Greening Fiscal Federalism

Lost in the din of the major recommendation of increasing the states’ share of central tax revenues from 32% to 42% by the Fourteenth Finance Commission (XIVFC) (2015–20), was the ₹55,000 crore horizontal devolution (based on a 7.5% weight for forest cover) for each state. Hailed as a game-changing watershed recommendation, the new dispensation provided ₹2,96,114 crore, amounting to an annual financing of about ₹55,000 crore, that surpassed the annual budget for the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA). For the first time, states with a legacy of very dense forests (VDF) and moderately dense forests (MDF) benefited the most from this new instrumentality of fiscal transfers.

The rationale behind awarding a 7.5% weight for dense forest cover was that while large forest cover provides huge ecological benefits, it also gives rise to an opportunity cost in terms of the area not being available for other economic activities. The devolution formula, therefore, captured both the revenue and cost disability of preserving forests.