Context:
Fiscal performance in India is assessed largely through tax policy and Union government deficits/debt, and fiscal health at the state level has not received much attention. The NITI Aayog’s Fiscal Health Index (FHI) is aimed at assessing the financial position of states, but is now in need of refinement for better policy applications.
Key Observations and Issues
Nothing about Public Service Provision
- Although macroeconomic stability is critical, the main roles of the states are social and economic service provision.
- The FHI, therefore, does not measure the volume and quality of public services that are provided by the states.
- Odisha, Chhattisgarh, and Jharkhand have ranked high on the index but severely lack in adequate teachers, healthcare staff, and medicines in hospitals.
Conceptual Issues in Fiscal Health Measurement
The index is derived from the five sub indices on an equal weighting basis:
- Quality of expenditure
- Development and capital expenditure as a percentage of total expenditure and GSDP.
- Revenue mobilisation
- Own revenue of the states as a percentage of GSDP and total expenditure.
- Fiscal prudence
- Ratio of fiscal and revenue deficit to GSDP.
- Debt index
- This relies on the ratio of interest payments to revenue receipts, as well as outstanding liabilities to GSDP.
- Debt sustainability
- This is defined as the gap between GSDP growth and interest rate growth. Problems with Debt.
- Sustainability Measure
- Whenever the nominal GSDP growth rate exceeds that of the effective interest rate, the Debt GSDP ratio would keep declining, not just its growth.
Data Accuracy and Comparability Issues
- Estimates of GSDP differ from state to state and are not strictly comparable.
- The Ministry of Statistics and Programme Implementation (MoSPI) provides comparable GSDP estimates for Finance Commissions, but these are not updated every year.
- Public accounts transfers are counted as expenditures, instead of deducting actual expenditures from these funds this needs reverse adjustments for clarity.
- State run enterprises (transport, electricity, lotteries, etc.) inflate both revenue and expenditure figures, distorting fiscal assessments.
- Off Budget liabilities, especially in power distribution and infrastructure projects (like Kerala Infrastructure Investment Fund Board), create hidden fiscal risk.
The FHI serves as a great point of reference, however, it must underlie some major improvements if it wants to be recognized in representing what states really look like in terms of financial health and their capacity to deliver services.
