ECONOMIC IMPACTS OF DROUGHTS AND DROUGHT RISK MANAGEMENT PRACTICES: A STUDY OF MADHYA PRADESH

Abstract

Disasters have always caused significant economic losses, which are likely to increase in future particularly for developing countries. Droughts and floods are two natural hazards faced most frequently in India. The present thesis considers only drought as flood induced losses have been extensively studied. Droughts are the slow onset, complex, and least understood disaster having multiple definitions and types. Around 50 percent gross cropped area is dependent on the South-West monsoon in absence of adequate irrigation infrastructure in India. As a result, drought affects the aggregate economy and in particular the agricultural sector. It may not cause any direct property damages, but may adversely affect individuals, communities and the overall economic growth of the affected region. Rather than long-term mitigation, response driven approaches such as post-drought financial relief is the primary mechanism to deal with such disasters in India. Droughts may result in diversion of financial resources towards relief and consumption smoothing causing adverse impact on the other sectors of the economy. Moreover, managing droughts are more challenging for governments and policy-makers because they could be avoided either by coping and adaptation strategies at the individual level or mitigated at the institutional level. The risk management strategies and adaptive capacity to deal with droughts also vary according to economic and social factors associated with individuals, communities and nations among others. It is also noticed that individuals often exhibit irrational decision choices driven by behavioural biases, which are the building blocks of decision making to deal with uncertain disaster events. Often, individuals either simply do not know the risk or do not understand the actionable after knowing the probable disaster risk. In literature pertaining to disasters, the three most prevalent behavioural biases are overconfidence, over-optimism and herding. With this backdrop, this thesis examines three important facets of drought disaster in the Indian context. First, it analyses the empirical relationship between droughts, drought-relief and growth parameter of the selected state economy in general and agricultural sector in particular. Previous studies have established statistical relationship between natural disasters (including droughts) and the economy, showing varying impact across economies and economic sectors. Therefore, drawing conclusion regarding the direction of impact on the locale economy is difficult, and an analysis at sub-national may generate further evidences to draw plausible inferences. The present study provides a statistical evidence for India and contributes to the existing literature on drought impact in developing economies. The second aspect of this thesis is to explore the behavioural issues, determinates of preparedness, and individual risk management practices (coping and adaptation strategies) to reduce losses against droughts with particular reference to Madhya Pradesh. The selected state is vulnerable to droughts and water scarcity owning to its geo-climatic features. In the last 30 years, 7 districts of the state have been highly affected by the droughts, and many districts faced recurrent drought events. In 2015-16 alone, total of 46 districts (90 percent) have been declared drought affected. Furthermore, 72 percent population resides in villages whose main occupation is agriculture. The proposed study in selected district of Madhya Pradesh may provide a first-hand information of existing practices at the individual level to deal with drought disasters. The insights may also be useful for policy-makers and state government to set the priorities for state run programs and further strengthening the social safety nets. Before such field level examination, the study empirically analysed the drought and financial relief impacts at the district level in Madhya Pradesh. Finally, there is an examination and evaluation of the government intervention through policies, particularly the pre and post-disaster budgetary policies for disaster risk management. The first research objective is accomplished by estimating the impact of droughts and financial relief on the aggregate and agricultural growth rates of 28 Indian states (full sample) and the three sub-groups (Irrigated, moderately irrigated and least irrigated states) for the period 1990-91 to 2015-16, employing panel fixed effects model. Drought shows negative relationship with State Agriculture Gross Domestic Product (SAGDP) in three cases (all states, moderately irrigated and least irrigated states) except for highly irrigated states. It clearly shows that along with overall agricultural growth, the least irrigated and the moderately irrigated states are vulnerable to droughts whereas the states with irrigation facilities could adapt to short-term drought shock efficiently. Droughts also adversely affected the State Gross Domestic Product (SGDP) growth rates. The financial relief, on the other hand, showed a negative and statistically significant effect on SAGDP for moderate and least irrigated states. These findings suggest that the policymakers should include drought mitigation as an integral part of the rural development strategy at sub-national and national level in India. There must be an enhanced expenditure on the agricultural research, drought and climate change related effect on economic growth. In addition, the state government must also ensure that the drought-relief funds are effectively utilized. The study also empirically estimates the drought and financial relief impacts on aggregate and sector wise (agriculture, secondary and tertiary) through a two-step System-GMM approach on the balanced panel data of 45 selected districts for 2005 to 2012 in Madhya Pradesh. The results show that the agricultural growth rate falls by 28%, whereas the aggregate growth rate reduces by 6% due to drought incidence. Post-drought financial relief shows a positive and statistically significant effect on the industrial as well as on the aggregate district growth rates. Therefore, there is an immediate need to look at drought management in the context of the economics of development. The second objective is fulfilled by analysing the data collected through primary survey. The study employs the descriptive and logistic regression approach to explore the individuals’ risk management strategies and determinates of preparedness against droughts in Sagar and Vidisha districts of Madhya Pradesh, India. The respondents’ proportion, who received an early warning, financial relief against crop losses, not incurred livestock loss and earn an income of INR 5000 and above, were more among those, prepared to deal with droughts and water scarcity situations. To mitigate the drought risk, many respondents diversified the income and employment sources, accessed more social safety schemes offered by State and Central governments, migrated for livelihoods, and arranged for different irrigation sources for water availability. The results of binary logistic regression analysis showed that the main variables associated with an increase in the odds of drought-preparedness were Gender, Income, and Migration (for full sample). The important predictor variables towards drought-preparedness were Income, Social group, Gender, Migration and Financial relief for sub-sample (farmers). These findings suggest that, there is a need for strong government intervention to strengthen the social safety net (schemes such as crop and livestock insurance), and providing more access to government schemes to individuals. The State Government must also ensure that the farmers timely receive financial relief towards crop losses due to droughts. Also, the financial relief reimbursement amount should be significantly increased from the current level. The findings and recommendations of the study may be equally applicable to other drought-affected regions with similar socio-economic characteristics of respondents. Further, a descriptive analysis is employed to examine the selected behavioural biases of respondents to mitigate drought risks. The respondents showed over-confidence, over-optimism and herding biases while dealing with uncertain drought events. Therefore, it is suggested that policy-makers should also incorporate behavioural issues in traditional decision-making models. The third objective of the thesis is achieved by examining the existing drought management policy framework, pre and post budgetary policies, various programmes and the role of institutions for effective disaster risk management. The outcomes indicate that India lacked a practical and effective drought management policy at the national and the sub-national (state) level of administration. The ambiguity arises due to difference in defining and declaring the drought and the variations in the drought assessment and subsequent management at the state level among others. The study further notices that in the revised drought management guidelines (2016), the new criteria to prove the drought occurrence is rigid as well as impractical and does not fit to all the states climatic conditions. An analysis of the state budgetary policy show that in short-term, relief oriented works are preferred to reduce drought risks. In addition, Drought-Prone Area Programmes (DPAP), Integrated Watershed Development Programmes (IWDP), Integrated Watershed Management Programmes (IWMP), irrigation projects and crop insurance are the major heads where funds were allocated for long-term in the state. There was an upward trend of budget allocation for DPAP (2001-2007), IWDP (1995-2009), and IWMP (2009-2013), with a few fluctuations in-between. The state also witnessed a consistent rise in the funds towards irrigation infrastructure from 2010 to 2015. Similarly, there was a regular increase in budgetary allocations by state government (2011 to 2015) towards the crop insurance premium. The data suggest that the state witnessed a declining trend in budget allocation towards financial relief to districts (from the SDRF) from 2005 to 2017, with some fluctuations in-between. It is recommended that state should further increase the budgeting to expand the irrigation infrastructure to withstand the drought shock.