NITI Aayog’s Fiscal Health Index is examined, highlighting methodological limitations arising from its emphasis on fiscal prudence over states’ structural and developmental differences. Regression analysis shows that higher fiscal and revenue deficits significantly reduce FHI scores, potentially penalising states with greater social and developmental spending. Comparative evidence further indicates that several “aspirant” states with weaker FHI scores outperform “achiever” states on human development indicators. The findings question whether fiscal prudence necessarily translates into improved welfare and call for a more nuanced assessment of sub-national fiscal health in India.

The author thanks Pinaki Chakraborty for his helpful comments and advice.

Is fiscal profligacy harmful to a nation? Some studies suggest that well-targeted public spending can improve human development outcomes (Bose and Banerjee 2025). The question also concerns efficiency and equity, which have long been central to public finance and have gained renewed attention in the Indian context (Muralidharan 2024). Fiscal prudence in budget allocation is meaningful only when it ultimately enhances citizens’ welfare. 

This article examines this debate in the context of NITI Aayog’s (2025) recent report on the Fiscal Health Index (FHI), which seeks to quantify and rank states using a set of fiscal indicators. A central question is whether a composite index can adequately capture the broader dimensions of fiscal prudence. The report leaves considerable ambiguity regarding the methodology used to measure fiscal prudence, particularly in relation to the framework envisaged by the Fifteenth Finance Commission. 

The analysis suggests that the FHI methodology may be biased towards certain indicators. The core research question is whether the FHI is associated with development outcomes. The results show a negative correlation between the FHI and selected development indicators, with states performing well on the FHI often lagging on key development measures. An exploratory analysis of the determinants of the FHI further indicates that the index is disproportionately driven by certain fiscal indicators. Specifically, a 1 percentage point increase in the fiscal deficit is associated with a 13 percentage point reduction in the FHI score, while a 1 percentage-point increase in the revenue deficit is associated with an 8 percentage point reduction; both effects are statistically significant at the 1% level. When forest cover (in square kilometres) and the share of the primary sector in the gross state domestic product (GSDP)—both variables used in the Finance Commission’s horizontal devolution formula—are included, the coefficient sizes decline.

The rest of the article is organised as follows. The first part examines the methodology underlying the FHI and its potential limitations. The second part examines development indicators and their possible associations with the FHI across states. The third part analyses the quantitative relationship between the FHI and other indicators. The article concludes with possible ways forward.

Methodological Limitations of the Fiscal Health Index

The FHI, recently published by NITI Aayog (2025), seeks to assess the fiscal health of Indian states. Given that states account for nearly two-thirds of public expenditure and one-third of total revenue, the report provides import­ant insights into sub-national fiscal performance. The composite FHI comprises five subindices: quality of expenditure, revenue mobilisation, fiscal prudence, debt index, and debt sustainability. The report identifies robust revenue mobilisation, effective expenditure management and prudent fiscal practices as key determinants of fiscal health. States are classified into........

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