Compensation for Environmental Services and Intergovernmental Fiscal Transfers in India

The paper analyzes the role of intergovernmental fiscal transfers in achieving environmental sustainability. Generally, genesis of environmental degradation can be found in the incentive structure of governance in India. About 35 percent of total grants-in-aid recommended by the 12th Finance Commission are used for the provision of environmental services and are predominantly given for developing end-of-pipe infrastructure. Earmarked grants are better suited for environmental clean-up activities. Lump-sum transfers based on a predefined formula are good candidates for precautionary activities. Financial acknowledgements of the environmental services provide incentives for enhancing environmental services. The inclusion of environmental services in the allocation of fiscal transfers would also help in reducing poverty and regional disparities