Why in News?

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

Fiscal Performance Index (FPI):

• The composite FPI developed by CII is an innovative tool using multiple indicators to examine quality of Budgets at the Central and State Level
• The index has been constructed using UNDP’s Human Development Index methodology which comprises six components for holistic assessment of the quality of government budgets.

Why need such an index?

• A single criterion such as the ‘fiscal deficit to GDP ratio’ does not tell us anything about the quality of the Budget.
• Hence, the Government should use multiple indicators to measure the quality of Budgets at the Central and the State levels rather than a single indicator

Components of FPI:

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

Other measures of FPI:

• As per the new index, expenditure on infrastructure, education, healthcare and other social sectors can be considered beneficial for economic growth
• At the same time, tax revenues are sustainable sources of revenue for the government as compared to one-time income source