Vishleshan for Regulatory Exams, 9 July 2025: Disaster Risk Financing

To ace your preparation for the UPSC, RBI, SEBI, or NABARD exam, you have to stay updated about key economic and regulatory updates. In today’s edition of Vishleshan, we delve into an important topic: Disaster Risk Financing. These issues are highly relevant for competitive exams and offer valuable insights into India’s evolving economic scenario. Keep reading to stay ahead with a clear understanding of these current updates.

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Disaster Risk Financing

Context: Successive Finance Commissions (FCs) have aided the cause, no doubt, but the country’s vulnerabilities have also grown. Perhaps the 16th FC will look at some new models that could be adopted to ensure India doesn’t scramble for funds if disaster strikes.

Link to the Article: Mint

India, despite facing devastating natural disasters with increasing frequency, has historically relied on a reactive approach to disaster management, primarily focusing on ex-post funding for recovery. However, a significant shift is underway towards proactive disaster risk financing, recognizing the unsustainability of solely relying on post-loss measures. This evolution, significantly influenced by successive Finance Commissions, particularly the 15th, aims to build national financial resilience against natural calamities, though challenges posed by rapid urbanization and climate change necessitate continuous innovation in funding mechanisms.

What is Disaster Risk Financing?

Disaster Risk Financing (DRF) refers to strategies and instruments that enable countries, businesses, and individuals to access sufficient and timely funds to manage the financial impacts of natural disasters. It’s about securing financial protection before a disaster strikes, rather than solely relying on emergency funds or debt after the event.

Associated Loss Each Year Globally and in India:

• In India: Economic losses from disasters are assessed to be upwards of a staggering ₹50,000 crore annually in the past five years.
• Globally: It is widely recognized that disaster losses globally are immense and growing, often running into hundreds of billions of dollars annually, significantly impacting national GDPs, especially in developing countries. (Global disaster losses often exceed 1-2% of GDP in highly vulnerable nations, though it varies widely).

Available Sources for Disaster Risk Financing in India:

India has evolved its disaster financing mechanisms over time, moving from ad-hoc responses to more structured funds.

• Early Mechanisms (“Margin Money”): In the 1950s, the Second Finance Commission (FC) recommended ₹6 crore annually under “Margin Money” to help states cope with natural calamities. This was initially a “symbolic gesture” but allocations rose substantially with successive FCs. The 8th FC scaled it up to ₹240 crore annually.
• Calamity Relief Fund (CRF): The 9th FC introduced the Calamity Relief Fund (CRF), recognizing the need for state-level autonomy. This was a “turning point”.
• National and State Disaster Response Funds (NDRF and SDRF): The 13th FC institutionalized the National and State Disaster Response Funds (NDRF and SDRF), following the Disaster Management Act of 2005. This marked the first time that a “structured, rule-based disaster financing took hold”.

Regulatory Provisions:

• Disaster Management Act of 2005: This Act provided India with a “legal institutional framework with clear terms of reference to comprehensively tackle disasters”. It established the National Disaster Management Authority (NDMA), State Disaster Management Authorities (SDMAs), and District Disaster Management Authorities (DDMAs), creating a structured approach to disaster management, including financing aspects.

Linkages with Finance Commission (FC):

Finance Commissions play a pivotal role in shaping disaster risk financing in India by recommending the allocation of funds from the Centre to states for disaster relief and mitigation.

• Early FCs (2nd, 8th, 9th): Recommended and scaled up “Margin Money” and introduced the “Calamity Relief Fund,” though the approach largely remained reactive.
• 15^th Finance Commission (FC): Spanning 2020-21 to 2025-26, the 15th FC brought about a significant paradigm shift.
  • Shift to Proactive Financing: It “not only recognized the scale of risks we face, but also proposed a financial architecture to match it”. This implied a shift to “Build now or pay later”.
  • Allocations: Allocated ₹1.60 trillion for states and ₹68,000 crore for the Centre.
  • Focus on Mitigation: Importantly, ₹45,000 crore was specifically earmarked just for mitigation, a component that had been “conspicuously underfunded” previously.
  • Disaster Risk Index (DRI): Adopted a Disaster Risk Index (DRI), a “data-driven formula to guide allocations based not on past expenditures but actual vulnerabilities”. This marked the “transition from a welfare mindset to a resilience mindset”.

Coalition for Disaster Resilient Infrastructure (CDRI):

Establishment: The Coalition for Disaster Resilient Infrastructure (CDRI) was launched by India’s Prime Minister Narendra Modi at the UN Climate Action Summit in New York in 2019.

Objective: Its primary objective is to promote the resilience of new and existing infrastructure systems to climate and disaster risks, thereby ensuring sustainable development.

Mandate: CDRI’s mandate is to support countries in:

• Developing standards for resilient infrastructure.
• Providing technical support and capacity building.
• Facilitating knowledge exchange and research.
• Promoting innovative financing for resilient infrastructure.

India’s Role in its Formation: India spearheaded the formation of CDRI, demonstrating its leadership in promoting global infrastructure resilience as a key component of disaster risk reduction and climate action.

Analysis of the Article: Decoding India’s Disaster Risk Management Shift

The article vividly portrays India’s evolving journey in disaster risk management, from a reactive approach to a proactive, resilience-focused strategy, driven by increasing disaster regularity and the lessons learned from past calamities.

1. The Devastating Regularity of Disasters:

• India has been “battered by cyclones like Amphan and Tauktae, floods in Bengaluru, Assam and Chennai, landslides in Wayanad and erratic monsoons” in the past five years.
• The “price tag” of these disasters is “upwards of a staggering ₹50,000 crore annually in economic losses”.
• “Unpredictable blow-hot-blow-cold weather pattern” has “adverse effects on communities and economies, especially the farming sector,” presenting “new but unquantifiable risks” to governments, policy experts, regulators, financial institutions, and businesses.

2. Shift from “Spend After Loss” to Proactive Preparedness:

• Inefficient and Unsustainable Past Model: The historical model of “spend after loss” (ex-post funding from public coffers and debt) was not only “inefficient but unsustainable for our developmental aspirations”. This approach often meant borrowing to rebuild, “shifting the burden onto future generations”.
• Progress in Risk Management: While enormous strides have been made in “risk assessment, early warning, mitigation and preparedness to reduce fatalities and infrastructure damage,” a lot more remains to be done.
• 15th FC’s Paradigm Shift: The 15th FC significantly changed this, proposing a financial architecture to match the scale of risks and adopting a “Build now or pay later” approach with substantial allocations for mitigation.
• Disaster Risk Index (DRI): The adoption of DRI for data-driven allocation based on “actual vulnerabilities” rather than past expenditures marked a transition from a “welfare mindset to a resilience mindset,” signifying preparedness.

3. Evolving Framework and Remaining Limits/Challenges:

• Rising Recovery Costs: The “cost of recovery is rising”.
• Reliance on MDBs: In the absence of pre-arranged risk financing, governments “tended to lean on multilateral development banks (MDBs) for loans to fund recovery efforts”. While a valid emergency option, this is “no substitute for national financial resilience”.
• Rapid Urbanization and Climate Change: These factors present ongoing challenges. Rapid urbanization turns “cities into flood traps,” and “climate change has escalated the severity of storms, making once-rare events routine”.
• Livelihood Destruction: Disasters can destroy livelihoods in villages and small towns if they don’t receive financial support.

4. Future Ideas and Strategic Imperatives (awaiting 16th FC Recommendations):

• Shift to Risk Sharing: Emerging ideas favour “risk sharing via pre-arranged financing tools like contingency buffers, catastrophe risk pools and parametric models that can release funds swiftly without delay”.
• Household-Level Resilience: Need to “consider support for household-level resilience and encourage communities to adopt personal risk coverage, not just for crops and property but also lives and livelihoods”. This emphasizes individual responsibility and private insurance.
• Urban Resilience: Focus on “urban resilience through dedicated funds for climate-adaptive infrastructure and the retrofitting of critical but vulnerable assets”.
• Accessible, Flexible, and Aligned Funds: A strategy is needed to ensure disaster funds are not merely “available” but also “accessible, flexible and aligned with the risk landscape”.
• Prime Minister’s Ten-Point Agenda (2016): The imperative is to transform India’s disaster risk management “as guided by the Prime Minister’s 2016 Ten-Point Agenda for disaster relief and rehabilitation”.
• True Independence: India must become a nation where resilience is built-in, not bolted on and does not scramble for funds after a disaster strikes, but is financially prepared.

In conclusion, India’s approach to disaster risk financing has undergone a commendable evolution from reactive funding to a more proactive, resilience-focused model, largely propelled by the 15th Finance Commission. Despite significant strides in mitigation and preparedness, the escalating costs of recovery due to climate change and rapid urbanization necessitate further innovation, including risk-sharing mechanisms, household-level resilience, and dedicated urban funds, to achieve true financial sovereignty in disaster management.

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