(Photo: PTI)
(Photo: PTI)

Opinion | A sustainable option to fund disaster management in India

The government should consider expanding the tax base of the National Calamity Contingency Duty in the Budget

The ongoing monsoon brings to mind the flood disaster that ravaged Kerala last year. Cyclone Fani wreaked havoc in Odisha in May. In the current year, more than 10 states have faced drought conditions. Natural disasters are increasingly affecting large parts of the country. The impact of these is asymmetric: The poor suffer more. Therefore, effective management of disasters is not only required for preserving growth, but equally for addressing poverty and reducing inequality. The sine qua non for effective disaster management is adequate funding.

There are three stages in disaster management. The first is disaster mitigation—taking long-term steps such as putting in place early warning systems and rainwater harvesting structures to reduce the impact of disasters . The second is disaster relief—where affected persons are provided assistance and essential services are restored. The third is disaster reconstruction—where damaged infrastructure is rebuilt. The Disaster Management Act, 2005, requires that a disaster management plan and a mitigation plan be formulated at the district, state and national levels. Each is to be supported at every level by disaster relief and mitigation funds that must be set up. Thus, six plans and six funds are required to be created to manage disasters in India.

Disaster management plans have been formulated. The National Disaster Relief Fund (NDRF) and State Disaster Relief Funds (SDRF) have been set up. However, mitigation plans have not been prepared at any level. Also, the corresponding funds have not been set up.

When disasters do occur, states are driven to unorthodox sources of funding for three reasons. First, the NDRF through which the centre assists states when they face severe calamities is available only for disaster relief and not for mitigation or restoration. A similar provision applies to the SDRF. States must meet outlays for disaster mitigation and restoration, which are as important as relief, on their own. Second, state governments underestimate the probability of adverse events occurring. They do not make adequate provision in their budgets for mitigation and reconstruction. Third, the borrowing capacity of states is constrained under the Fiscal Responsibility and Budget Management Act.

These could be the reasons why the Kerala government requested the Goods and Services Tax (GST) Council to permit it to levy a cess on state GST (SGST) to fund its disaster management. The council authorised it to levy a cess of 1% on its SGST for up to two years, which means Kerala will have a different SGST structure from other states. A cess on SGST for the purpose is not desirable for a number of reasons. This has been analysed elsewhere. Suffice to say, such a cess will not be eligible for input tax credit and militates against the very idea of GST. Further, other states may make similar requests. Post Fani, Odisha could do so. States such as Maharashtra, which are suffering drought, may follow suit. If such requests are agreed to, each state will have a different GST structure. No longer will it be “one tax for one nation". This option is thus not sustainable.

Another unorthodox measure adopted by Kerala is its issuance of rupee-denominated bonds overseas (masala bonds). The Kerala Infrastructure Investment Fund Board (KIIFB) issued masala bonds of 2,150 crore in March 2019. Critics have argued that the use of such an instrument of debt infringes Article 293(1) of the Constitution, which prohibits state governments from borrowing outside the territory of India. As a “state" encompasses all authorities over which it has full control and KIIFB is one such, that restriction would apply. The legal maxim, what cannot be done directly can also not be done indirectly, is applicable here. As state governments cannot borrow from international markets, their para-statals equally cannot. The requirement that only the central government can borrow money from abroad recognises that a single agency is better placed to manage the country’s foreign exchange exposure, given the impact it could have on the economy. In defence of bond issues, it can be argued that there is indeed a single agency monitoring India’s foreign exchange exposure arising from such bonds: the Reserve Bank of India (RBI), which has permitted the issue of these bonds subject to stipulations. As more and more state governments seek to tap this source of funds, RBI may face increasing pressure from them to consent. States could claim need, precedent or even politics to buttress their requests, putting RBI in an unenviable position. Perhaps RBI should approve such requests from state government para-statals only after the centre’s clearance. In any case, this is also an unsustainable option.

The above analysis does not imply that states facing calamities of rare severity should not receive additional assistance. They should. Such assistance should be drawn from a bolstered NDRF, which is financed by the National Calamity Contingency Duty (NCCD), the proceeds of which have fallen sharply after the introduction of GST. According to the interim budget, the collections from NCCD during 2019-20 are projected to be only 2,480 crore. The government proposed an additional outlay of 7,520 crore from its own resources, aggregating 10,000 crore for disaster relief assistance. This amount is not enough to meet demand.

The GST compensation cess generates more revenue in a month than the NCCD does in an entire year. As its own resources are limited, the centre may consider expanding the tax base of the NCCD to mimic that of the GST compensation cess in the forthcoming budget. This is the only sustainable option to fund disaster management nationally. It will enable the creation of a national disaster mitigation fund as envisaged and required. In parallel, India’s states should set up state disaster mitigation funds on their own.

V Bhaskar(mrvbhaskar@gmail.com) and Vijay Kelkar (vlkelkar@yahoo.com) are respectively Senior Fellow and Vice President of the Pune International Centre.

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