No increase in forestry budgets of states due to ecological fiscal transfers, says study

  • A latest study points out that though Indian states budgeted 19 percent more money for forestry in three years after the introduction of ecological fiscal transfers, the share of the states’ budgets allocated for forestry was 16 percent less than before.
  • Of the 25 states considered for the study, 21 increased their forestry budgets with a maximum increase of 65 percent in Maharashtra. Four states decreased their forestry budgets with a maximum decrease of 20 percent in Manipur.
  • The authors of the study emphasised that EFTs provide an incentive for states to maintain their forest cover, but states are yet to take advantage of it as they have not increased forestry budgets.

Even though Indian states budgeted 19 percent more money for forestry in three years after the introduction of ecological fiscal transfers (EFTs) than in the three years prior to its introduction, the share of the states’ budgets allocated for forestry was 16 percent less after than before (from 0.99 percent to 0.83 percent), a new study has revealed. 

The study emphasised that the 19 percent increase (Rs. 161 billion compared to Rs. 136 billion before) for forestry is considerably less than the states’ 42 percent overall budget increase over the same time period. 

The study, ‘Did India’s ecological fiscal transfers incentivize state governments to increase their forestry budgets?’, was published in the open-access journal, Environmental Research Communications in March 2020. The analysis was done by Jonah Busch of California-based Earth Innovation Institute, Avani Kapur of Delhi-based Centre for Policy Research and Anit Mukherjee of the Washington-based Center for Global Development

They studied India’s EFTs in detail, a move which sought to incentivise Indian states for maintaining forest cover, and analysed if states are taking advantage of EFTs. The study looked at 25 states and, of that, 21 increased their forestry budgets, led by a maximum increase of 65 percent in Maharashtra. Four states decreased their forestry budgets led by a maximum decrease of 20 percent in Manipur. The authors highlighted that the introduction of EFTs did not appear to be responsible for a large and immediate increase in state forestry budgets.

In accordance with the Indian Constitution, a Finance Commission is required to be established every five years and that Commission then recommends the distribution of central taxes between the government of India and the states (vertical devolution) and further sharing of such proceeds among the states (horizontal devolution). The 14th Finance Commission (FC) mandated forest cover as a criteria in the central tax distribution to states. The final report of the 15th FC is expected by the end of October 2020. 

Jonah Busch, an environmental economist who works on climate change and tropical deforestation and one of the authors of the study, said that he has been following the 15th FC. “Together with my colleagues Anit Mukherjee and Avani Kapur, I urged the 15th FC to keep state forest cover as an element in the tax revenue sharing formula and to update the year for which forest cover is measured,” Busch, who is the chief economist at the Earth Innovation Institute, told Mongabay-India. 

He explained that in its interim formula covering 2020-21 fiscal, the 15th FC upped the share of revenue tied to forest cover from 7.5 percent to 10 percent. The co-author of the study Anit Mukherjee said that the interim report, submitted in November 2019 and tabled in the Parliament along with the federal budget, recommends this change in the devolution formula with an increase in the share of forest cover.

Mukherjee said that he does not expect the sharing formula, per se, to change. “However, the current COVID-19 crisis will certainly have some repercussions. I expect a substantial grant-in-aid to states for pandemic preparedness and mitigation measures. Depending on how deep the crisis is, there may be a suspension of the FRBM (fiscal responsibility and budget management) ceilings on state borrowings to finance additional expenditure over the remaining four years of the 15th FC grant period.” 

Dense forest cover is an important criteria

Every year, the government of India distributes around Rs 7.5 trillion in divisible tax revenue to states and 7.5 percent of that is transferred in proportion to the states’ area of very dense and moderately dense forest cover, explained Busch. 

So, the more ‘very dense or moderately dense forest’ a state had in 2013, the more revenue it receives. Now with the 15th FC’s report, the share of divisible tax revenue that is based on dense forest cover will increase to 10 percent, and the year has been updated from 2013 to 2017.

According to Sushil Saigal, programme lead-lands, The Nature Conservancy-India, a science-led conservation NGO in the country, the inclusion of dense forest cover as one of the criteria for “horizontal devolution” by the 14th and the 15th FCs is a positive development that can lead to maintenance and enhancement of the country’s forest cover in the long run.

Maintaining and increasing forest cover can now lead to better incentives for states. Photo by Deepanwita Gita Niyogi.

“By continuing and strengthening the dense forest cover criterion in its interim report, the 15th FC has ensured stability and predictability of resources, which is essential for such incentives or nudges to translate into gains on the ground. This should help the states in long-term planning and budgeting. The states have a key role to play in preserving and reviving India’s forests,” Saigal told Mongabay-India.

However, Rohini Chaturvedi, who is on the board of the Global EverGreening Alliance, said that dense forests, as measured by the Forest Survey of India, are not always a good indicator of ecology because there is often no distinction between plantations and natural forests. “You can achieve dense forest cover in plantations, but it does not address the ecology side of it. We can also have dense forests of exotic species, say in Rajasthan, but we need native species and we are not looking at this nuance. Maybe in arid regions, dense is not naturally possible. From the ecology side of it, we need to bear this in mind.”

Read more: Are states being rewarded enough for protecting forests?

Incentivising forests

The authors of the study studied the country’s EFTs because they are the largest of their kind. “The Union government directs billions of dollars a year to state governments on the basis of their environmental performances, and in this case, their maintenance of forest covers,” Busch said. 

According to Busch, what happens in India is very important for avoiding climate change as well as protecting and restoring forests, along with increasing the availability of renewable energy. 

Regarding insufficient motivation on the part of states, Busch explained that for the EFTs to provide an incentive, states need to expect that if they increase their forest cover, they will be transferred more revenue. 

“But that was not necessarily the case before the 15th FC’s interim report since states did not know whether future revenues would be on the basis of future forest cover or past forest cover. But now the 15th FC has updated the date of the forest cover used to calculate the transfers from 2013 to 2017. So, states that recently increased their forest cover will earn more money this fiscal year (2020-2021) as a result of it,” he pointed out while emphasising that this sends a good signal that future forest increases will also be rewarded.

Involving local communities

In many areas in India, forests have been maintained by local communities and thus their role is significant. 

The state forest departments only look after areas under their jurisdiction, said Chaturvedi. However, according to her, there has been a significant increase in trees outside forests or forest cover outside forests largely because of community initiatives. “We have historical evidence of how communities have looked after forests in Uttarakhand, Odisha, Maharashtra and many other parts of the country,” she said.

According to Saigal, wherever forest departments have successfully collaborated with local communities, there have been positive outcomes for both forests as well as people. 

“The central government can further strengthen flagship initiatives such as the Green India Mission, the National Bamboo Mission, the sub-Mission on Agroforestry and the National Afforestation Programme. State governments could accord these sectors high priority, allocate adequate resources and closely monitor the outcomes of various forest conservation and restoration initiatives,” Saigal explained.

He said if the right policies and programmes are in place, fiscal transfers can play a positive role towards encouraging community participation in forest management. “By adding dense forest cover in the formula for determining different states’ share, the 14th and the 15th FCs have provided a strong incentive to the states to conserve and restore forests, and in my view, active participation of local communities is integral to this.”

A sacred grove in Gumla district of Jharkhand. Photo by Deepanwita Gita Niyogi.

The Forest Rights Act, 2006 was enacted to empower tribal communities living in forests for centuries. “However, the way the FRA came to be enacted shows that the relationship between locals and states has been antagonistic. But we need to think of community rights not as an end, but as a means to help us achieve our climate commitments and the SDGs,” Chaturvedi added.

In the past 14 years since FRA came into play, states do not have any incentive to continue with it, she added.

Read more: Protecting Jharkhand’s groves of faith

The performance of the states

The study points out that among the states, the maximum increase has occurred in Maharashtra and the maximum decrease in Manipur.

On this, Saigal said that it is pertinent to note that the latest available FSI report, the State of Forest Report 2019, is based on data collected from around two years earlier. The full impact of the 14th FC’s forest award can be discerned in the State of Forest Report 2023. “Considering the time taken in data collection, analysis and interpretation, the impact on the ground of the 14th FC award (applicable till March 31, 2020) can be assessed once the report becomes available,” added Saigal.

There are several reasons for gain and loss in forest cover, which includes both actual changes on the ground and improvements in data interpretation. The reasons for the observed change are usually provided by the Forest Survey of India in its biennial reports. The State of Forest Report 2019 shows the state with the highest gain in forest cover is Karnataka, explained Saigal.

“Where states are weighing decisions about forest diversion, the benefits of forests are no longer just ecological or social, they are also financial—around US $250 per year going directly into state budgets for each hectare of forest that’s spared from diversion,” said Busch. 

However, Chaturvedi feels that we do not need money flowing into state forest departments for improvement in forest cover. There are many decisions, which determine forest quality, that are actually taken beyond the forest department. 

But she acknowledged that this is the only way in which incentives are being provided to states to improve their forest cover as a way of financing other developmental priorities as well. “We need continuity to send out the right signal that as an incentive it will stay. It is important to ask the states as to why they are investing less,” she added. 

“It is true that many states have decreased the budgetary support to the forest departments. But maybe these states feel that the forest departments can use a lot of CAMPA money,” she pointed out. CAMPA (Compensatory Afforestation Management & Planning Authority) money is collected in lieu of forest land diverted for non-forestry purposes like dams and mining projects for carrying out compensatory afforestation.

Chaturvedi pointed out for many years there was a talk about the absence of incentives for political and administrative support to the forest sector. “After the Godavarman case (a Supreme Court decision) restricted felling, many states argued that forests were not generating any economic returns but were instead, becoming a financial and development liability,” she said.

She explained that though the grants of the 12th and 13th FCs were relatively small, they sent a big signal that we need to pay greater attention to maintaining and increasing forests. All of the 12th FC and part of the 13th FC grants flowed directly to the forest sector through the forest departments.

“The 14th and the 15th FCs, however, included forests in the devolution formula. Hence, state governments are now receiving the forest–linked incentive. This is the only way in which incentives are being provided to states to maintain and improve their forest cover. We need continuity of this incentive for its full impact to be realised,” said Chaturvedi while adding that the additional allocation on account of forests can also be used for financing other developmental priorities.


Busch, J., Kapur, A., & Mukherjee, A. (2020). Did India’s ecological fiscal transfers incentivize state governments to increase their forestry budgets?. Environmental Research Communications, 2(3), 031006.


Banner image: India’s forests and wildlife are under huge development pressure. Photo by Deepanwita Gita Niyogi.

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