Uttarakhand and the fiscal paradox of ecological security 

As ecological risks intensify across India’s mountain states, the question is no longer whether forests generate national benefits, but how these benefits and risks are being recognised and internalised within the country’s fiscal federal architecture. Forests have been part of India’s tax devolution formula since the Fourteenth Finance Commission (FC14), signalling an important shift in recognising them as fiscal assets. The underlying logic has been one of compensation: forests generate national benefits, while the opportunity costs of maintaining them are borne locally. But the Sixteenth Finance Commission (FC16) takes this a step further. It moves beyond measuring forest stock to asking a more critical question: are states improving the quality of their forests? Two changes distinguish FC16 from its predecessors. First, it broadens the definition of forest to include Open Forest (OF) alongside Moderately Dense (MDF) and Very Dense Forest (VDF) categories, recognising that ecological function is not limited to density classes. Second, and more significantly, it links 20 percent of forest-ecology-based devolution to changes in weighted forest cover between 2015 and 2023. With this reframing, forests are no longer treated as static assets, but as outcomes shaped by policy effort and fiscal investment. 

The fiscal paradox of Uttarakhand’s forest 

For Uttarakhand, this recalibration is especially consequential. Sitting in the Western Himalaya, the state’s forests, wetlands, and mountain ecosystems support water security, buffer disasters, and regulate climate well beyond its borders. Nearly 47% of the state’s land is covered under forests, generating ecosystem services valued at over INR 95,112 crore annually, with the total forest assets valued at over INR 14.1 lakh crore (Verma et al., 2019). These values are significant numbers even when viewed against the state’s entire fiscal base. Yet this substantial contribution, either direct or indirect, to the state’s economy does not translate into fiscal strength. Budgetary allocations to forestry and wildlife remain modest, at just 1.3% and 2.6% of total state expenditure. In 2025–26, spending stands at around Rs 1,157 crore and continues to be financed largely from the state’s own resources. The result is a familiar imbalance: Uttarakhand generates national ecological value but bears a disproportionate share of the costs. This challenge is further compounded by its geography, as nearly 85% of its terrain is mountainous, raising the cost of everything from roads and healthcare to water supply and disaster response. 

 Uttarakhand’s aggregate forest cover appears deceptively stable, shifting only marginally from 24,240 sq km in 2015 to 24,304 sq km in 2023. But the FC16 lens, which looks beyond canopy, reveals a more consequential shift. Between 2015 and 2023, VDF increased by 513 sq km (weighted gain of 513 sq km) and OF by 635.6 sq km (weighted gain of 190.7 sq km); however, MDF, the most expansive and ecologically significant class, declined by 1085.4 sq km (weighted loss: 705.5 sq km). 

 The change in composition is equally stark. Ban Oak Forest, a key broadleaf species in Uttarakhand’s mid-hill ecosystems, declined by 56%, giving way to Chir Pine, a fire-adapted, less ecologically resilient species. Moru Oak, another important broadleaf species, contracted by 87%. These are not mere statistical findings, but structural losses in forest quality that the FC16 framework is designed to capture. 

 Applying the Commission’s weights of 1, 0.65, and 0.3 for VDF, MDF, and OF respectively, this translates into a net weighted loss of 1.3 sq km, seemingly minor, but sufficient to disqualify the state from the 20% performance-linked devolution. Even modest improvements in forest quality carry significant fiscal upside. If Uttarakhand were to record a positive change under the performance component, and progressively recover MDF, the additional devolution gains could range from about ₹15 crore to about Rs 7,500 crore, depending on the scale of restoration. The arithmetic also points clearly to the policy lever: every 100 sq km restored from OF to MDF or from MDF to VF yields a weighted gain of 35 sq km, offering a direct and measurable return to investments in forest quality. 

 Forest fires: The missing fiscal signal 

 Among anthropogenic pressures like forest diversion for infrastructure, grazing, fuelwood collection, forest fire emerges as one of the key drivers of this compositional shift. Between 2016 and recent years, annual fire-affected forest area in Uttarakhand has ranged from 12.9 to 44.3 sq km, which is 10 to 34 times larger than the 1.3 sq km weighted shortfall that cost the state its eligibility for performance-linked devolution. 

The fiscal penalty is threefold: suppression and post-fire restoration expenditure falls almost entirely on the state exchequer; each fire event risks degrading forests from higher to lower density classes, directly eroding the weighted forest base; and the cumulative effect risks keeping the state below the performance threshold. 

The pressure is concentrated in a few districts. In 2023–24 alone, Nainital recorded 3,320 fire detections, followed by Uttarkashi with 2,457 and Chamoli with 1,331. The impact on forest structure is already visible in these regions. Nainital saw the sharpest district-level decline in MDF, losing 356 sq km between 2015 and 2023. Though VDF in the district increased by 178 sq km over the same period, overall forest cover still declined by 137 sq km, pointing to a broader shift towards degradation. Bageshwar, Uttarkashi, and Chamoli show a similar pattern, where fire and canopy thinning are steadily eroding the MDF base. 

Each fire season risks undoing years of active restoration effort. Fire prevention is therefore not just an ecological priority but a fiscal one. Protecting moderately dense forests from fire-induced downgrading is the most immediate lever available to regain eligibility for performance-linked devolution in future commission cycles. 

From Compensation to Incentivised Stewardship: Uttarakhand’s Pathway 

FC16 has created, for the first time, a structured pathway between forest stewardship and fiscal return. Realising this opportunity requires Uttarakhand to act on three clear priorities. 

The first is protecting and regenerating MDF in the 500–2,000 m altitudinal belt, where canopy thinning is most pronounced and which directly determines both weighted area and performance eligibility. 

The second is prioritising Ban Oak conservation and regeneration across the state. This is not just a biodiversity concern, but a fiscal and ecological imperative for the state, since its displacement by Chir Pine directly risks lowering the forest quality captured in the FC16 formula. 

The third is investing in systematic fire prevention in districts such as Nainital, Bageshwar, Uttarkashi, and Chamoli, treating it as a strategic investment in devolution outcomes rather than a cost to the state exchequer. 

 Together, these priorities go beyond forest management; they define Uttarakhand’s pathway to strengthening its devolution position in future Finance Commission cycles. The FC16 framework makes this linkage explicit within intergovernmental transfers. How the state responds will determine whether its forests become a sustained fiscal asset or remain an undervalued ecological inheritance. 

 Co-authors: Madhu Verma (Senior Economic Adviser and Chief Environmental Economist at Iora Ecological Solution, New Delhi); Shweta Bhagwat (Senior Specialist, Nature-based Solutions and Climate Finance at Iora Ecological Solution, New Delhi); and Swapan Mehra (Founder and CEO, Iora Ecological Solution, New Delhi) 

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