Ecological Fiscal Transfer in India

Broadening the Framework

Abstract

India adopted ecological fiscal transfer (EFT) in the 14th Finance Commission (FC) and redefined the tax share formula by adding the net forest cover alongside other parameters such as population, income, area, tax collection, and demographic performance. The 16th FC has tried to bring some positive changes in the EFT formula by combining the share of weighted forest area and share of increase in the weighted forest area of states to address oversimplification of the ecological variable. However, the EFT has more potential, beyond just forest. Other national-level issues, specifically air and water pollution, trickle down to the local level, squeezing the subnational expenditure. Therefore, including pollution in fiscal transfers would do justice to lower-level governance. In this context, the ‘Forest and Ecology’ in the tax devolution can be replaced with a multidimensional environmental component, combining the forest, air and water quality. However, if the union government is not confident enough to experiment with the pollution angle in the transfer mechanism, they can consider including biodiversity in the transfer formula as an immediate action. This will be a less radical way to modify the EFT framework by integrating biodiversity along with forest cover, keeping the essence of forest and ecology in the centre of EFT. The commentary offers an alternative narrative for the EFT mechanism in India and paves a way to a different set of ideas that can be further expanded and studied empirically.