Extreme weather events in India are no longer deviations from the norm; they are rapidly becoming a defining feature of the country’s economic landscape. Their recurrence is forcing state governments into repeated cycles of reconstruction and emergency expenditure, gradually transforming climate risk from an environmental concern into a core fiscal governance challenge, with deep implications for India’s fiscal federalism and the long-term sustainability of subnational public finance. As the World Bank cautions, “climate shocks are increasingly becoming macroeconomic shocks”, particularly in emerging economies where adaptive capacity remains uneven.
In India’s case, this shift is already visible in state budgets, intergovernmental negotiations, and development planning priorities, signalling a structural stress on public finance. The aggregate economic toll of floods, heatwaves, cloudbursts, and cyclones is no longer marginal; it is systemic, repeatedly disrupting livelihoods, infrastructure, and economic activity in hotspot regions. This
reality is reinforced by India’s 9th rank in the long-term Climate Risk Index released by Germanwatch. Climate volatility must therefore be treated not as episodic disruption, but as a persistent structural constraint on growth, investment, and fiscal stability.
Yet hazards alone do not explain the scale of losses. The defining factor is vulnerability. Climate events translate into recurring fiscal shocks where exposure, sensitivity, and limited adaptive capacity intersect. The Climate Risk and Vulnerability Assessment (CRVA) 2025 by the Institute for Competitiveness identifies higher risks across states such as Bihar, Assam, Odisha, Chhattisgarh, Jharkhand, and Punjab, revealing how climate risk is unevenly distributed and tightly coupled with development deficits, governance capacity, and fiscal fragility.
These hotspot regions do not merely suffer asset losses, but they experience a steady erosion of fiscal capacity. Recurrent droughts, floods, and heat stress compel state governments to prioritize relief and rehabilitation spending, shrinking fiscal headroom and delaying long-term investments in resilience. This dynamic mirrors global evidence that adaptation, when pursued in isolation from broader structural reforms, can become fiscally defensive rather than development-enhancing. It also reflects a growing international consensus that climate adaptation cannot indefinitely offset escalating climate impacts in the absence of sustained mitigation.
Uttarakhand illustrates this dynamic vividly. Frequent flash floods and cloudbursts have pushed the state to allocate nearly eight per cent of its revenue expenditure toward disaster relief and rehabilitation in recent years. Karnataka’s growing monsoon volatility has stretched its budgetary buffers, prompting explicit concerns about shrinking fiscal space during pre-budget consultations with the Union government. Punjab’s severe floods in 2025, with officially estimated losses of Rs12,905 crore across 23 districts, led the state to seek special assistance which is its second such appeal in two years. These are not isolated fiscal stress events; they reflect a rebuild-and-repeat expenditure cycle that is steadily normalising fiscal distress.
Vulnerability mapping clearly shows that without targeted capacity-building investments in high-risk states, climate shocks will continue to drain public finances. However, India’s current fiscal architecture does not fully address this asymmetry. While the Finance Commission governs intergovernmental fiscal transfers, climate vulnerability has yet to emerge as a central, explicit criterion in fiscal devolution, despite its growing influence on state expenditure patterns and debt trajectories. Population, income distance, and forest cover are accounted for but not multi-hazard exposure, adaptive capacity gaps, or projected climate risk trajectories.
As a result, disaster financing remains reactive. Allocations under the NDRF and SDRF are primarily geared toward post-disaster relief, while funding for pre-disaster risk reduction and resilience remains fragmented and insufficient. This institutional design perpetuates a relief trap: public resources are repeatedly consumed by recovery, while prevention and resilience remain chronically underfinanced, even as climate risks intensify.
The relief trap has deeper macroeconomic consequences. Without parallel investments in mitigation and structural resilience, rising temperatures progressively erode the effectiveness of adaptation measures, locking vulnerable regions into low-growth, high-risk equilibria. States with the highest vulnerability are therefore forced to divert development spending toward relief, reinforcing regional inequality within India’s federal structure.
The urgency for reform is now visible in contemporary fiscal debates. In the run-up to the Union Budget 2026, several states have flagged mounting climate-related fiscal pressures. Punjab’s pre-budget memorandum explicitly cites the cumulative burden of repeated flood events. Karnataka has raised concerns over disaster-related expenditure crowding out development priorities. At the national level, industry bodies such as PHDCCI have proposed the creation of a Green Bank or Climate Finance Facility to mobilise capital for resilience and adaptation. These developments suggest that climate risk is already influencing fiscal choices, even if formal fiscal rules have yet to internalise these risks systematically.
If India continues to treat climate shocks as exceptional events, fiscal planning will remain locked into a relief-heavy model. Alternatively, integrating vulnerability assessments such as CRVA into fiscal federalism would represent a decisive shift from post-shock expenditure toward pre-shock investment, and from reactive transfers toward anticipatory risk governance. Financing resilience should be risk-weighted, capacity-oriented, and targeted. Such transfers would not only reduce vulnerability but also embed climate risk explicitly within India’s fiscal devolution framework. This approach offers three strategic advantages. First, it reduces long-term disaster losses by lowering baseline vulnerability. Second, it replaces ad-hoc relief with predictable resilience financing, stabilising state fiscal planning. Third, by protecting high-risk regions that are central to agricultural output, labour supply, and internal migration, it safeguards national economic growth.
If climate vulnerability continues to align with existing development divides, uncorrected fiscal frameworks will amplify regional inequality. Low-risk states will advance faster, while high-risk states remain trapped in cycles of rebuilding. The solution is not simply more spending, but smarter spending guided by granular risk data and embedded within fiscal federalism. India has already demonstrated analytical maturity in mapping climate vulnerability. The next step is ensuring that public budgets, fiscal rules, and intergovernmental transfers align with these risk maps. Ultimately, resilience will not be built through infrastructure alone; it will be delivered through risk-informed fiscal design that integrates development, adaptation, and long-term climate strategy.
Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of the publication |
