Non-timber forest product (NTFP) extraction contributes significantly to household incomes across India. This study aimed to understand the relationship between market proximity, NTFP dependence and forest condition, and assess how it is mediated by local forest institutions. Three villages with different degrees of access to markets for sale of forest products, in an area of high poverty and forest dependence in the dry tropical forest belt in central India, were examined. The village with the greatest access to the market had a greater proportion of income coming from non-forest sources, the least dependence on NTFP harvest and the most degraded forests. The strongest forest institution was found in the village closest to the market, owing largely to its access to support from the Forest Department. This emphasizes the extreme vulnerability of forest villages located distant from local markets, which are forced to depend on forests for most of their livelihood and income requirements, and left to deal with degrading forests in the absence of technical and financial support from the Forest Department. There is a critical need to strengthen local institutions for sustainable forest management in such villages, and to provide them with alternate sources of income generation.