OECD Economic Outlook 2025 on Disaster Risk Financing: India Ranks 2nd Globally in Disaster Vulnerability
SDG 13: Climate Action | SDG 1: No Poverty | SDG 11: Sustainable Cities and Communities
Ministry of Finance | National Disaster Management Authority (NDMA) | IFSCA | IRDAI
The OECD Economic Outlook for Southeast Asia, China and India 2025 identifies Emerging Asia as a global disaster hotspot, with India ranked as the second most vulnerable country in the world according to the World Risk Index 2025. With a population of 1.45 billion and a USD 3.91 trillion GDP (2024), India faces a structural threat to its 6.49% real GDP growth from climate-related shocks such as the 2018 Kerala floods and 2020 Cyclone Amphan.
The report estimates that India’s average annual disaster losses (AAL) stand at 0.42% of its GDP, primarily driven by high exposure to floods, droughts, and cyclones. While India possesses strong institutional frameworks, it remains caught in a cycle of reactive funding that can destabilize long-term public finances.
Key structural and digital developments include:
Ex-Post Dominance: India relies heavily on the National and State Disaster Response Funds (National Disaster Response Fund (NDRF) and State Disaster Response Funds (SDRF)). While robust, these are “ex-post” mechanisms that depend on budget reallocations after a disaster has already occurred.
Sectoral Leadership: The Pradhan Mantri Fasal Bima Yojana (PMFBY) is a global standout, providing crop insurance to 25 million farmers and serving as a blueprint for large-scale sectoral risk transfer.
Capital Market Integration: The International Financial Services Centres Authority (IFSCA) is currently drafting regulations to enable Insurance-Linked Securities (ILS) and sovereign Catastrophe (CAT) Bonds, marking a significant step toward transitioning from reactive funding to proactive disaster risk financing.
Pilot Frameworks: India is actively piloting parametric insurance schemes for flood and drought management. These initiatives aim to provide faster payouts and reduce administrative costs compared to traditional indemnity-based insurance
What is the Protection Gap? It refers to the massive disparity between the total economic losses caused by a disaster and the portion of those losses actually covered by insurance. In India and the broader Asia-Pacific, this gap is approximately 91%, meaning the government and uninsured households must bear nearly all recovery costs. This gap hinders “bouncing back” and can trap vulnerable populations in cycles of debt and poverty.
Policy Relevance
The OECD report identifies the protection gap for households and small businesses as a primary challenge for India’s fiscal policy. To sustain its growth trajectory amidst “high uncertainty” and global trade tensions, the report recommends:
Modernizing Legislative Frameworks: India should modernize its public finance laws to include legal mandates for risk-layered tools, ensuring that DRF is not just a contingency but a core pillar of national fiscal planning.
Enhanced Inter-Governmental Coordination: Improving the integration of DRF between the Central and State governments is essential to resolve existing coordination bottlenecks that slow down the flow of recovery funds.
Deepening Insurance Penetration: Currently, India has relatively low insurance penetration. Developing an investor base for Catastrophe Bonds and improving data quality are critical steps to making disaster insurance a viable market.
Disaster Risk Literacy: The report advocates for embedding DRF education into school curriculums and targeted training for public officials and farmers to move the national mindset from “disaster relief” to “financial resilience”.
Regional Risk-Sharing: India should explore strengthening ties with regional risk-sharing pools like SEADRIF to diversify its risk exposure beyond its own borders.
Follow the full report here: Economic Outlook for Southeast Asia, China and India 2025 - Enhancing Disaster Risk Financing