Who Is Truly Fiscally Healthy?

ITI Aayog's recent launch of a fiscal health index, intended as an annual publication, aims to provide data-driven insights into the fiscal health of Indian states.

- SAMRIDHI AGARWAL

It focuses on guiding fiscal governance and policy reforms for resilient economic growth. However, the guiding philosophy and methodology behind the index warrant careful scrutiny.

While rankings are commonly used to incentivize performance improvement, there is no definitive theoretical basis for favoring one ranking system over another. In the Indian federal system, rankings can shift dynamics from cooperative to competitive federalism. This competitive focus may neglect historical context and diverse processes that contribute to regional differences. Rankings should complement—not replace—a deeper understanding of fiscal drivers. Hence, policymakers must avoid overemphasizing ranks and, instead, focus on their region's unique economic niche, strategic partnerships and strengths.

The Fiscal Health Index (FHI) is a composite measure based on five sub-indices—quality of expenditure, revenue mobilization, fiscal prudence, a debt index and debt sustainability—constructed from nine fiscal metrics. It uses minimum-maximum normalization, scaling 'good' indicators positively and inverting 'bad' ones through a deprivation index to reflect both current performance and historical benchmarks.