Tamil Nadu Fiscal Health: NITI Aayog Report Reveals Surprising Rankings | Chennai News
TN Shows All The Signs Of High Growth, But Low Fiscal Health Index Score Points To Either Flaws In Formula Or Strain On Finances Due To Focus On Welfare
K R Shanmugam & Saumitra N BhaduriTamil Nadu’s economy is, by most visible measures, a success story. It is among the fastest-growing states, ranks first in GSDP growth and second in contribution to GDP. On the social front, it has the highest enrolment in higher education and the second-lowest poverty ratio. Yet, according to the Fiscal Health Index (FHI) 2026 released by NITI Aayog for 2023-24, Tamil Nadu ranks 13th among 18 general category states, with a score of 29.8%. Moreover, TN’s rank is lower than its position (ninth) in the horizontal devolution formula by the Sixteenth Finance Commission (SFC).The position appears incongruous given the state’s strong economic and social performance. One explanation is that the state uses fiscal resources to support growth and welfare outcomes rather than strict fiscal consolidation.Although the state’s score increased slightly from 29.2% in 2022-23, its rank declined from 11th to 13th. TN has slipped from the ‘Performer’ category to ‘Aspirational’, indicating emerging fiscal pressures. The FHI is a data-driven framework designed to assess fiscal performance, identify vulnerabilities, and support evidence-based policymaking at the state level. It is built on five pillars and nine sub-indicators. It is built on five pillars and nine sub-indicators, including development expenditure to total expenditure, capital expenditure to GSDP, own revenues to GSDP, own revenues to total expenditure, fiscal deficit to GSDP, revenue deficit to GSDP, interest to revenue receipts, outstanding liabilities to GSDP, and the gap between GSDP growth and interest payment growth. The Linear Scaling Technique (LST) is used to standardise indicators so that each indicator score ranges from 0 to 1. All indicators are assigned equal weights.This index is relevant because it considers tax policy (affecting disposable incomes, aggregate demand, and relative prices), expenditure indicators (reflecting the scale and composition of public spending), and deficit and debt indicators (critical for macroeconomic stability and growth).The report also analyses fiscal trends over a decade (2014-2015 to 2023-2024), providing a longitudinal perspective on states’ fiscal trajectories. As per the report, TN’s fiscal health has deteriorated over the past decade. During 2014-15 to 2016-17, the state ranked 9th with a score of 40.5%, but this declined to 15th with a score of 31.5% during 2017-2018 to 2019-2020.Tamil Nadu’s quality of expenditure score declined from 33.6% (2014-2015 to 2016-2017) to 25.1% (2017-2018 to 2019-2020), and eased again to 30.5% in 2023-2024 after a brief recovery. The revenue mobilisation score fell steadily from 49.9% to 39.8% over the same period. The fiscal prudence score dropped from 29% to 15.3%, before settling at 21.5% in 2023-2024. The debt index score went from 76.5% to 39.1%, while the debt sustainability index fell to 18.2% in 2023-2024, indicating rising fiscal stress.Interest payments accounted for a quarter of the state’s committed expenditure, highlighting a high debt servicing burden. Outstanding liabilities increased by 11.6% over the previous year, while public debt grew by 14.2%, reflecting continued borrowing to finance expenditures and meet fiscal requirements.Overall, the report shows the importance of strong state finances for macroeconomic stability. It calls for better tax mobilisation, tighter control of committed expenditure, higher capital spending, and stronger fiscal discipline. Despite its usefulness, the FHI assigns equal weights to all five pillars, but aspects such as macroeconomic stability and tax capacity may warrant different weights based on statistical methods.Further, development expenditure includes capital expenditure, potentially leading to double counting within the quality of expenditure pillar since deficits are essentially the difference between expenditure and revenues. It fails to account for the outcome of fiscal policies such as how education expenditures increased higher education enrolment. SFC followed earlier commissions in using income distance, area, population, forest cover, demographic change and GDP contribution to determine horizontal devolution of central taxes to states.Under the SFC’s devolution formula, TN ranks 9th with a horizontal share of about 4.1%. However, discrepancies emerge when comparing these allocations with the FHI rankings. For Example, Odisha ranks first in FHI but 12th in SFC ranking, receiving 4.4% share. Similarly, Uttar Pradesh ranks 8th in FHI but 18th in SFC, receiving the largest share (17.6%) and Bihar ranks 12th in FHI but 17th in SFC, receiving the second-largest share (9.9%). These discrepancies arise because the SFC relies on indirect proxies rather than direct measures of fiscal performance. If the SFC had used the FHI ranking criterion, Tamil Nadu’s share of central taxes could rise from 4.1% to about 6%. This percentage point increase would translate into a substantial gain, amounting to about `1.9 lakh crore over the award period, or roughly ₹38,040 crore more each year.There is a need to refine the FHI to better assess states’ fiscal performance and to consider its use as a criterion for tax devolution.(K R Shanmugam is former director of Madras School of Economics; Saumitra N Bhaduri is professor at MSE)
