In January 2026, the authors’ article in Down to Earth argued that the 16th Finance Commission had a rare opportunity to move India’s ecological fiscal transfers beyond static forest by expanding the indicator base, rewarding performance alongside possession, and aligning fiscal incentives with real conservation outcomes. The Commission’s report has since been released, and this article examines what changed. The revised formula takes a meaningful step: open forests are now included, and a fifth of the ecological pool is tied to improvement in forest cover. Yet a state-level look of the Rs 7.83 lakh crore ecological allocation reveals a structural tension. The states facing the greatest pressure to conserve are not always those best placed to benefit from the new design.
For decades, India’s forest-rich states faced a fiscal paradox: the more forest they maintained, the less land they could put to economic use. Yet this contribution found no place in the sharing of central taxes. That changed in 2015, when the 14th Finance Commission assigned a 7.5 per cent weight to forest cover in deciding each state’s share of the national tax pool. It was the first time an ecological service was formally recognised within India’s system of fiscal transfers. The principle is straightforward: forest-rich hilly states store carbon, conserve biodiversity and regulate water for the country as a whole, while the cost of leaving that land undeveloped is borne locally. The 15th Commission retained the criterion and raised its weight to 10 per cent, but kept the formula anchored to dense forest alone. The 16th Commission has preserved that 10 per cent while changing what is counted, and how.
The revised approach expands the formula in two respects. First, it broadens the definition of forests to include open forests. These are landscapes with sparse and fragmented tree cover that span a wide range of ecologically important ecosystems across India. Though they lack dense canopies, they sequester carbon, regulate water and support forest-dependent livelihoods. At the same time, the formula continues to differentiate by ecological quality, assigning higher weights to denser forests and lower weights to open forests.
Second, and more significantly, the formula begins to reward improvement rather than possession alone. While 80 per cent of the ecological allocation continues to be distributed on the basis of a state’s forest stock, the remaining 20 per cent is reserved for states that increased forest cover between 2015 and 2023. States with declining forest cover receive no share of this component. This introduces a dynamic element into what was previously a static measure, signaling that allocations reflect not only a state’s forest endowment but also changes in forest cover over time. By linking a portion of transfers to improvements in forest cover, the formula creates a fiscal signal for restoration alongside conservation, broadening the incentive beyond existing forest stocks and recognizing efforts to improve and restore degraded forest landscapes.
One limitation deserves mention. The underlying forest classification does not distinguish natural forests from plantations: a stand of eucalyptus or rubber plantations, or fruit orchards, can meet the canopy threshold and be counted as forest. This risks, assigning the same fiscal value to a commercial plantation as to the regeneration of a natural ecosystem. Future assessments would need to address this measurement gap.
With open forests entering the formula, the distribution of state shares is rebalanced. Dry, largely agricultural states gain the most. In Rajasthan, where open forest accounts for nearly three-quarters of total forest cover, the ecological share rises by about 54.5 per cent; in Haryana by 46.6 per cent. For these states, forests are part of a mixed landscape rather than the basis of the economy.
Conversely, bringing open forest from all states into a common pool erodes the relative position of states with large dense forest. Arunachal Pradesh, Chhattisgarh and Uttarakhand each see a decline in their stock-based allocations. These are also among the states with relatively higher dependence on central transfers and less diversified economies. A third group, including Maharashtra, Tamil Nadu, Madhya Pradesh and Odisha, remains largely unaffected, since their mix of forest types mirrors the national average. The result is a rebalancing of ecological allocations rather than a fundamental restructuring of the transfer system.
The performance component does not merely extend this redistribution; in several cases it reverses it. States that lose share under the stock component can recover through gains in forest cover, while states that gain from the inclusion of open forests may see that advantage eroded if their forest cover declines.
Andhra Pradesh is the clearest illustration. By adding nearly 3,054 sq km of forest, it nearly doubles its allocation, from about Rs 31,500 crore to Rs 59,598 crore. Karnataka follows a similar trajectory: its stock share contracts by 9.18 per cent, but gains in cover raises its total allocation by 41 per cent. Together, the two states account for 44 per cent of the Rs 1.56 lakh crore performance pool, despite holding only a tenth of the country’s forest. For Andhra Pradesh, the annual gain of about Rs 5,620 crore is more than twenty times what the state spends on its forests each year.
The contrast with declining-cover states is sharp. Uttarakhand, where forests cover about 71 per cent of the geographical area, records a marginal decline in forest cover and consequently receives no share of the performance pool, losing close to Rs 9,940 crore over the award period relative to the earlier formula. In all, seven states receive no performance allocation, including Arunachal Pradesh, Madhya Pradesh, Uttarakhand and Kerala, which together account for more than a third of India’s forest cover. The reward, in effect, flows towards states with the resources and institutional capacity to expand forest cover, rather than towards those that hold the country’s most significant forest assets.
The revised formula preserves the redistributive logic that has long underpinned these transfers: forest-rich states tend to be poorer, and their larger ecological shares reflect this. What it adds is a new signal. A state that expands forest cover now earns a fiscal return, regardless of its existing stock. This marks a shift from compensating states for holding forests towards rewarding them for improving them.
Two gaps remain. Dispersed farm trees and agroforestry systems, a substantial part of rural India’s tree cover, still fall outside the formula; future commissions could bring them in, alongside measures of ecological quality such as carbon stocks. The more fundamental constraint is scale. At 10 per cent of total devolution, the ecological criterion may be too modest to alter state behaviour, and many of the states holding the country’s most significant forests still lack the resources to maintain them, let alone improve them.
As climate and biodiversity pressures intensify, fiscal policy will play a growing role in shaping ecological outcomes. The 16th Commission takes a meaningful step towards recognising forests as natural capital, rewarding existing forest assets while creating incentives for restoration and adaptation. It has set the direction; whether this translates into stronger conservation outcomes will depend on the weight given to these signals and on how states choose to respond.
Madhu Verma is Senior Economic Adviser and Chief Environmental Economist at Iora Ecological Solution, New Delhi;
Shweta Bhagwat is Senior Specialist, Nature based Solutions and Climate Finance at Iora Ecological Solution, New Delhi
Amitabh Kundu is Senior fellow at Iora Ecological Solution, New Delhi, and ex-professor, Jawaharlal Nehru University
Ankit Pacha is a Senior Associate at IORA Ecological Solution, New Delhi
Views expressed are the authors’ own and don’t necessarily reflect those of Down To Earth