For India to Take Climate Leadership, It Should Keep Forests in the Fiscal Devolution Formula

Forests have been all over the news recently as the Brazilian Amazon burns and the world reacts. One of the most consequential decisions for India’s forests will be made soon in a surprising place—the country’s 15th Finance Commission.

Five years ago, at the recommendation of the 14th Finance Commission, India began awarding a share of central government tax revenue to states in proportion to their forest area. When the 15th Finance Commission issues new recommendations on tax revenue distribution next month, it should keep the forest area indicator in the equation and update the year when forest area is measured to account for states’ recent forest growth. In a new policy paper, we argue that doing so would keep India at the vanguard of countries leveraging forests to combat climate change.

Nearly four percent of India’s GDP is distributed to states using the tax revenue distribution formula set by the 14th Finance Commission in 2014. The formula includes an indicator for forest area, alongside indicators for population, poverty, and land area. The motivations for including forest area in the formula were twofold. First, to compensate states for the “fiscal disability” they incur when they keep forests standing. And second, to recognize the “huge ecological benefits” that forests provide.

Forest-proportional tax revenue transfers have the potential to do more than just compensate states for maintaining forests in the past. They potentially offer an incentive to keep them growing into the future. If—and this is a big if—states expect that contemporary forest cover will remain part of the formula for many years to come, they will have a financial motivation to plant and protect forests; not just an environmental one.

Even states that currently have little forest area can gain by planting more trees. In August volunteers in Uttar Pradesh planted more than 200 million trees in a single day, eclipsing the record of previous tree-planting events in Madhya Pradesh and Uttar Pradesh. A durable and periodically updated forest area indicator in the formula would mean that states that plant trees can win not just Guinness World Records, but also revenue for their states’ budgets.

Forest-proportional revenue transfers comprise 7.5% of the total fiscal transfer from the central government to states, averaging around US$7.4 billion per year between 2015-16 and 2018-19. These revenue transfers represent the largest payments for forests between governments anywhere in the world, dwarfing the US$1 billion that Norway paid Brazil for protecting its Amazon forest.

Protecting and restoring forests—alongside increasing the availability of renewable energy—offers an important way to meet the challenge of climate change. Climate change is predicted to cost India more than any other country, despite India having per capita emissions of greenhouse gases well below many others.

lndia laid out a multifaceted and far-reaching plan for fighting climate change in 2015 that stated how the country’s growing forests pulled more than a billion tons of carbon dioxide out of the atmosphere between 2005 and 2013. The plan mentioned India’s long-term goal of increasing forest cover from 24% to 33% of its land area, and cited forest-proportional revenue transfers as an important initiative for giving afforestation a “massive boost.”

According to our research, the first three years of forest-proportional revenue transfers haven’t yet had led to an increase in states’ forest area. States where forest-proportional transfers comprise a larger share of state revenue haven’t reforested faster than other states.

Perhaps that’s to be unexpected. Forest-protection policies take time to implement; forests take time to grow; and growing forests take time be detected by satellite images. The 15th Finance Commission should keep forest-proportional revenue transfers in the formula at least until they’ve had a reasonable time to work—closer to ten years.

We find that states also don’t seem to be responding to the transfers by investing in forests in order to increase future tax revenues. States where forest-proportional transfers comprise a larger share of state revenue haven’t yet disproportionately increased their budgets for forestry. We surmise that this is because state government officials don’t yet expect that increases in forest cover will be rewarded with increases in revenues.

The 15th Finance Commission can address states’ cautious expectations by making the indicator of forest area contemporary—that is, by updating it to a more recent year to reflect recent forest growth. If this means increasing resources for the India State of Forest Report that’s well worth it to have a reliable basis for revenue transfers. States need to expect that the forest area indicator that their tax revenue is based on will endure and be updated, rather than cycle out or remain stuck in the past.

By keeping forests in the formula, the 15th Finance Commission can keep India in the forefront of nations fighting climate change.

Read the full paper here.


CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.