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Uttar Pradesh and Bihar have made significant progress in improving expenditure quality, focusing on developmental spending and capital outlays to drive growth. Yet, their struggles with revenue mobilisation pose a critical challenge.
Odisha and Chhattisgarh have emerged as India’s top-performing states in fiscal health in NITI Aayog's inaugural Fiscal Health Index (FHI), which reviewed 18 non-special-category states accounting for 85 per cent of gross domestic product (GDP). Odisha topped the rankings with an overall score of 67.8, driven by exceptional performance in the Debt Index (99.0) and Debt Sustainability (64.0). Its fiscal strength lies in low deficits, disciplined debt management, and an above-average capital outlay-to-GSDP ratio.
Chhattisgarh strengthened its position for balanced spending and effective debt control. On the contrary, large states like Andhra Pradesh, Punjab, West Bengal, and Kerala—tagged as ‘aspirational states’—grappled with revenue mobilisation, fiscal prudence, and debt sustainability.
The FHI evaluates states across five parameters—quality of expenditure: Developmental spending versus total outlay and capital investment relative to GSDP; revenue mobilisation: Efficiency in generating internal revenues; fiscal Prudence: adherence to deficit targets; debt index: Levels and structure of debt; debt sustainability: Capacity to service and manage obligations.
Based on FY 2022-23 data from the Comptroller and Auditor General (CAG), the report highlights Odisha’s success in growth-focused spending paired with debt discipline. However, it also flags significant gaps in weaker states, highlighting the need for structural reforms in revenue generation and debt management to secure fiscal stability.
Uttar Pradesh and Bihar stand out in quality of expenditure, prioritising developmental spending and capital outlays. Yet, their poor performance in revenue mobilisation highlights inefficiencies in generating own revenues.
Karnataka continues to impress with robust fiscal management, consistently performing well across most indices. However, its inclusion among ‘aspirational states’ in debt sustainability raises red flags about its debt-servicing capacity, the report said.
Odisha and Chhattisgarh shine in revenue mobilisation, bolstered by strong growth in own non-tax revenue, particularly from mining. Chhattisgarh’s weaker showing in debt sustainability points to vulnerabilities in long-term debt management.
The findings reveal a broader challenge: states excelling in specific dimensions, such as expenditure quality or revenue generation, often face deficits in others, like debt management. This emphasises the need for a balanced fiscal policy framework.
For mining-reliant states like Odisha and Chhattisgarh, diversifying revenue streams and enhancing debt sustainability mechanisms are critical to safeguarding fiscal stability over the long term.
The NITI Aayog highlights the growing fiscal challenges faced by states like West Bengal, Punjab, and Kerala, urging urgent reforms to address rising debt burdens and fiscal inefficiencies. West Bengal’s alarming debt-to-GDP ratio and its interest payments consuming 20.47 per cent of revenue receipts in 2022-23 signal a severe strain on its ability to fund development initiatives.
The report recommends a robust fiscal discipline and broadening revenue bases across states. Kerala’s struggles with low revenue mobilisation and inefficient resource allocation highlight the need for increased tax and non-tax revenues, along with a focus on boosting capital expenditure in social services.
In contrast, Gujarat’s relatively high score of 40/100 in expenditure quality reflects better standards in developmental spending.
The 16th Finance Commission’s recommendations, set to take effect in April 2026, aim to provide actionable frameworks to enhance fiscal performance and mitigate risks, especially for states burdened by unsustainable debt. The urgency for states like West Bengal, Punjab, and Kerala to adopt structural reforms is clear if they are to ensure fiscal sustainability and optimise resource allocation.