Planning, right financial products can help governments address potential risk of a disaster to budgets: CDRI’s Prothi | Mint

Risk transfer instruments can offer cost-effective alternatives to measures aimed at mitigating significant long-term climate threats to the economy, said Amit Prothi, director general of the Coalition for Disaster Resilient Infrastructure (CDRI).

CDRI, a multilateral organization based in New Delhi, was launched by Prime Minister Narendra Modi at the 2019 United Nations (UN) Climate Action Summit.

Risk transfer instruments such as catastrophe bonds, reinsurance and Insurance can provide optimal solutions which can be funded through the public-private partnership (PPP) mechanism.

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Catastrophe bonds allow the transfer of risks to bond investors. For the issuer, such as governments, insurers and reinsurers, the bonds offer financial protection in case of major natural catastrophes such as floods, cyclones and earthquakes.

“A structured approach to disaster risk financing (DRF) ensures the availability of funds and enhances cost-effectiveness, timeliness and efficiency—critical factors in reducing indirect economic losses. Besides the public sector, the private sector and individuals can play an important role in financing of disaster risks,” Prothi said.

He also said the organization is working on disaster risk financing to understand how disasters may impact state as well as union budget and how should government have a cushion or to address the potential risk of a disaster to their budgets.

“CDRI is conducting a fiscal risk assessment (FRA) study to analyze governments’ contingent liabilities from disasters and develop a comprehensive disaster risk finance framework. The study covers the sub-national (Odisha, Gujarat, Tamil Nadu and Himachal Pradesh) and national (India, Nepal, Fiji, and Mauritius) levels,” said Prothi.

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With increasing extreme weather events across the country, it is important to assess the impact of disaster events on the state’s overall finances and the gaps in funding disaster response and recovery efforts.

“The FRA study, aims to assess the broader landscape of risk financing across selected states and countries, identifying gaps through risk modelling to evaluate both direct and indirect disaster impacts. The study seeks to propose solutions and recommendations for a more effective disaster risk financing framework,” he added.

Additionally, CDRI is assisting the Sixteenth Finance Commission in strengthening the assessment of disaster risk profiles of the states including natural hazards, exposure and vulnerability assessment to refine state-specific disaster risk profiles for more effective disaster management fund devolution.

India is one of the few countries in the world to develop a comprehensive framework and funding windows for disaster risk financing focusing on response, preparedness, capacity building and recovery.

Following the Fifteenth Finance Commission, the Disaster Risk Management Fund was established at both the national and state levels, with allocations of ₹68,463 crore and ₹1.6 trillion, respectively, for 2021-26.

These funds are designated as the National Disaster Risk Management Fund (NDRMF) and the state disaster risk management funds (SDRMF).

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While India’s NDRMF and SDRMFs retain disaster risks within the public finance system, residual risks and extreme outlier events pose significant long-term threats to regional and national economic stability. To enhance financial resilience, risk transfer instruments can offer cost-effective alternatives.

CDRI’s FRA study provides a structured framework to evaluate disaster risk financing options in a layered manner, optimizing value and impact. The study’s final reports are currently under review, and key insights will be shared upon its release.

When asked whether the budget at the central or state level was adequate for effectively mitigating disaster risks, he added that to enhance disaster risk mitigation, the Fifteenth Finance Commission recommended earmarking the National Disaster Mitigation Fund (NDMF) and State Disaster Risk Mitigation Fund (SDMF) within the broader NDRMF and SDRMF frameworks.

“That said, beyond these funds that are dedicated for mitigation, for addressing and mitigating disaster risks effectively, all development projects should mainstream risk reduction which means consider and address disaster risks in their planning, design, construction and implementation, operation, and maintenance. Funding is also available with different sectoral ministries for disaster management,” Prothi further.

Besides other projects, CDRI is working with the power sector in Odisha and with the Department of Telecommunications on telecom infrastructure, and is looking at airports around the world, including two in India.