Fiscal arrangements in India for financing relief, recoveryand reconstruction

Ila PatnaikNational Institute of Public Finance and Policy

May 11, 2017

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Outline

History of relief and recovery financing in India

Projections of Finance Commission (FC)

Current system: Sources of funds in India

Financing of NDRF, SDRF, DDRF

Channelising of funds

Moving Forward

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History of recovery and relief financingMilestones achieved

India has come a long way into managing disaster recovery and relief.

Disaster relief and recovery finance goes back to the 2nd FinanceCommission (1957) where the concept of “margin money” was introduced.

The 9th Finance Commission (1988) recognised the need to have a separateCalamity Relief Fund (CRF) which provides more autonomy andaccountability to the states.

The 10th Finance Commission (1995) recommended setting up of a NationalFund for Calamity Relief (NFCR).

The system evolved with the introduction of the Disaster Management (DM)Act, 2005.

Under the recommendations of the 13th Finance Commission (2009), theCRF was merged into State Disaster Relief Fund (SDRF) and the NationalFund for Calamity Relief (NFCR) was converted into the National DisasterRelief Fund (NDRF) as envisaged by the the DM Act, 2005.

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Projections of FC with respect to marginmoney/CRF/SDRF

2nd

3rd

4th

5th

6th

7th

8th

9th

10th

11th

12th

13th

14th

Rs.

Cro

re

0

10000

20000

30000

40000

50000

60000

70000

38 78 72 254 503 12044020

6304

11008

21333

33581

61219

Margin Money

CRF

SDRF

Source: 13th and 14th Finance Commission report

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Types of FundsAs envisaged under the DM Act 2005

Two types of funds: Response funds and Mitigation Funds1.

For post-disaster: Response funds are used.

Both response funds and mitigation funds need to be set up at national, state and districtlevel (DM Act, 2005).

National level: National Disaster Response Fund (NDRF) and National Disaster MitigationFund (NDMF)2

State level: State Disaster Relief Fund (SDRF) and State Disaster Mitigation Fund(SDMF)3

District level: District Disaster Response Fund (DDRF)4

1Mandated under Disaster Management (DM) Act, 20052NDMF not yet set up3Very few States have an SDMF (14th Finance Commission report, 2014)4Again, mandated under the act but DDRF is primarily financed out of SDRF (14th Finance

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How NDRF is financed?

National Calamity Contingency Duty (NCCD)5.

Approved annually through the finance bill.

Additional Budgetary support provided when necessary.

Person or institution contribution.6

5Duties on goods like Pan Masala, cigarettes, tobacco, crude products, AC cars etc.6Not been tapped much

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How SDRF is financed?

Primary Fund available for disaster response.

Each state mandated to constitute an SDRF.

Corpus of SDRF recommended by the Finance Commission under Article 275(1) of the Constitution over 5 years.

Corpus based on past expenditure method.

75 percent financed by Centre for general category state, 90 percent forspecial category states as grants-in-aid7.

Rest financed by states own budget.

7The 14th FC report recommended changing this to 90:10 for all statesIla Patnaik Fiscal arrangements in India for financing relief, recovery and reconstruction May 11, 2017 7 / 16

Use of SDRF

The DM Act, 2005 defines a disaster to mean a ‘catastrophe, mishap,calamity or grave occurrence in any area, arising from natural or man-madecauses, or by accident or negligence, which results in substantial loss of life orhuman suffering or damage to, and destruction of, property, or damage to, ordegradation of, the environment’

The Act, however, does not quantify terms like substantial loss of life, orhuman suffering. (13th FC).

List of eligible disasters drawn by earlier Finance Commissions.

The list however does not cover all location/state specific disasters (e.g.,lightning, heat waves, cloudbursts etc.)

The 14th FC recommended that states can use up to 10 percent of the SDRFfor disasters not listed in the list of disasters of Ministry of Home Affairs.

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How DDRF is financed?

DDRF financed out of SDRF

Left at the discretion of the state.

Role of the Incident Commander to assess the situation and ask for resources.

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Significant gap between what State demands and whatCentre provides

The Tamil Nadu governmenthad urged the Centre to

sanctiona sum of Rs 39,565 crore

from the NDRFin January 2017.

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Size of relief and delays in getting relief

The relief from Centre came 9 months post the disaster and was not enough.

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Not always the Centre’s fault...

There is no monitoringmechanism to ensure States’

judicious spending inmitigating the crisis in

drought-hit areas.

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Risk Mitigation Funds

International experience with mitigation funds is limited

Mexico has a small mitigation fund.

The incentive to build resilience works through reduced contributions byfederal government to provinces that do not buy insurance.

Reduced resilience investment increases the insurance premium.

This would required risk pooling, information about risks and compulsoryinsurance.

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Mitigation Fund

What needs to be done so that states invest in resilience?

Should a mitigation fund be used for preparedness or reconstruction?

How would the fund be distributed among states?

Based on hazard indices?Based on resilience plans of states?

Is there any other way to create incentives for resilience? Will it come frompublic pressure?

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A lot needs to be done...

1 Creation of a mitigation fund.

2 Size of SDRF and NDRF.

3 Need for a stable source of financing for reconstruction. Currently funds areprovided only for relief and rehabilitation not reconstruction.

4 Financing of NDRF post GST.

5 Need to create and validate the Hazard Risk Vulnerability Index.

6 The sharing ratio 75:25 or 90:10 needs to be worked upon.

7 Tapping public funds through Corporate Social Resposnibility (CSR).

8 Management of funds so they are easily available in the event of a disaster.

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Thank you

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