Ecological Fiscal Transfers

The Center for Global Development analyzed state budgets to examine whether ecological fiscal transfers (EFTs) have impacted state forestry expenditures in a recent study.
  • EFTs are meant to reward states that protected their forests. Within the total center-state disbursement, 7.5% was set aside to be divided among states based on the area of forests within states (by 14th Finance Commission).
  • Consequently, states that preserved forests stood to gain in terms of greater disbursement from the center.
  • Based on available state budget data of 25 Indian states which accounted for 90% of India’s forest cover (as of 2013), they find that forestry budgets increased by 19% in the three years EFTs were introduced. However, the authors do not attribute the increase in forestry budgets to EFTs because forest spending as a share in total state spending actually decreased by 16% post EFT.
  • EFTs did not increase forest budgets either because states did not expect them to be a criterion in future tax devolutions of the funding was not significant enough.
  • For EFTs to work as a mechanism to restore forests and mitigate climate change, it needs to be retained in the next devolution formula by the 15th Finance Commission with the base year for forest cover measurement updated to 2019 (from 2013 currently).
  • Ecological Fiscal Transfers (EFTs) distributes a share of intergovernmental fiscal transfers and revenue sharing schemes according to ecological indicators such as protected areas or watershed management areas. These conservation areas thus become a source of income for the receiving governments.
  • Today, EFTs are often seen as an instrument that incentivizes decentralized conservation efforts.

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