🗞️ Why in News On 11 March 2026, NITI Aayog released the second edition of the Fiscal Health Index (FHI) 2026, assessing state finances for FY 2023-24 across 28 states and expanding coverage to include 10 North-Eastern and Himalayan states for the first time — with Odisha retaining the top rank among major states and Punjab, Kerala, West Bengal, and Andhra Pradesh flagged as fiscally stressed.

Why State Finances Are a National Issue

India’s fiscal debate gravitates almost entirely toward the Union Budget. Yet the actual delivery of development — schools, hospitals, irrigation, roads, welfare transfers, and local infrastructure — depends overwhelmingly on the states. States are responsible for approximately two-thirds of India’s consolidated public expenditure and raise roughly one-third of public revenue. They also account for about one-third of India’s general government debt, a proportion that has grown steadily since the early 2000s.

When a state’s finances deteriorate, the consequences are not local. Capital expenditure — the most productive form of government spending — is always the first casualty of fiscal stress. A state that begins to spend 55–60% of its revenue receipts on salaries, pensions, and interest payments has almost no room left for roads, water systems, or health infrastructure. Multiplied across several large states simultaneously, this represents a structural drag on India’s growth and development trajectory.

The Fiscal Health Index (FHI) was designed by NITI Aayog precisely to make this problem visible and comparable. It is a benchmarking exercise — not a statutory ranking — that allows policymakers, civil society, and the public to assess how different states are managing their public finances relative to each other and over time.

What the Fiscal Health Index Measures

NITI Aayog released the first edition of the FHI in 2024, covering 18 major states for the period FY 2014-15 to FY 2022-23. The second edition (FHI 2026), released on 11 March 2026, uses CAG-verified data (data verified by the Comptroller and Auditor General of India) and covers the decade-long period from FY 2014-15 to FY 2023-24. This longitudinal scope makes it a tool for assessing structural trends, not just a snapshot of a single year.

The Index evaluates states across five pillars: Quality of Expenditure, Revenue Mobilisation, Fiscal Prudence, Debt Index, and Debt Sustainability. Together these pillars capture not just whether a state is running a deficit, but whether it is spending wisely, collecting taxes effectively, controlling its debt trajectory, and preserving space for future investment.

A critical methodological feature of the 2026 edition is that the 10 North-Eastern and Himalayan states — Arunachal Pradesh, Assam, Himachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, and Uttarakhand — are ranked separately from the 18 major states. This separation is analytically sound because these states face structural constraints absent in larger, more economically diverse states: difficult terrain, sparse populations, very limited own-tax revenue capacity, high service-delivery costs per capita, and dependence on Union transfers that can approach 80–90% of total receipts.

Findings for the 18 Major States

The Top Performers: Odisha, Goa, Jharkhand

Odisha retained the top position among major states, a result that reflects consistent fiscal discipline over more than a decade. Odisha’s fiscal management has been notable for maintaining capital expenditure at around 4–5% of GSDP — among the highest for any Indian state — while reducing its debt-to-GSDP ratio from over 23% in 2019-20 to around the mid-teens by 2023-24. Its own-tax revenues have grown steadily, and the state has avoided the pattern of large committed expenditure commitments through populist spending that has destabilised other state budgets. Goa and Jharkhand ranked second and third, reflecting smaller and more manageable fiscal positions with relatively better revenue mobilisation ratios.

The Middle Tiers

The index places Gujarat, Maharashtra, Chhattisgarh, Telangana, Uttar Pradesh, and Karnataka in the Front-Runners category, while Madhya Pradesh, Haryana, Bihar, Tamil Nadu, and Rajasthan are classified as Performers. A notable finding is that Bihar improved from the aspirational group in the first edition to the performer category in FHI 2026, reflecting better deficit management and improved revenue performance — a significant shift for a state historically burdened by weak own-revenue capacity and high transfer dependence.

The Aspirational States: Structural Fiscal Stress

The four major states ranked weakest — West Bengal, Kerala, Andhra Pradesh, and Punjab — share a pattern of recurring fiscal stress that has compounded over multiple years. Their combined characteristics include debt-to-GSDP ratios in the range of 35–45%, significantly above the broadly accepted prudential norm of around 25%. Committed expenditure — defined as salaries, pensions, and interest payments — consumes approximately 50–60% of revenue receipts, leaving very limited headroom for capital or developmental spending. Interest payments alone often exceed 15–20% of revenue receipts, meaning that a large share of every rupee collected in taxes goes toward servicing past debt rather than current services.

Punjab is particularly concerning: its debt-to-GSDP ratio is among the highest in the country, its pension commitments are substantial, and years of revenue-deficit financing have left very little fiscal flexibility. Kerala has used off-budget borrowing vehicles — including borrowings by the Kerala Infrastructure Investment Fund Board (KIIFB) — to finance spending in ways that may not be fully captured in standard deficit numbers, raising questions about the true scale of state fiscal obligations.

Findings for North-Eastern and Himalayan States

Among the newly covered states, Arunachal Pradesh and Uttarakhand ranked at the top. Both states have benefited from capital-intensive central projects that have supported GSDP growth and from relatively contained salary-pension burdens. The middle tier includes Assam, Meghalaya, Mizoram, Sikkim, and Tripura.

At the weaker end, Himachal Pradesh, Manipur, and Nagaland face the most acute fiscal pressure in this group. Himachal Pradesh in particular has drawn national attention for a debt-to-GSDP ratio that some estimates place near or above 40%, combined with a very high share of salary and pension commitments in total expenditure and a narrow economic base relative to its public-sector size.

The Structural Problem: Off-Budget Borrowings and Committed Expenditure

The FHI 2026 highlights two systemic issues that headline fiscal deficit numbers often conceal. First, off-budget borrowings — loans taken by state-owned corporations and special-purpose vehicles that are financed or guaranteed by the state government but do not appear in the official fiscal deficit calculation. The Reserve Bank of India (RBI) and the 15th Finance Commission (2021-26) both flagged this issue, with the RBI’s State Finances Report estimating that off-budget liabilities could add 2–3 percentage points to the effective debt levels of several states.

Second, the rising share of committed expenditure is structurally destabilising. States that have expanded government employment, implemented Pay Commission revisions, and made pension commitments — particularly in states that have not moved to the National Pension System (NPS) from defined-benefit state pension schemes — find that the committed expenditure share of their revenue budget grows automatically each year, irrespective of economic conditions.

The FRBM Framework and Finance Commission Targets

The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 and its state-level equivalents established the norm that states should keep their fiscal deficits at or below 3% of GSDP. The 15th Finance Commission (2021-26) reinforced this framework while acknowledging that the pandemic years (2020-22) required relaxation. For post-pandemic fiscal consolidation, the Commission recommended a phased return to the 3% norm, with an additional 0.5% available under specific reform-linked conditions.

The 16th Finance Commission (2026-27 to 2030-31), under Chairman Dr. Arvind Panagariya, submitted its report to President Droupadi Murmu on 17 November 2025 and was tabled in Parliament on 1 February 2026. Its deliberations are expected to focus significantly on incentivising states to improve revenue mobilisation, rationalise subsidies, and reduce off-budget liabilities — issues directly addressed by the FHI framework.

Critical Assessment: What the Index Does Not Capture

The FHI is a valuable tool, but it has important limitations. First, it focuses on fiscal prudence but does not systematically assess social outcomes — a state could rank high on fiscal discipline while performing poorly on health or education delivery. Odisha’s top fiscal ranking, for instance, coexists with significant indicators of poverty and malnutrition in parts of the state. Second, the index is backward-looking: it uses CAG-verified data that typically lags by 18–24 months, meaning it cannot capture the most recent fiscal deterioration or improvement. Third, it does not penalise states for the quality of capital expenditure — spending on productive infrastructure is treated the same as spending on economically unproductive assets.

A stronger version of the index would integrate fiscal health with human development outcomes, creating a composite accountability framework for state governments.

UPSC Relevance

Prelims: Fiscal Health Index, NITI Aayog, CAG, GSDP, FRBM Act 2003, debt sustainability, 15th Finance Commission, 16th Finance Commission, off-budget borrowings, NPS, KIIFB. Mains GS-2: Fiscal federalism, Centre-State financial relations, Finance Commission. Mains GS-3: Public finance, state debt management, quality of expenditure, macroeconomic stability, fiscal consolidation.

📌 Facts Corner — Knowledgepedia

Fiscal Health Index 2026 — Core Data:

  • Released by: NITI Aayog
  • Release date: 11 March 2026
  • Data coverage: Fiscal performance for FY 2023-24
  • Data verification: CAG-verified (Comptroller and Auditor General of India)
  • Longitudinal period: FY 2014-15 to FY 2023-24 (10-year span)
  • Five pillars: Quality of Expenditure, Revenue Mobilisation, Fiscal Prudence, Debt Index, Debt Sustainability
  • First edition: Released 2024; covered 18 major states
  • Second edition coverage expansion: Added 10 North-Eastern and Himalayan states; ranked separately

Major State Rankings:

  • Top Achievers: Odisha (1st, score 73.1), Goa, Jharkhand
  • Front-Runners: Gujarat, Maharashtra, Chhattisgarh, Telangana, Uttar Pradesh, Karnataka
  • Performers: Madhya Pradesh, Haryana, Bihar, Tamil Nadu, Rajasthan
  • Aspirational (weakest): West Bengal, Kerala, Andhra Pradesh, Punjab
  • Bihar: Improved from aspirational to performer category between editions

NE/Himalayan State Rankings:

  • Top performers: Arunachal Pradesh, Uttarakhand
  • Middle tier: Assam, Meghalaya, Mizoram, Sikkim, Tripura
  • Weakest: Himachal Pradesh, Manipur, Nagaland

Key Fiscal Metrics:

  • State share of general government debt: Approximately one-third
  • State share of public expenditure: Approximately two-thirds
  • FRBM norm for state fiscal deficit: 3% of GSDP (with conditional 0.5% relaxation)
  • Debt-to-GSDP of stressed states: Approximately 35–45% (Odisha: reduced from ~23% to mid-teens by 2023-24)
  • Committed expenditure in stressed states: Often 50–60% of revenue receipts
  • Interest payments in stressed states: Often 15–20% of revenue receipts
  • Odisha’s capital outlay: Approximately 4–5% of GSDP
  • State debt-to-GSDP (India average): Rose from approximately 16.7% in 2013-14 to nearly 23% in 2022-23
  • Off-budget liabilities: RBI estimates they could add 2–3 percentage points to effective debt levels

Institutional and Legal Framework:

  • FRBM Act: 2003 — establishes fiscal deficit and debt norms for Centre and states
  • 15th Finance Commission: Term 2021-26; flagged off-budget borrowings; Chair: N. K. Singh
  • 16th Finance Commission: Term 2026-27 to 2030-31; Chair: Dr. Arvind Panagariya; report submitted 17 November 2025; tabled in Parliament 1 February 2026
  • CAG: Comptroller and Auditor General of India — verifies state accounts used by FHI
  • KIIFB: Kerala Infrastructure Investment Fund Board — a state off-budget borrowing vehicle
  • NPS: National Pension System — states that adopted NPS have lower future pension liabilities than those on defined-benefit schemes

Other Relevant Facts:

  • Fiscal weakness typically shows first as a squeeze on capital expenditure — the most productive government spending
  • The FHI is a benchmarking tool, not a statutory ranking under the Constitution or Finance Commission
  • High fiscal discipline does not automatically guarantee high social outcomes — Odisha scores high on FHI but has significant poverty indicators
  • States responsible for health, education, water, agriculture, and local infrastructure — fiscal weakness directly undermines these services

Sources: NITI Aayog, PIB, Finance Commission of India, Reserve Bank of India — State Finances Report, The Economic Times