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Several people contributed to writing this note. Their support was invaluable.In particular, we would like to thank Esha Sarswat from the International Food Policy Research Institute (IFPRI) for her helpful comments and committed guidance.We are also grateful to Suman Chakrabarti from the University of Washington for his insightful suggestions. We would like to thank Avantika Srivastava from the Accountability Initiative and Pratima Mathews from IFPRI for editing this note. Lastly, we are indebted to Akash Singh for designing it.

Ecological fiscal transfers (EFTs) involve higher levels of government distributing funds to lower levels of government based on ecological indicators. In 2015 India established the world's largest system of EFTs when its 14th Finance Commission added forest cover to the formula that determines the amount of tax revenue the Union government distributes annually to each state. Here we gather stateby-state data on forestry budgets to assess whether India's EFTs incentivized states to protect and restore forests as evidenced by increases to their forestry budgets. We find that states increased their forestry budgets by 19% in absolute terms in the three years after the introduction of EFTs relative to the three years prior. However, forestry budgets as a share of overall state budgets shrank by 16% after the introduction of EFTs, from 0.99% to 0.83%. Furthermore, states that obtained a larger share of their budget from EFTs did not disproportionately increase their forestry budget. Taken together, this suggests the introduction of EFTs has not yet led states to increase their forestry budgets. We develop a causal chain that suggests two reasons this could be: (1) low expectations on the part of state government officials that EFTs would continue in such a way that increases in forest cover would be rewarded with increases in revenue; and/or (2) insufficient motivation to increase forestry budgets as an investment in future revenue from EFTs. The 15th Finance Commission has plausibly addressed low expectations by keeping forests in the tax revenue distribution formula for another period and updating the year for which forest cover is measured from 2013 to 2017. It has plausibly addressed insufficient motivation by increasing the weight on forests in the formula from 7.5% to 10%. Future research can show whether these modified EFTs incentivize states to increase forest protection and restoration.

SummaryBackgroundThere is limited empirical evidence about the efficacy of fiscal transfers for a specific purpose, including for health which represents an important source of funds for the delivery of public services especially in large populous countries such as India.ObjectiveTo examine two distinct methodologies for allocating specific‐purpose centre‐to‐state transfers, one using an input‐based formula focused on equity and the other using an outcome‐based formula focused on performance.Materials and MethodsWe examine the Twelfth Finance Commission (12FC)'s use of Equalization Grants for Health (EGH) as an input‐based formula and the Thirteenth Finance Commission (13FC)'s use of Incentive Grants for Health (IGH) as an outcome‐based formula. We simulate and replicate the allocation of these two transfer methodologies and examine the consequences of these fiscal transfer mechanisms.ResultsThe EGH placed conditions for releasing funds, but states varied in their ability to meet those conditions, and hence their allocations varied, eg, Madhya Pradesh received 100% and Odisha 67% of its expected allocation. Due to the design of the IGH formula, IGH allocations were unequally distributed and highly concentrated in 4 states (Manipur, Sikkim, Tamil Nadu, Nagaland), which received over half the national IGH allocation.DiscussionThe EGH had limited impact in achieving equalization, whereas the IGH rewards were concentrated in states which were already doing better. Greater transparency and accountability of centre‐to‐state allocations and specifically their methodologies are needed to ensure that allocation objectives are aligned to performance.