CII unveiled new Index to measure fiscal performance

Confederation of Indian Industry (CII) has launched a new Index to measure fiscal performance titled ‘Fiscal Performance Index’(FPI). It uses multiple indicators to assess the quality of budgets presented by the Centre and state governments.

Key Points:

• FPI has been constructed using United Nations Development Programme’s (UNDP) Human Development Index methodology. It comprises of 6 components.
• As per the new index, expenditure on infrastructure, education, healthcare and other social sectors are considered to be beneficial for economic growth. In addition, tax revenues are considered as sustainable sources of revenue for the government against the one-time income sources.
• The CII has used this index to analyze state and central budgets from 2004-05 to 2016-17. It observed that in spite of the improvements, a reduction in the fiscal deficit between FY13 and FY18, the overall performance of the budget remained steady with improvements only in FY16 and FY17.
• The analysis pointed out that the high income states like Gujarat, Haryana and Maharashtra which are presumed to have good fiscal health because of low fiscal deficit to GDP ratio, did not perform well on the composite FPI as a result of poor expenditure and revenue quality compared to other states. Other states including, Madhya Pradesh, Andhra Pradesh, Uttar Pradesh and Bihar have done well on the FPI because of their good performance in revenue and capital expenditure indices.

6 main Components of FPI:

1. Quality of revenue expenditure: measured by the share of revenue expenditure other than interest payments, subsidies, pensions and defence in GDP.
2. Quality of capital expenditure: measured by share of capital expenditure (other than defence) in GDP.
3. Quality of revenue: ratio of net tax revenue to GDP (own tax revenue in case of States).
4. Degree of fiscal prudence I: fiscal deficit to GDP.
5. Degree of fiscal prudence II: revenue deficit to GDP.
6. Debt index: Change in debt and guarantees to GDP.