Towards Green Federalism: India Needs Benchmarking, State Ecological Scorecard

However, as noted earlier, it wasn't equitable in the sense of the relative climate vulnerabilities faced by the states and their ecological restoration needs.

From A Reactive To A Proactive Climate Framework

To institutionalise climate resilience in fiscal policy, the terms of reference must be revised under the 16th Finance Commission (FC) to explicitly include these factors. A green fiscal transfer framework should expand upon the existing forest cover-based incentives and incorporate additional parameters such as wetland conservation, soil health, and biodiversity richness — each weighted by the value of ecosystem services they provide, such as carbon sequestration and flood mitigation.

India’s current State Disaster Response Fund (SDRF) remains predominantly reactive, with limited scope for ex-ante investment. This necessitates a redesign of the SDRF to allow preventive and resilience-oriented spending, including early warning systems, ecosystem-based adaptation (e.g., mangrove restoration), and resilient infrastructure. Moreover, the allocation of disaster relief funds should be guided by region-specific risk exposure indices, using granular climate and hazard data.

An interstate ecological equalisation mechanism is also imperative. States like Bihar, Odisha, and those in the Northeast — which face high climate risks and low fiscal capacity — require targeted transfers to enhance adaptive infrastructure and capacities.

At the same time, states that maintain large tracts of ecologically sensitive areas, such as Arunachal Pradesh and Chhattisgarh, should be compensated for the development constraints imposed by conservation imperatives. Such compensation can take the form of tax devolution adjustments or dedicated cost-disability grants, reflecting restrictions under environmental regulations.

Strengthening Oversight & Data Governance

Effective implementation of ecological fiscal transfers requires robust monitoring, evaluation, and data transparency. A multipronged reform agenda should begin with the establishment of a permanent Ecological Fiscal Unit (EFU) within the Ministry of Finance.

This specialised unit, comprising experts from the Ministry of Environment, Forest & Climate Change (MoEF&CC), Central Pollution Control Board (CPCB), Forest Survey of India (FSI), and Indian Meteorological Department (IMD), would be responsible for integrating ecological parameters into fiscal decision-making processes.

Simultaneously, a unified environmental data platform must be created to provide real-time, publicly accessible ecological data. It should synthesise satellite-derived and ground-level datasets on forest health, water availability, air quality, and carbon flux, and be interoperable with the Public Financial Management System (PFMS). This will enable the generation of ecological dashboards to inform budgetary and planning processes at both state and district levels.

The development of multidimensional ecological indices is also essential. Metrics such as the forest quality index (based on biodiversity and canopy density), water stress index, air quality compliance score, and carbon sequestration rate, etc., can replace static indicators and guide performance-based green grants.

To ensure consistent benchmarking and interstate comparability, a state ecological scorecard should be developed and updated periodically. Not only will this promote healthy interstate competition, but also ensure accountability and evidence-based decision-making.

Further, an ecological performance review panel should be established to independently verify state-level data. States should be mandated to prepare annual green budgets aligned with the Finance Commission’s performance metrics. A climate and biodiversity fiscal transparency portal should also be introduced to facilitate real-time monitoring of ecological outcomes and fiscal flows.

Learning From Global Practices

India can benefit from international experiences in aligning ecological objectives with fiscal federalism. Brazil’s ICMS Ecológico redistributes a portion of state VAT revenues to municipalities based on ecological performance, providing a model for India to extend ecological fiscal transfers (EFTs) to sub-state levels, such as districts or panchayats.

Canada’s fiscal equalisation framework incorporates adjustments for natural resource revenue disparities, offering a blueprint for compensating Indian states with conservation-linked revenue constraints.

Similarly, the EU’s green conditionalities within its cohesion and agricultural funds demonstrate how environmental outcomes can be tied to fiscal disbursements. Grants can be linked to measurable targets such as forest carbon stock, wetland health, and land restoration.

Australia’s experience with community-driven restoration, through the Landcare Programme and environmental water buybacks in the Murray-Darling basin, shows the potential of co-financed, bottom-up conservation models.

India can replicate such models by designing eco-incentive schemes for local communities involved in forest, watershed, or wetland conservation, supported jointly by the Union and state governments.

Beyond Revenue-Sharing Frameworks

In conclusion, strengthening India’s fiscal federalism to address the ecological and climate challenges of the 21st century requires a paradigm shift in how intergovernmental transfers are conceptualised and operationalised.

The Finance Commission must move beyond traditional revenue-sharing frameworks to embed ecological resilience, climate vulnerability, and conservation efforts as core components of fiscal policy.

By adopting performance-based green transfers, compensating opportunity costs, and integrating real-time ecological data into financial governance, India can promote both environmental sustainability and fiscal equity.

Drawing on global best practices and tailoring them to India’s unique socio-ecological landscape will be crucial for building a more climate-resilient and inclusive federal system.

(This is Part 2 of a two-part series. You can read Part 1 here)

(Garg is former Special Secretary, MoEF&CC, and President, Mobius Foundation. Rathore is a research associate, Mobius Foundation. Views are personal)