2025 · GS Paper 3 · Q11 · 15 marks
Explain how the Fiscal Health Index (FHI) can be used as a tool for assessing the fiscal performance of states in India. In what way would it encourage the states to adopt prudent and sustainable fiscal policies ?
In short
NITI Aayog's Fiscal Health Index assesses 18 major states on expenditure quality, revenue mobilisation, fiscal prudence, debt and debt sustainability, and its public ranking spurs prudence through peer pressure and market scrutiny. In the 2025 edition Odisha led with a score of 67.8 while Punjab ranked last.
Model answer
Ghissu Editorial · Verified 4 Oct 2026 · 279 words
Five sub-indices
Quality of Expenditure, Revenue Mobilisation, Fiscal Prudence, Debt Index and Debt Sustainability together prevent a state from hiding weak capital spending behind a low deficit.
Benchmarking
Odisha led with 67.8 while Punjab ranked last, and capital outlay ranged from about 27% of development spending in Madhya Pradesh to about 10% in West Bengal.
Early warning
Tracking debt and interest burdens against GSDP and revenue flags states drifting towards unsustainable borrowing.
Competitive federalism
Public ranking creates the peer pressure that the Ease of Doing Business rankings created, nudging laggards to copy leaders.
Cheaper borrowing
With market loans above half of state liabilities by 2019, a better profile can lower borrowing costs.
Revenue effort
Odisha and Jharkhand raising about 21% of revenue from non-tax sources shows others what is possible.
Discipline on freebies
A visible fall in prudence scores raises the political cost of untargeted subsidies.
Incentives and coverage
Link scores to Finance Commission performance grants and include off-budget borrowings and guarantees so scores reflect true debt.
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Question from the official UPSC Civil Services (Main) Examination 2025 paper. Answer written by Ghissu's engine and checked against our editorial standards. Found an error? Tell us and we correct it within 48 hours.