Two thousand villages uprooted, 43 lives lost, and thousands of people displaced in Punjab in recent floods is not an anomaly, but a recurrent catastrophe. Recent years have been marked by a cascade of climate hazards, revealing a nationwide pattern of escalating climate risks and mounting damages. The statistics reveal a glaring reality: human proclivities and the pursuit of high growth have left the planet vulnerable, altering the planet’s radiative forcing and straining its natural resources. This has exacerbated the intensity, severity, and frequency of natural hazards, resulting in socio-economic damages and losses. Keeping in line with the dynamic characteristics of climate change, the 15th Finance Commission’s disaster finance recommendations provide a systematic suite of guidelines to mitigate and recover from the climate change-induced disasters.
The report astonishingly diverges from its successive commissions by introducing a new methodology to allocate disaster funds based on a state’s capacity, risk exposure, and vulnerability. The commission has also suggested maintaining mitigation funds aimed at avoiding losses and damages both at the national and state levels, along with response funds, to support preparedness, mitigation, and recovery efforts. Mitigation, within the scope of the document, has been referred to as all the measures taken to avoid the damages before the disaster, differing from its conventional and broader meaning in mainstream climate discourse. Additionally, it has also proposed exploring market-based risk management tools and alternative funding sources to strengthen disaster financing.
This marks a tremendous shift from previous reports and covers a broad spectrum of climate risks and associated relief measures, supporting the concerted efforts to acknowledge the loss and damages emanating from climate risks. However, it still continues to prioritise post-disaster relief over pre-disaster resilience. For instance, from the corpus dedicated to disaster management at both the state and national level, 20% has been earmarked for avoiding damages, while the rest has been allocated to the response fund comprising response and relief, recovery and reconstruction, and capacity building funds. This highlights that India is still stuck in a “pay after damage” model rather than a “prevention is better than cure” model. The uncertainty of disasters and the quantum of damages they leave in their wake, preventive measures such as climate proofing existing infrastructure, establishing monitoring and warning systems, and deploying climate resilient technologies are not mere fancy environmental luxuries, but essential safeguards. However, these measures require huge upfront costs, making the current allocation grossly inadequate.
Despite Section 2 (i) of the Disaster Management Act defining mitigation practices involving developing coastal walls, flood embankments, etc, the role of nature-based solutions still remains grossly under-invested. The recommendations call for allocating funds to support the relocation of affected communities located in floodplains, coasts, and hills. While suggested in good faith, this overlooks the sizeable financial commitments involved to build resettlements, in conjunction with it being socially disruptive. In contrast, the Finance Commission argues that these projects should not be funded from the mitigation fund. Whereas, a forward-looking plan should argue and include the costs within the mitigation funds to finance these projects, if not fully then partially, that reduce the damages significantly, instead of making relocation a default action and leaving the state government to cut expenses from its regular budgets to make the deployment of these projects economically viable.
In addition, the report recommends expanding the state-specific allocation to 25% from 10%. This could have been done with the view that damages like landslides, floods, and heatwaves are largely local in nature and need certain flexibility from the state government to address them. However, the increase in allocation may not be fiscally prudent and may put immense pressure on public budgets without the scope for diversifying funding sources. Given damages induced from climate change form public goods, this leaves primarily the state with a huge responsibility to mitigate it, supported by the central government whenever necessary. There is a need to mobilise funds from sources other than public streams, such as blended finance, bonds, risk pools, catastrophe (CAT) bonds, parametric insurance and corporate investments, to increase private players’ participation. After all, the aftermaths of climate change do not discriminate and affect everyone.
In this vein, the recommendations also touch upon making insurance available to raise funds, recognising the rapid growth of the sector and the pivotal role that it can play to ease fiscal burden. The recommendation expands on including four broad facets, such as disaster-related death insurance, crop insurance, a national risk pool for protecting and restoring infrastructure, and international parametric insurance. However, this recognition is in stark contrast to the reality. Most households and businesses have minimal to no coverage against climate-related losses. The report merely lays down the role that insurance can play without building a foundational mechanism to expand coverage, such as a premium support and risk-sharing framework to make the tool operational, missing a critical opportunity. Despite meaningful deliberations on this aspect, without concrete guidelines, the government will continue to shoulder compensation costs post each disaster.
Photo by Ravi Roshan on Pexels.com
The shift in the 2020-21 report to a more balanced methodology, including mixing fiscal capacity, risk exposure, and disaster risk index, is a welcome and strategic correction. Moreover, its continuation for 2021-26 reflects a much-needed acknowledgement that climate vulnerability, not historical expenditures, should drive the allocations of the funds. By incorporating risk exposure and disaster risk, the Commission lays a foundation for a more equitable and needs-responsive financing and allocation system. Incorporating these elements to determine climate vulnerability is essential for understanding future risks and informing studies that employ downscale climate data to identify and estimate parameters that shape how climate hazards manifest and impact the local economies. Deliberations on instruments such as insurance to share risks and expand financial resources are both proactive and practical.
Increasing the share of state-specific allocations and calling for exploring market-based instruments is also welcomed as an aspirational move. However, in an era of intensifying climate change that will repeatedly lead to severe losses, incremental improvements are not enough. There is an urgent need for a proactive, forward-looking disaster finance system that prioritises reducing risks before the disaster strikes.
(Views expressed are the author’s own and do not reflect those of ICRIER)
