UPSC Mains 2025 GS3 Q11: model answer

States account for most of India's general government spending. NITI Aayog released the first Fiscal Health Index in January 2025, ranking 18 major States for 2022-23.

Structure

A composite index of five sub-indices:

• Quality of expenditure (capital spending share, development spending).
• Revenue mobilisation (own tax and non-tax revenue).
• Fiscal prudence (fiscal and revenue deficits).
• Debt index (debt to GSDP, interest burden).
• Debt sustainability (debt growth compared with GSDP growth).

Odisha topped the index, followed by Chhattisgarh and Goa; Punjab was at the bottom.

As an assessment tool

• Gives a single comparable score instead of scattered indicators.
• Shows each State its weak area: Punjab's debt, others' low capital spending.
• Tracks change over years and flags early stress before a crisis.
• Covers off-budget borrowing and guarantees when data are included.

How it encourages prudence

• Competitive federalism: public ranking creates peer and political pressure.
• Credit markets: better scores can lower borrowing costs in State development loans.
• Can be linked to incentives, like extra borrowing room for reforms, as done in the 15th Finance Commission period.
• Pushes shift from freebies and revenue spending to capital investment.
• Encourages own-revenue efforts such as property tax and mining royalty.

Limits

• Data lags and quality of State accounts.
• Ignores structural differences: hill States, special category, natural disasters.
• Risk of States cutting welfare to score well.

Used with fiscal responsibility laws and Finance Commission incentives, the FHI can become a mirror States consult every year.