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Incentivising and financing forest conservation in India

Blog | Sun, 20 May, 2018 · 9 min read
Incentivising and financing forest conservation in India

The positive effects arising from forest conservation directly impact both the revenue capacities and expenditure needs of various states in India. While benefits from forests have always been recognised, the lack of incentive-based mechanisms in the past meant that there was inadequate motivation for states to keep areas under forest cover and intact for the ‘greater good’ of society.

India’s Finance Commission is an extra-budgetary body that regulates the portion of centrally collected annual revenue which is distributed to states, while deciding on the formula that determines the allocation between states.

In the past, forests were not seen as a natural resource that needs preservation and expansion. Instead, forests were considered a handicap towards the economic development of India. States faced declining revenue from forests due to policies that restricted exploitation of forest resources. This deprived states with large forest cover of an important source of revenue. Ironically, Indian states that were not bound by such decree allowed diversion of forests for non-forestry purposes and earned revenues through a charge mechanism named Net Present Value (NPV) of diverted forest. Indian states conserving forests lost capacities to earn income through commercial felling while also having to bear the additional cost of conservation – for which no compensation was awarded by the Central Government.


Source: Forest Survey of India, India State of Forest Report (2011)


Considering this gap, for the first time, the 12th and 13th Finance Commission introduced a forward-looking incentive-based grant of INR 10 billion (USD 150 million) and INR 5 billion (USD 75 million) respectively over the period of 2005-09 and 2010-14, rewarding the states with forest cover and linking financial return to the canopy density of forests in each state.

The 14th Finance Commission of India (FFC) reinforced this forward-looking idea of incentivising Indian states for maintaining land under forest cover. Among many complex and multi-dimensional issues, FFC included the variable of forest cover in the devolution formula for allocation of taxes from the divisible pool. Through this, the Commission acknowledged that a large forest cover provides huge ecological benefits. It also recognised that there is an opportunity cost – in terms of area not available for other economic activities – that serves as an important indicator of fiscal disability. Forest cover was included in the formula with a 7.5 percent weight, among other factors such as population, fiscal capacity/income and geographical area.

Separating forest cover from grants and including it in the devolution formula means that changes in forest cover will now be reflected by an increased or decreased share in the allocation of taxes. This provides adequate incentives for conservation of forests in India.

The Government of India estimates that from 2015 to 2019 it will distribute USD 6.9-12 billion per year to states in proportion to their forest cover, amounting to an incentive of USD 175-300 per hectare of forest per year. With the first post-reform budget in 2015-16, USD 5.7 billion was transferred to states based on their forest cover. This scale of finance dwarfs most previous environmental payment programmes for tropical forests in terms of total finance and dollars per hectare.

In framing its recommendations, FFC was influenced heavily by a study executed by Centre for Ecological Services Management – a division of the Indian Institute of Forest Management in India. The study made the case of conservation finance for India’s forests and identified forests across the country holding high conservation value. Therefore, the study concluded that the forestry sector deserves special attention for conservation, preservation and enhancement of forest cover.

States with large forest cover now find that their efforts of maintaining and conserving good forests is paying in the form of enhanced allocation in taxes from the divisible pool. This recognition by the Government of India can be considered payment for ecosystem services provided by the forests. It encourages individual Indian states to retain high forest cover and provide stronger livelihood support to forest-dependent communities.

Incentivising and financing forest conservation in India
© singhajay

This innovation in fiscal federalism will attempt to compensate forest-rich states for the resulting handicap in carrying out developmental work. This is also a reward for the opportunity cost of not diverting forest areas for other non-forest purposes. The increased funding incentivises and empowers all states to improve the quality of degraded forests (or forests with low density cover) and ensures an increased flow of ecosystem services from India’s forests.

The funds will also help cover the increased cost of delivering desirable social and developmental services to people living inside or near forest areas; to ensure that they are not left behind. This forward-looking move of the Government of India will go a long way in ensuring that a living tree is more valuable than a dead one in India.

Download and view the report - High Conservation Value Forests:An Instrument for Effective Forest Fiscal Federalism in India

The information and views set out in this guest blog post are those of the writers and do not necessarily reflect the opinion of the UN-REDD Programme.