Later this year India’s 15th Finance Commission will review and recommend updates to the formula used to determine how much central tax revenue will be devolved to each state for fiscal years 2020-21 through 2024-25. Currently, 7.5% of the central tax revenue that is devolved to states (an estimated US$6.9-12 billion per year) is allocated to states in proportion to their forest area circa 2013.
These “ecological fiscal transfers” (EFTs) potentially provide Indian states with the incentive to increase their budgets for forestry as an investment in increased future shares of central tax revenue. Here we look at whether or not states are yet increasing forestry budgets to take advantage of this opportunity. We find that:
-- States increased their forestry budgets by 19% in the three years after the introduction of EFTs relative to the three years prior.
-- However, this 19% increase is considerably less than the 42% increase in state budgets across-the- board and the 65% increase in states’ social sector expenditures over the same time period.
-- States that are currently benefiting the most from EFTs did not systematically increase their forestry budgets as an investment in future revenue from EFTs more than other states.
We surmise that states are not yet certain that the EFTs will continue in such a way that increases in forest cover will be rewarded with increases in revenue. We recommend that the 15th Finance Commission resolve this uncertainty for states by i) keeping forests in the revenue devolution formula for another five years; and ii) updating the year for which forest cover is measured from 2013 to a later year (e.g. 2019). By doing so India’s EFTs can fulfill their potential as an innovative mechanism for incentivizing states to protect and restore forests, thereby mitigating climate change.