Intergovernmental fiscal transfers and the environment: a study of India

Abstract

Across the world, intergovernmental fiscal transfers in federal structures have the principle of equity as a paramount feature; it is in this context that the question of equity versus efficiency has been raised frequently. It has been argued that a total commitment to equity often leads to Rob-Peter-to-Pay-Paul approach , creating disincentives to the relatively well-off or the so called efficient administrative units within the federation (of States). The resultant friction between the protagonists of equity and of efficiency could be minimized to a certain extent by ensuring that the fiscal transfers also take into account parameters other than the existing socioeconomic parameters. The main premise of this study is that environmental externalities can potentially be an important such parameter. Whereas the socio-economic functions in public domain have long been an integral part of inter-governmental fiscal transfers, the functions related to ecological services have not been reasonably included yet. This study attempts to evolve a framework for the design of fiscal transfers after taking into account environmental externalities in the Indian context. Given the broader questions of public acceptability and the need for simplicity in order to become operational, the framework has been kept simple by proposing both vertical transfers from the Centre to States as well as horizontal transfers among the States to be based on their relative conservation measures and consumption patterns that generate environmental externalities. Instead of merely using total forest area as the conservation measure, overall health of forests with the notion of effective forest area based on the density of forest cover is proposed as an improved measure of the provision of ecological services by forests. From the choice of various parameters, the State-wise consumption of Motor Spirit (MS) and High Speed Diesel (HSD) was found to be the feasible parameter for identifying consumption patterns leading to negative...