The bag is blue in color.

The correct answer is: It

In the above sentence we will use 'it' because it, I/me, they/them, he/him, she/her, we/us, are personal pronouns. Personal pronouns are pronouns that refer to specific individuals and groups. Whenever we want to use a pronouns other than human beings then we use 'it' in that case, for human beings we use 'He/she'. In the above image, a bag picture is shown and a bag is a non living thing, hence we used 'it'.