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The report also highlights state-specific challenges and areas for improvement. This article briefly discusses the report and analyzes its findings on Tamil Nadu and West Bengal.

On January 24, 2025, NITI Aayog launched the inaugural issue of its “Fiscal Health Index (FHI) 2025.” The report offers a comprehensive assessment of the fiscal health of 18 major states, based on five key sub-indices: Quality of Expenditure, Revenue Mobilization, Fiscal Prudence, Debt Index, and Debt Sustainability. It also provides insights into state-specific challenges and areas that need improvement.

During the launch, Dr. Panagariya, Chairman of the 16th Finance Commission, emphasized the importance of states maintaining stable fiscal paths to promote balanced regional development, long-term fiscal sustainability, and effective governance. He noted that the FHI offers a systematic approach to measuring fiscal performance at the state level, while providing valuable insights into broader fiscal trends. This, he stated, would help deepen the understanding of fiscal health across the country, ultimately contributing to fiscal health and long-term growth.

The FHI aims to clarify the fiscal status at the sub-national level and guide policy reforms to achieve sustainable and robust economic growth. The report ranks states according to a comprehensive fiscal index based on the five sub-indices.

Key Findings: Odisha ranks first among the 18 largest states, with a score of 67.8, followed by Chhattisgarh and Goa at 55.2 and 53.6, respectively. These leading states exhibit strong fiscal health, excelling in revenue mobilization, expenditure management, and debt sustainability. Improvements are also noted in states like Jharkhand, which has strengthened fiscal prudence and debt sustainability. However, Karnataka faces challenges due to weaker performance in expenditure quality and debt management. These interstate disparities underscore the need for targeted reforms to address specific fiscal challenges and promote sustainable growth.

The top five high-performing states are Odisha, Chhattisgarh, Goa, Jharkhand, and Gujarat, while the bottom five, termed “aspirational states,” are Haryana, Kerala, West Bengal, Andhra Pradesh, and Punjab. However, performance varies significantly across the five sub-categories. Let’s now examine the report’s analysis of Tamil Nadu and West Bengal.

West Bengal

The report suggests that to improve its fiscal health, West Bengal should focus on increasing capital expenditure and enhancing tax collection, while maintaining strict fiscal discipline.

Key Findings:

Quality of Expenditure:

The proportion of capital expenditure (Capex) as a percentage of total expenditure has declined from 12.2% in 2018-19 to 8.3% in 2022-23. Spending on physical infrastructure also fell from 5.3% in 2018-19 to 3% in 2022-23, which is below the national average. The state’s expenditure on social services stood at 28.2%, lower than the average of major states.

Revenue Mobilization:

The state’s own tax revenue grew at an annual rate of 6.6% over the past five years, primarily driven by the State Goods and Services Tax (SGST). However, overall state tax revenue has been on a decline over the last five years. Additionally, the state’s reliance on grants has increased, rising from 17.6% of total revenue in 2018-19 to 19.6% in 2022-23.

Fiscal Prudence:

The revenue deficit as a percentage of Gross State Domestic Product (GSDP) increased in 2020-21 but declined in the subsequent years. The fiscal deficit as a percentage of GSDP marginally decreased from 3.9% in 2020-21 to 3.2% in 2022-23, although it remains above 3%.

Debt Index & Debt Sustainability:

Debt as a percentage of GSDP declined from 40.7% in 2010-11 to 35.7% in 2018-19. However, interest payments now account for 20.47% of revenue receipts, limiting the state’s capacity for developmental expenditure.

Tamil Nadu

The FHI report notes that Tamil Nadu has shown substantial growth in revenue and capital expenditure, but fiscal deficits and debt levels have exceeded the targets set by the Fiscal Responsibility and Budget Management (FRBM) Act. The state needs to diversify its revenue sources, enhance spending efficiency, ensure fiscal discipline, and boost economic growth through investment.

Key Findings:

Quality of Expenditure:

From 2018-19 to 2022-23, revenue expenditure grew at a Compound Annual Growth Rate (CAGR) of 7.3%, with economic services experiencing the largest growth. Capital expenditure increased at a CAGR of 10%, driven largely by the social sector, while economic services also saw an annual growth of 8%.

In 2022-23, committed expenditure accounted for 52% of total revenue expenditure. This growing trend, which increased at an annual rate of 9.9% since 2018-19, has reduced the government’s capacity for developmental spending. Subsidies also account for a significant portion of non-committed expenditure.

Revenue Mobilization:

Tamil Nadu’s Own Tax Revenue grew at a CAGR of 7.3% from 2018-19 to 2022-23. The ratio of Own Tax Revenue to GSDP remained steady at approximately 6% over the last five years. Additionally, non-tax revenue surged by 40.8% in 2022-23.

Fiscal Prudence:

The fiscal deficit as a percentage of GSDP increased from 2.9% in 2018-19 to 3.4% in 2022-23. The revenue deficit, which has been rising since 2013-14, decreased by approximately 22.2% in 2022-23. It fell from 3.5% of GSDP in 2020-21 to 1.5% in 2022-23.

Debt Index & Debt Sustainability:

Since 2020-21, Tamil Nadu has consistently exceeded the debt limits set by the Tamil Nadu Fiscal Responsibility Act, with the outstanding liabilities to GSDP ratio averaging around 29% over the past three years.

Conclusion:

Both West Bengal and Tamil Nadu need to adopt stronger fiscal discipline. West Bengal should focus on increasing capital expenditure to boost infrastructure development and reduce interest payments, which currently consume a large portion of revenue. Tamil Nadu, on the other hand, needs to curb its outstanding liabilities and non-committed expenditure, while also working to bring its fiscal deficit within the FRBM limits.

The report provides similar analyses for all 18 states. India’s first-ever state-wise fiscal health index indicates that while the path to fiscal sustainability is complex, it can lead to transformative outcomes if both the central and state governments collaborate effectively.