Measuring Fiscal Performance of States

An alternative approach of measuring the fiscal discipline of states by preparing a composite index (Fiscal Performance Index) out of eight fiscal indicators is attempted in this paper. It is argued that although the Eleventh and Twelfth Finance Commissions fully recognised the importance of different fiscal parameters, like the composition of government expenditure, sources and pattern of government finances, the magnitude of debt, subsidies and interest burden, the measure of fiscal discipline, adopted by them is based on only one indicator. The Fiscal Self Reliance and Improvement Index constructed by the TFC that considers the 'change' in a single indicator is narrowly based, unstable and biased against the better fiscal performers. The suggested FPI, on the other hand, is multi-dimensional, more stable, just towards better performers and also useful for state level policy-making. The empirical analysis suggests the large inter-state variations in the level of FPI and almost continuous fiscal deterioration during the post-reform years.