UPSC Mains 2025 GS3 Q11 — Fiscal federalism, FHI
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? (Answer in 250 words)
Question Decoded — examiner's intent
- Directive verbs
- Explain
- Scope keywords
- Fiscal Health Index (FHI)assessing the fiscal performance of statesprudent and sustainable fiscal policies
- Implicit sub-parts
- What are the specific parameters/indicators used to calculate the Fiscal Health Index (e.g., Fiscal Deficit, Own Tax Revenue, Debt-to-GSDP)?
- How does the index allow for objective inter-state comparison and benchmarking?
- What are the mechanisms of behavioral change (incentives) created by public rankings and performance-based devolution?
- How does the index help in identifying structural vulnerabilities like high committed expenditure?
- Common pitfalls
- Defining general fiscal terms without mentioning specific FHI components like 'Tax Buoyancy' or 'Interest Payments to Revenue Receipts'.
- Spending too much time on the Union budget instead of focusing strictly on State-level fiscal dynamics.
- Failing to link the index to the 15th Finance Commission recommendations or NITI Aayog's monitoring role.
- Treating 'prudent' and 'sustainable' as the same thing rather than distinguishing between short-term deficit management and long-term debt solvency.
- Dimensions required
- Comparative FederalismMacroeconomic StabilityInstitutional AccountabilityPublic Financial Management (PFM)
- Marks allocation hint
Allocate 50-60 words to defining the FHI and its core pillars (indicators). Dedicate 90-100 words to the 'how' of assessment, focusing on data-driven benchmarking. Use the final 90-100 words to analyze the impact on state behavior, specifically regarding competitive federalism and long-term fiscal discipline.
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