New index to Assess Quality of Central and State Budgets

The Confederation of Indian Industry (CII) has come out with a Fiscal Performance Index to assess the quality of budgets presented by the Centre and state governments.

Fiscal Performance Index

Fiscal Performance Index (FPI) is an innovative tool which uses multiple indicators to examine the quality of Budgets at the Central and State levels. It has been constructed using the UNDP s Human Development Index methodology.

The composite index FPI comprises the following six components for holistic assessment of the quality of government budgets:

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

CII also recommends that the Fiscal Responsibility and Budget Management (FRBM) Act which sets targets for the governments to reduce fiscal deficits must not solely focus on one component. Instead, a holistic performance of all entities viewed from all angles of expenditure quality, revenue receipts quality, and fiscal prudence should be taken into consideration.