Financial Resilience: Building a Disaster-Ready India

Exploring India's Multi-layered Financial Mechanisms for Proactive Disaster Risk Reduction, Swift Response, and Resilient Recovery.

Introduction

Effective disaster management, encompassing robust risk reduction, swift response, and resilient recovery, requires substantial and sustained financial resources. The unpredictability and scale of disasters necessitate well-defined financial mechanisms to ensure timely mobilization of funds. India has established a multi-layered framework for disaster finance, primarily anchored by the National Disaster Response Fund (NDRF) and State Disaster Response Fund (SDRF). This topic explores the creation, utilization, and audit of these statutory funds, examines the crucial recommendations of Finance Commissions (e.g., 15th FC) on disaster funding, touches upon the historical NCCF, and highlights the role of Crop Insurance Schemes (PMFBY), the Public Liability Insurance Act, 1991, Corporate Social Responsibility (CSR), and International Aid in bolstering India's financial resilience against escalating disaster risks.

Core Financial Mechanisms

3.5.1. National Disaster Response Fund (NDRF) & State Disaster Response Fund (SDRF)

These are the primary funds for meeting the expenses for immediate relief in the event of a disaster.

National Disaster Response Fund (NDRF)

  • Creation: Constituted by the Central Government under Section 46 of the Disaster Management Act, 2005. It supplements SDRF for severe disasters.
  • Contribution: Primarily funded through a National Calamity Contingent Duty (NCCD) levied on certain goods (e.g., pan masala, tobacco, crude petroleum) and other budgetary provisions.

State Disaster Response Fund (SDRF)

  • Creation: Constituted by the State Governments under Section 48(1)(a) of the Disaster Management Act, 2005. It is the primary fund available with State Governments for immediate relief.
  • Contribution: The Central Government contributes 75% for general states and 90% for North-Eastern and Himalayan (hilly) states. States contribute the remaining share.

Utilization & Audit

  • Purpose: Both NDRF and SDRF are primarily used for immediate relief and rehabilitation operations (temporary shelter, food, water, medical care, restoration of essential services, ex-gratia, livelihood assistance).
  • Not for Mitigation: Traditionally, these funds are NOT meant for long-term mitigation and preparedness measures, a key point of criticism.
  • Audit: Both NDRF and SDRF are subject to audit by the Comptroller and Auditor General of India (CAG), ensuring transparency and accountability.

3.5.2. Recommendations of Finance Commissions (e.g., 15th FC) on Disaster Management Funding

Finance Commissions (FCs) play a crucial role in deciding the vertical and horizontal devolution of funds between the Centre and States, and often include specific recommendations on disaster management funding.

15th Finance Commission (FC) (2020-2025): Key Recommendations

  • Core Recommendation: Continued importance of SDRF as the primary response fund at the state level.
  • Central Contribution: Maintained the Centre's contribution to SDRF (75% for general, 90% for Hilly/NE states).
  • Mitigation Fund: Recommended creation of a National Disaster Mitigation Fund (NDMF) and State Disaster Mitigation Funds (SDMFs), as distinct from NDRF/SDRF, to specifically fund long-term mitigation activities. (Addresses a long-standing criticism)
  • Special Grants: Recommended grants for specific sectors like urban flood management and managing risks related to glacial lake outburst floods (GLOFs) in Himalayan states.
  • Performance-based Incentives: Proposed linking a portion of central grants to states' performance in DRR.

Significance: Finance Commissions aim to strengthen the financial architecture for DM, shift focus towards mitigation, and provide greater predictability in funding.

3.5.3. Role of National Calamity Contingency Fund (NCCF)

Genesis: The NCCF was established in 2001 (after the 11th Finance Commission recommendations) as a central fund for meeting emergency expenditure for relief from natural calamities of a severe nature.

Current Status: With the enactment of the DM Act, 2005, and the subsequent establishment of the NDRF, the NCCF was subsumed into the NDRF in 2010. The funds collected through the National Calamity Contingent Duty (NCCD) now directly go into the NDRF.

3.5.4. Crop Insurance Schemes (PMFBY)

PMFBY (2016): Provides financial support to farmers for crop loss/damage due to natural calamities (drought, flood, hailstorm, cyclone).

Significance: Enhances farmers' economic resilience, reduces agrarian distress.

3.5.5. Public Liability Insurance Act, 1991

Purpose: Mandates industries handling hazardous substances to obtain public liability insurance.

Significance: Immediate relief to victims of industrial accidents, reducing reliance on government funds. Form of risk transfer.

3.5.6. Corporate Social Responsibility (CSR) in DRR

Companies Act, 2013: Mandates certain profitable companies to spend 2% of profits on CSR. Disaster relief, rehabilitation, reconstruction are eligible activities.

Significance: Mobilizes private sector resources, expertise for DRR and mitigation.

3.5.7. International Aid & Bilateral/Multilateral Assistance

While India primarily relies on its own resources for DM ("self-reliance"), international aid plays a supplementary role, particularly for large-scale disasters or for specialized technical assistance.

Key Sources:

  • World Bank: Loans and technical assistance for post-disaster recovery, reconstruction, and long-term DRR projects. Develops disaster risk financing strategies (e.g., Catastrophe bonds).
  • ADB (Asian Development Bank): Similar role to the World Bank, focusing on Asia and the Pacific.
  • UN Agencies: UNDRR, UNDP, UNICEF, WFP provide technical assistance, humanitarian aid, and support capacity building.
  • Bilateral Assistance: From countries like Japan (ODA for disaster-resilient infrastructure), US, UK, EU for specific projects or emergency aid.

India's Stance on International Aid

India follows a policy of "self-reliance" in disaster relief, generally not accepting international aid for smaller disasters. However, it does accept technical assistance and for very large-scale events (e.g., initially accepted aid for 2004 Tsunami, then stopped for future events). India also provides assistance to other countries.

Conclusion & Way Forward

A robust and multi-layered financial framework is paramount for effective disaster management. India's framework, centered on the NDRF and SDRF, is strengthened by the forward-looking recommendations of Finance Commissions (especially the 15th FC's push for mitigation funds), crop insurance schemes, public liability laws, and increasing contributions from CSR and international assistance. The shift towards dedicated mitigation funds and greater reliance on risk transfer mechanisms (like insurance, CAT bonds) is crucial. By ensuring adequate, predictable, and timely financial resources, India can significantly enhance its capacity for proactive risk reduction, rapid response, and resilient recovery, protecting its development gains and achieving its vision of a truly disaster-resilient nation.

Prelims-ready Notes

NDRF & SDRF Basics

  • NDRF: Central Govt. (DM Act 2005, Sec 46). Supplements SDRF.
  • SDRF: State-level (DM Act 2005, Sec 48). Primary fund. Centre contrib: 75% (general), 90% (NE/Hilly).
  • Utilization: Both for immediate relief, NOT long-term mitigation (traditional view).
  • Audit: Both subject to CAG audit.

Finance Commissions

  • 15th FC: Proposed NDMF & SDMFs (separate from NDRF/SDRF) for mitigation.
  • Special Grants: Urban floods, GLOFs. Performance-based incentives for DRR.

Other Mechanisms

  • NCCF: Predecessor to NDRF, subsumed in 2010.
  • PMFBY (2016): Crop insurance for farmers against natural calamities.
  • Public Liability Insurance Act, 1991: Mandatory insurance for hazardous industries.
  • CSR: Companies Act, 2013 (Sec 135). Disaster relief is eligible.

International Aid

  • Sources: World Bank, ADB (loans, tech support), UN agencies, bilateral.
  • India's Stance: "Self-reliance," generally not accepting aid for smaller disasters. Provides aid to other countries.

Mains-ready Analytical Notes

Disaster Risk Financing in India: Strengths, Weaknesses, and the Path Towards Financial Resilience.

Strengths:

  • Statutory Funds: NDRF and SDRF provide a clear, dedicated framework for immediate relief.
  • Decentralized Access: SDRF at the state level ensures quicker access to funds for primary response.
  • Insurance Mechanism: PMFBY provides a crucial safety net for farmers.
  • Legal Mandates: Public Liability Insurance Act and CSR provisions bring in private sector resources.
  • Audit Mechanism: CAG audit ensures accountability.

Weaknesses/Challenges:

  • Focus on Relief: Insufficient dedicated funds for long-term mitigation and preparedness.
  • Funding Gaps for Mitigation: Proactive investments often underfunded.
  • Limited Insurance Penetration: Low penetration of property and health insurance for disaster risks.
  • Lack of Risk Transfer Instruments: Limited use of Catastrophe (CAT) Bonds.
  • Assessment & Disbursement Delays: Challenges in accurate damage assessment and timely disbursement.

Path Towards Financial Resilience:

  • Dedicated Mitigation Funds: Implement 15th FC's recommendations for NDMF/SDMFs.
  • Expand Insurance: Promote widespread property, health, and micro-insurance.
  • Risk Transfer: Explore CAT bonds, reinsurance.
  • Public-Private Partnerships: Encourage private sector investment.
  • Data & Risk Models: Develop robust assessment models.
  • Climate Finance: Leverage international climate finance for resilience building.
The 15th Finance Commission's Recommendations on Disaster Management Funding: A Catalyst for Shifting Towards Proactive and Climate-Resilient DRR.

Context: FCs allocate central resources, including for disaster relief. 15th FC's recommendations are crucial for 2020-2025.

Key Recommendations as a Catalyst for Proactive DRR:

  • Creation of Separate Mitigation Funds (NDMF & SDMFs): Landmark recommendation addressing insufficient funding for proactive measures.
  • Urban Flood Management & GLOF Grants: Specific grants for increasing climate-related hazards, linking climate change to disaster finance.
  • Performance-based Incentives: Linking grants to states' performance in DRR encourages better governance.
  • Continued Central Contribution to SDRF: Ensures primary response fund is adequately resourced.

Impact on Climate-Resilient DRR:

  • Increased Investment: Boosts investments in climate-resilient infrastructure, early warning systems.
  • Policy Shift: Reinforces paradigm shift from relief to mitigation with financial backing.
  • Adaptation Finance: NDMF/SDMFs can become dedicated channels for climate change adaptation.

Challenges: Ensuring effective utilization by states, overcoming bureaucracy, ensuring sufficient quantum of funds.

Beyond Government Funds: The Complementary Role of Insurance and Corporate Social Responsibility (CSR) in India's Disaster Management Financing.

Rationale for Complementary Mechanisms: Government funds alone are often insufficient. Diversifying funding and distributing risk is crucial.

Role of Insurance:

  • Risk Transfer: Transfers financial burden from individuals/government to insurers.
  • PMFBY: Provides financial safety net for farmers.
  • Public Liability Insurance Act: Ensures immediate relief to victims of industrial accidents.
  • Future Potential: Micro-insurance, CAT Bonds for rapid, large-scale post-disaster liquidity.

Role of Corporate Social Responsibility (CSR):

  • Mandated Contribution: Companies Act 2013 mandates 2% net profit for CSR.
  • Funding Gaps: Supplements government funds for relief and long-term projects.
  • Expertise & Innovation: Private sector brings technical expertise and solutions.

Challenges:

  • Low Insurance Penetration: Limited awareness, affordability.
  • Coordination: Seamless coordination between diverse private sector and government agencies.
  • Transparency: Ensuring transparency and accountability in CSR utilization.

Current Affairs & Recent Developments

2023

G20 Working Group on Disaster Risk Reduction

During its Presidency, India actively pushed for financing for DRR, emphasizing the adoption of high-level principles on the matter in the G20 Leaders' Declaration. Highlights ongoing global and national focus on strengthening financial mechanisms, especially for proactive measures.

Dec 2023

Operationalization of Loss and Damage Fund at COP28

A landmark agreement at COP28 (Dubai) established and operationalized a fund for climate-induced losses and damages. Signifies global recognition of the massive financial costs of disasters and the need for new funding mechanisms.

Recent

Recent Disasters and SDRF/NDRF Utilization

Major disasters like Cyclone Michaung (Dec 2023), Sikkim Flash Flood (Oct 2023), and Uttarakhand Tunnel Collapse (Nov 2023) led to extensive utilization of SDRF and deployment of NDRF, underscoring their role in immediate relief and continuous financial burden on states.

Ongoing

PMFBY Enrollment and Benefits

The Pradhan Mantri Fasal Bima Yojana (PMFBY) continues to be a crucial financial safety net. Recent monsoon seasons and extreme weather events led to significant claims and payouts, demonstrating its role in enhancing economic resilience.

2023

Public Health Bill, 2023 (Proposed)

The proposed Public Health (Prevention, Control and Management of Epidemics, Bio-terrorism and Disasters) Bill, 2023, while not directly a financial act, will impact how funds are allocated and utilized for public health emergencies, aligning with the DM Act's broader financial provisions.

Ongoing

Private Sector/CSR in DRR

Growing interest in private sector engagement. Companies are increasingly investing in climate-resilient infrastructure projects and early warning systems as part of their CSR initiatives, aligning with the broader push for sustainable development and DRR.

UPSC Previous Year Questions (PYQs)

Prelims MCQs:

1. (2020) 'Pradhan Mantri Fasal Bima Yojana' (PMFBY) uses which of the following technologies for loss assessment?

  1. Remote Sensing
  2. Smartphones
  3. Drones
  4. GPS technology

Select the correct answer using the code given below:

  • (a) 1 and 2 only
  • (b) 2 and 3 only
  • (c) 1, 2 and 3 only
  • (d) 1, 2, 3 and 4 (Answer)

Hint: PMFBY is a key financial mechanism for disaster management in the agricultural sector.

2. (2018) Consider the following statements with reference to the 'Sendai Framework for Disaster Risk Reduction (2015-2030)':

  1. It is a legally binding international agreement.
  2. Its primary goal is to substantially reduce disaster risk and losses in lives, livelihoods, and health.
  3. It emphasizes strengthening disaster risk governance.

Select the correct answer using the code given below:

  • (a) 1 and 2 only
  • (b) 2 and 3 only (Answer)
  • (c) 1 and 3 only
  • (d) 1, 2 and 3

Hint: The Sendai Framework emphasizes investing in DRR (Priority 3), which requires robust financial mechanisms.

Mains Questions:

1. (2018) Discuss the contemporary challenges to disaster management in India. (15 Marks)

Direction: This is a direct fit. A major challenge is securing adequate and predictable financing for mitigation and long-term resilience, addressing issues with NDRF/SDRF utilization, expanding insurance penetration, and leveraging private sector funds (CSR).

2. (2016) The frequency of earthquakes appears to have increased in the Indian subcontinent. However, the intensity of the earthquake does not increase. Discuss the contemporary challenges of earthquake preparedness and mitigation in India. (12.5 Marks)

Direction: This question relates to specific hazards. Mitigation and preparedness for earthquakes require significant funding, which ties back to the effectiveness of financial mechanisms.

Trend Analysis (Last 10 Years)

UPSC's questioning on Financial Mechanisms for Disaster Management has consistently been an important area, reflecting the critical role of funding in effective DRR.

Prelims Trend:

  • Earlier: Often direct on full forms of NDRF/SDRF or chairpersons.
  • Current Trend: More conceptual and specific, testing purpose/utilization of NDRF/SDRF, Finance Commission recommendations (shift towards mitigation), and role of schemes like PMFBY. Growing emphasis on diverse funding sources (CSR, international aid, insurance mechanisms like CAT bonds). Current affairs crucial.

Mains Trend:

  • Earlier: Could ask for a general list of funds.
  • Current Trend: Highly analytical and critical, requiring candidates to evaluate effectiveness/shortcomings, analyze impact of FC recommendations, discuss need for diversification, integrate current affairs heavily, and focus on policy implications.

Overall, UPSC demands a comprehensive, critical, and policy-oriented understanding of India's financial architecture for disaster management, emphasizing its ability to fund proactive risk reduction and resilient recovery in the face of escalating risks.

Original MCQs for Prelims

1. The 15th Finance Commission made a key recommendation regarding disaster management funding that aims to shift focus towards long-term mitigation. This involved proposing the creation of:

  • (a) A national fund for immediate disaster response, supplementing SDRF.
  • (b) Separate National and State Disaster Mitigation Funds (NDMF and SDMFs). (Answer)
  • (c) A centralized disaster relief fund for all types of calamities.
  • (d) A special fund for international humanitarian assistance.

Explanation: The 15th FC specifically recommended the establishment of distinct National Disaster Mitigation Fund (NDMF) and State Disaster Mitigation Funds (SDMFs) to address the long-standing criticism of insufficient funding for proactive mitigation measures, as existing funds (NDRF/SDRF) primarily focus on relief.

2. Which of the following is a financial instrument that transfers a specific set of disaster-related risks from a sponsor (e.g., government) to investors, providing a large payout if a defined catastrophic event occurs?

  • (a) Micro-insurance
  • (b) Contingent Reserve Arrangement (CRA)
  • (c) Catastrophe (CAT) Bonds (Answer)
  • (d) Equity-linked Savings Scheme (ELSS)

Explanation: Catastrophe (CAT) Bonds are a type of financial instrument used by governments or large entities to transfer the financial risk of specific, low-probability but high-impact natural disasters to investors in the capital markets, providing quick liquidity for post-disaster recovery. Micro-insurance is for small-scale risks at individual level, CRA is for currency crises, and ELSS is a tax-saving investment.

Original Descriptive Questions for Mains

"Effective disaster management necessitates a robust and predictable financial framework that goes beyond merely funding immediate relief. Critically analyze the evolution of disaster financing mechanisms in India since the DM Act, 2005, and discuss the imperative for greater investment in long-term mitigation and risk transfer instruments." (15 Marks)

Key Points/Structure:

  • Introduction: Emphasize critical role of finance in DM; need for robust, predictable framework beyond relief.
  • Evolution of Disaster Financing since DM Act, 2005:
    • Pre-DM Act: Famine Codes, ad-hoc relief.
    • Post-DM Act (2005): Establishment of NDRF and SDRF as statutory funds for immediate relief.
    • PMFBY (2016): Comprehensive crop insurance, enhancing economic resilience.
    • 15th Finance Commission Recommendations: Proposal for NDMF & SDMFs (separate mitigation funds) as a landmark shift.
    • CSR Provisions (Companies Act 2013): Mobilizing private sector funds.
  • Imperative for Greater Investment in Long-term Mitigation:
    • Cost-Effectiveness (saves multiple rupees in recovery).
    • Reduced Vulnerability (resilient infrastructure, EWS, land-use planning).
    • Climate Change (escalating hazards demand scaled-up efforts).
    • Protecting Development Gains.
  • Imperative for Greater Investment in Risk Transfer Instruments:
    • Rapid Liquidity (CAT Bonds).
    • Financial Resilience (reduces reliance on national budgets).
    • Micro-insurance (safety nets for vulnerable populations).
  • Challenges: Existing funds tilted towards response; inadequate mitigation investment; low insurance penetration.
  • Conclusion: India's framework evolved, but true resilience requires paradigm shift to prioritize predictable, substantial investment in mitigation and comprehensive risk transfer, safeguarding development.
"The recommendations of successive Finance Commissions, particularly the 15th FC, have played a catalytic role in shaping India's disaster management funding towards a more proactive and climate-resilient approach. Evaluate these recommendations and discuss their significance in strengthening India's financial preparedness against increasing disaster risks." (20 Marks)

Key Points/Structure:

  • Introduction: Highlight crucial role of FCs in DM funding. State their catalytic role, especially 15th FC, in pushing proactive/climate-resilient approach.
  • Evolution of FC Recommendations (briefly):
    • Earlier FCs: Focused on relief (CRF/NCCF).
    • Later FCs: Broadened scope to include some preparedness.
  • 15th Finance Commission's Key Recommendations (Catalytic Role):
    • Dedicated Mitigation Funds (NDMF & SDMFs): Most significant, addresses insufficient proactive funding.
    • Special Grants for Emerging Risks: Urban flood management, GLOFs – explicitly links climate change to finance.
    • Performance-based Incentives: Linking grants to states' DRR performance for better governance.
    • Continued Central Contribution to SDRF: Ensures primary response fund is resourced.
  • Significance in Strengthening India's Financial Preparedness:
    • Shift to Proactive Funding: Institutionalizes funds for long-term mitigation, moving from reactive model.
    • Climate Resilience: Enables greater investment in climate-resilient infrastructure, EWS, ecosystem-based adaptation.
    • Enhanced State Capacity: Empowers states with dedicated DRR resources.
    • Accountability & Governance: Performance-based incentives.
    • Predictability: Provides more predictable funding for mitigation.
  • Challenges in Realization: Ensuring effective utilization by states; overcoming bureaucratic hurdles; quantum of funds vs. escalating risks; political will.
  • Conclusion: 15th FC's recommendations are significant stride. By emphasizing dedicated mitigation funds and climate-resilient actions, they act as crucial catalyst for India to fully embrace proactive, long-term, sustainable DRR, preparing financially for increasing disaster impacts.