Unlocking value in India’s natural capital through financial inclusion by Rana Kapoor

By Rana Kapoor

Forestry and wildlife conservation often do not rank high on the priority list of investments for the sustainability of the Indian economy. However, the imminent threat of climate change and the extreme vulnerability of India’s agricultural, forest and coastal communities to resulting droughts and rising sea levels respectively, the Indian financial sector faces an existential risk due to its exposures across the country’s geographical landscape.

Scientists at Oxford University recently concluded that the cheapest technology for climate change mitigation and adaptation are tropical and sub tropical rainforests as they sequester a vast quantum of the planet’s carbon dioxide, drive the global freshwater cycle, regenerate soil, strengthen river banks, protect shorelines, support bio-diverse ecosystems and sustain the livelihoods of millions. Hence, our forests are natural capital assets that provide a slew of undervalued ecosystems services to the economy at large.

In essence, economies can only thrive if natural capital is invested in and nurtured so that it is able to provide sustained returns for generations to come. To drive these investments and essentially transform our collective perspective towards forests, the United Nations Framework Convention on Climate Change (UNFCCC) has designed the Reducing Emissions from Deforestation and Land Degradation (REDD+) mechanism which aims to financially compensate sustainable forest management (SFM) practices led by forest communities and that ensure biodiversity conservation in developing countries.

Given that India is the seventh most bio-diverse country on the planet with approximately 24% forest cover, home to 17,000 species of flowering plants and about 5400 endemic species, the country stands to benefit a great deal from the REDD+ program. However, India’s gross deforestation rate stands at -0.43% (2009-2011) which implies that India will lose its entire forest cover in 100-150 years unless urgent action is taken. Our forests are stressed by expanding agriculture and industrialization, in comparison to which the forest economy is regrettably considered more fragmented, informal and therefore perishable.  Astonishingly, approximately 300 million Indians directly or indirectly depend on the forests for their livelihoods, indicating the need for India’s forest economy to come out of the shadows and actively contribute towards GDP growth.

Going beyond eco-tourism, timber, fruits and nuts, the forest economy of India must also include key ecosystems services mentioned earlier, such as soil conservation, carbon sequestration and watershed management. The valuation of these ecosystems services is underway through various studies conducted by the The Economics of Ecosystems and Biodiversity (TEEB) program and the Indian Institute of Forest Management, but more needs to be done on this front.

Key to driving investments in this exciting space is the need for ecosystems valuations and innovative mechanisms for monitoring and measurements over time, working towards a Green National Product, a more holistic measurement of the health of the economy. Resources have been mobilized to this effect by the Ministry of Environment, Forests and Climate Change using satellite imagery and remote sensing to measure India’s forest cover and carbon sequestration baselines at the state level. Furthermore, India’s unique Joint Forestry Management program is a outstanding example of a state and forest community partnership in managing and monitoring forest activities.

Despite these innovative institutional structures, in the air and at the grassroots level, due to the largely informal nature of India’s forest economy most forest dwelling communities suffer from a lack of recognition and endemic institutional corruption which pushes them further away from the mainstream economy and government subsidy channels. Pushing these communities to the furthest fringes presents obvious threats to national security where the country currently faces an onslaught of extremist left wing terrorism in the forests of some of India’s poorest states. The financial exclusion of our forest dwelling communities is a problem we must tackle immediately if they are to feel valued and be compensated for their efforts in nurturing our life sustaining ecosystems.

Hence, I foresee a tremendous role for the financial sector in facilitating payments for ecosystems services between state governments, the private sector and forest dwelling communities by using Aadhar caards to set up ‘Jan Dhan’ accounts and activating mobile banking solutions, dubbed as the J.A.M. Trinity by the Honorable Finance Minister, as a first step to formalize India’s forest economies.

This will ensure that REDD+ funds and assigned government subsidies trickle down to the last mile in a cashless manner, in line with the Honorable Prime Minister’s vision to execute direct cash transfers to the poor. Coupled with the RBI’s recent categorization of overdrafts on Jan Dhan accounts as ‘priority sector lending’, the banking and financial sector will now be able to directly offer credit lines to forest dwelling  self help groups (SHGs) and enterprises, which may trigger a wave of entrepreneurship in our forest hinterlands. This comprehensive approach will ensure that forest dwelling communities are financially included in the country’s growth, thereby unlocking the value of this potentially lucrative sector.

Through the National Agroforestry Plan, which has an ambitious target of increasing India’s tree cover to 33% through agro-forestry practices, an exciting livelihood option that will encourage forest dwelling communities to keep forests intact and earn revenue from tree based farming practices. Furthermore, a INR 5300 crore allocation for the Pradhan Mantri Krishi Sinchai Yojana (PMKSY), a critical drive to transition to sustainable agricultural practices, could help states to potentially explore the application of these funds for agro-forestry projects. Since agro-forestry helps achieve the Green Indian Mission, funds for accelerating agro-forestry could also come from the National Clean Energy Fund, which will see a marked increase in size since the Honorable Finance Minister mentioned an increase of the coal cess from INR 100 to INR 200 per ton of coal.

Going forward, creating and supporting a lucrative market for sustainable forest produce must also become a key policy focus where forest communities that strive for value adding international eco-labels, such as Fair Trade, Forest Stewardship Council and Rainforest Alliance, must  be able to access more funds through the PMKSY scheme. Eco-labels ensure a premium that will encourage forest dwelling communities to produce using sustainable methods.

The INR 20,000 corpus Micro Units Development Refinance Agency (MUDRA) Bank announced by the Honorable Finance Minister to enable SC/ST enterprises through MFIs may also propel forest produce processing, enabling forest communities to add value to their produce and sell them for a premium in the domestic and international markets. It is hoped that these funds will also be used to finance energy efficient cook stoves and decentralized clean energy solutions for forest dwelling communities, ensuring a substantial reduction in their dependence on the forests for fuel wood, which leads to severe forest cover degradation.

It is about time the financial sector begins to sharpen its lens on forest economies that impact hundreds of millions of lives, addresses climate change and conserves biodiversity. This cannot be done just under the guise of Corporate Social Responsibility but rather using a more acute business focus since natural capital cannot sustainably grow on grants alone.

To those who believe that the commoditization of nature goes against the very idea of conservation, I ask them to carefully analyze the current situation and reflect on whether our forests will thrive against the backdrop of reduced budget allocations for forest conservation. In my view, leaving the responsibility of conserving our forests to the state is an abhorrent case of passing the buck where Indian corporations must do their bit, through their business models, and thereby fulfill their ecological licenses to operate in this great country. It is about time we put our jungle boots on and venture into the forests, leading the financial inclusion mission and directing capital where it is critically needed to sustain India’s economic growth and tackle the greatest existential threat to human civilization, climate change.

(Rana Kapoor, MD & CEO – YES Bank and President – Assocham)