal Health Index is a composite index developed by NITI Aayog to assess and rank Indian states on the quality and sustainability of their public finances. The first edition covered FY2022-23; the second edition (released March 2026) covers FY2023-24.
- Built on five pillars with differential weightages: Quality of Expenditure (30%), Revenue Mobilisation (20%), Fiscal Prudence (20%), Debt Index (15%), Debt Sustainability (15%)
- Data source: Comptroller and Auditor General (CAG) of India — certified actuals, not budget estimates
- Coverage: 18 major states ranked in one group; 10 NE and Himalayan states ranked separately (to ensure contextually appropriate comparison given their greater dependence on central transfers)
- Key metrics under each pillar: capital expenditure ratio, own tax revenue buoyancy, fiscal deficit as % of GSDP, debt-to-GSDP ratio, interest payments as % of revenue receipts
- The index is advisory/diagnostic — it does not have statutory force but informs Centre-state fiscal discussions
Connection to this news: The FHI provides an evidence-based framework for evaluating state fiscal performance beyond the single metric of fiscal deficit, enabling granular identification of where each state needs to improve.
FRBM Act, 2003 — Fiscal Rules for Centre and States
The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 is India's primary statutory framework for fiscal discipline. It sets deficit targets, mandates medium-term fiscal policy statements, and provides for escape clauses in exceptional circumstances.
- Enacted: FRBM Act, 2003; implemented from July 5, 2004; applies to the Union government
- States have their own FRBM Acts (all 28 states have enacted state FRBM legislation) with corresponding fiscal deficit targets
- Central government target: Fiscal deficit to be reduced to 3% of GDP (original target for 2008, subsequently revised multiple times)
- State fiscal deficit limit: 3% of GSDP (norm set by the Finance Commission and Centre's borrowing rules under Article 293); relaxed to 3.5% of GSDP in recent years with conditionalities for capital expenditure
- NK Singh Committee (2017): Recommended a fiscal deficit glide path for the Centre — 3% by 2020-21, then 2.5% by 2023; also recommended a Fiscal Council and a formal debt-to-GDP target of 60% (Centre 40% + States 20%)
- 2018 Amendment: Section 4(2) escape clause — deficit target can be exceeded by up to 0.5% of GDP in exceptional circumstances (national calamity, national security, structural reforms, agricultural collapse)
- Revenue deficit target: Elimination of revenue deficit (current practice defers this to progressive reduction)
Connection to this news: The FRBM framework is the statutory basis for the 3% fiscal deficit norm that NITI Aayog is urging states to adhere to; the FHI's Fiscal Prudence pillar directly measures compliance with these norms.
Revenue Deficit vs Fiscal Deficit — Key Distinction
Revenue deficit is the excess of revenue expenditure over revenue receipts; fiscal deficit is the excess of total expenditure over total non-debt receipts. For states, revenue deficit is a critical metric because it means current spending (salaries, interest, subsidies) is being financed by borrowing — which is inherently unsustainable.
- Revenue Deficit = Revenue Expenditure − Revenue Receipts (if positive, it means the government is borrowing to fund current spending)
- Fiscal Deficit = Total Expenditure − (Revenue Receipts + Non-Debt Capital Receipts) = Net borrowing requirement
- Primary Deficit = Fiscal Deficit − Interest Payments (measures current fiscal stress excluding legacy debt burden)
- Effective Revenue Deficit = Revenue Deficit − Grants for capital formation (introduced by the 13th Finance Commission; recognises that some grants create capital assets)
- States with high revenue deficits have less room to increase capital expenditure — creating a "fiscal trap" where borrowing finances consumption rather than investment
- NITI Aayog's FHI specifically measures "widening revenue deficits" as a red flag for structural fiscal deterioration
Connection to this news: NITI Aayog's specific recommendation for states with widening revenue deficits to align expenditure with sustainable revenue growth directly addresses this fiscal trap; it is a precondition for states to increase capital spending for growth.
GST and Own Tax Revenue — State Fiscal Capacity
A key NITI Aayog recommendation is for states to broaden the GST framework and enhance own tax collection capacity. States' Own Tax Revenue (OTR) determines their fiscal autonomy and ability to fund development spending without depending on central transfers.
- States' revenue sources: Own Tax Revenue (state GST, stamp duty, registration fees, state excise, vehicle tax, electricity duty), Non-Tax Revenue, Shared Taxes from Centre (tax devolution as per Finance Commission formula), and Grants-in-Aid
- GST (Goods and Services Tax): Introduced July 1, 2017 via 101st Constitutional Amendment Act; subsumed multiple state taxes (VAT, entertainment tax, entry tax, luxury tax, purchase tax)
- States receive SGST (State GST) on intra-state transactions; IGST on inter-state transactions is shared between Centre and states; revenue-neutral rate (RNR) was the basis for the switch
- GST Compensation Cess: States were guaranteed compensation for revenue loss for 5 years (2017-22) at 14% annual growth over 2015-16 base; the compensation period ended June 2022
- States with low own-tax buoyancy (growth in tax revenue relative to GSDP growth) are structurally dependent on central transfers, making them vulnerable to any reduction in the Centre's tax devolution
Connection to this news: NITI Aayog's call to broaden the GST base is about improving states' own revenue buoyancy — a structural reform that reduces dependence on borrowed funds for development spending.
Key Facts & Data
- Fiscal Health Index 2026: 2nd edition; covers FY 2023-24; released March 2026
- Top major states: Odisha (score 67.8), Chhattisgarh, Goa, Jharkhand, Gujarat, Maharashtra, Telangana (7th), UP, Karnataka, MP
- Bottom major states: Punjab, West Bengal, Andhra Pradesh
- Top NE/Himalayan state: Arunachal Pradesh, followed by Uttarakhand, Tripura, Meghalaya, Assam, Mizoram
- FHI pillars and weights: Quality of Expenditure (30%), Revenue Mobilisation (20%), Fiscal Prudence (20%), Debt Index (15%), Debt Sustainability (15%)
- FRBM Act, 2003: State fiscal deficit limit — 3% of GSDP (relaxed to 3.5% with capital expenditure conditionality in recent years)
- NK Singh Committee (2017): Recommended fiscal deficit glide path, Fiscal Council, and 60% debt-to-GDP target (Centre 40% + States 20%)
- FRBM escape clause (2018 amendment): Up to 0.5% excess fiscal deficit in exceptional circumstances under Section 4(2)
- GST implemented: July 1, 2017 via 101st Constitutional Amendment Act