Every few months, climate shocks remind us how fragile India’s development trajectory is. A cloudburst in the Himalayas, a flood in a drought-prone district and heat islands in most large cities. We talk about infrastructure, insurance and early-warning systems. What we rarely talk about is the role of a powerful constitutional body that shapes the direction of funds from the Centre to the states: the Finance Commission.
The Sixteenth Finance Commission (SFC) is set to release its report and is being keenly awaited. The Fourteenth and Fifteenth Finance Commissions took important steps by recognising forests in the tax devolution formula and carving out grants for forest and ecology. The framework, however, remains forest-centric and static. It rewards states for the area of forest they have on paper, with little consideration of how they are managing, restoring or expanding their ecological assets.
Where ecological money goes
Understandably, forest-centric devolution formulae tend to ignore the special challenges faced by states with fragile Himalayan slopes, biodiversity hotspots, coasts, wetlands and stressed aquifers that are quietly absorbing the opportunity costs of conservation. These states forgo roads, mining projects or real-estate windfalls to maintain ecological buffers that are critical in the national interest.
Yet ecological spending by states hovers at roughly 2-3 per cent of their budgets, while public finances continue to bear almost the entire burden of climate adaptation. Expecting states to shoulder rising ecological responsibilities without a commensurate redesign of fiscal support undervalues their opportunity costs.
It is therefore imperative that the SFC moves from a forest-centric to an ecology-centric devolution formula. Forest cover must remain an important criterion, but it cannot be the only ecological proxy. Trees Outside Forests that line farms and cities, carbon stored in forests and agroforestry systems, the extent and health of Protected Areas, groundwater status, and the incidence of forest fires all shape India’s resilience. An ecology-centric approach would expand the criteria to recognise this full mosaic of green and blue assets.
At present, data constraints are a major challenge and often lead to inaction. Many of the indicators we need — including wetlands and mangroves, invasive species, biodiversity richness, soil health, water and air quality, and climate vulnerability — exist only in fragments, housed across different institutions and formats.
The SFC can change this by explicitly recommending the creation of robust, national-level ecological databases as a fiscal priority in itself. Good data is not a technical luxury; it is the backbone of fair ecological federalism.
The second task is to reward performance, not just possession. A formula that relies on static “stock” indicators such as total forest area will always favour states with large inherited endowments, regardless of whether those forests are degrading or improving. Modelling exercises show how significantly interstate incentives change when even a modest share of funds is linked to “flow” indicators that capture improvement or decline.
A third, often overlooked, issue is what happens to ecological funds after they reach state treasuries. Today, most ecological transfers are not ring-fenced; they merge into general budgets. Forest departments, wetland authorities and biodiversity boards must then compete for allocations like all other departments. The SFC cannot micro-manage state spending, but it can do far more to tag and protect ecological funds.
For instance, it could recommend that the share of devolution attributable to ecology be transparently reported and tracked, or link a portion of performance grants to demonstrable increases in spending on forests, biodiversity, wetlands, coastal protection and nature-based adaptation. Transparency and gentle nudging can prevent ecological allocations from becoming invisible.
Design choices that matter
Perhaps the most urgent design choice before the SFC, however, concerns India’s ecological frontline: The Himalayas. The Indian Himalayan Region is the hydrological engine of the subcontinent. Its glaciers, snowfields, forests and rivers sustain hundreds of millions of people downstream. Yet it is also India’s most climate-vulnerable region, facing landslides, glacial-lake outburst floods, flash floods and erosion that are intensifying with every fraction of a degree of warming.
While retaining the principles of equity and efficiency, what must change is the lens through which ecology is viewed. The shift needs to be from a narrow forest proxy to a richer set of indicators; from static stocks to dynamic change; from generic transfers to tagged and trackable ecological investments; and from treating all geographies alike to recognising the special responsibilities of climate-exposed regions.
If the SFC embraces this agenda, India could become a global leader in ecological fiscal transfers, demonstrating how a large federal democracy can embed climate and biodiversity concerns into its core revenue-sharing mechanisms rather than treating them as afterthoughts or donor-driven projects. If it does not, we will continue to ask under-resourced state agencies to do more with less, even as climate risks mount and ecological buffers erode.
In a climate-challenged India, the SFC has a rare opportunity to future-proof the federal compact by aligning money with the ecosystems that keep the country liveable. That is not just good ecology; it is sound economics.
Madhu Verma is senior economic adviser and chief environmental economist at Iora Ecological Solution, New Delhi; Amitabh Kundu is senior fellow at Iora Ecological Solution, New Delhi, and ex-professor, Jawaharlal Nehru University; Swapan Mehra is chief executive of Iora Ecological Solution, New Delhi; and Priyamvada Bagaria is senior manager at Iora Ecological Solution, New Delhi.
Views expressed are the author’s own and don’t necessarily reflect those of Down To Earth
