MITIGATION OF ECONOMIC DAMAGES DUE TO DISASTERS: A STUDY OF RISK FINANCING IN INDIA

Abstract

Natural hazard-induced disasters (hereafter, disasters) may cause serious economic and fiscal repercussions by destructing both human and physical assets, disrupting economic activities, destroying the tax base, and increasing the financial burden of post-disaster response, recovery, and reconstruction on the government. The threat of disasters could be more severe for many developing or relatively lower-income countries largely due to their low-income populations, high exposure to natural hazards, and limited human and economic capacities to respond to such events. Therefore, being a developing country, India remains highly vulnerable to disasters. Besides, India’s vast geographical area, topology, diverse climatic conditions, and a large population makes it one of the most disaster-prone countries of the world. Among the four types of disasters induced by natural hazards (droughts, storms, earthquakes, and floods) that regularly occur in India, floods are the most frequent and destructive ones. Despite India’s commitment to the Sendai Framework for Disaster Risk Reduction (SFDRR), the financial arrangements to fiscally safeguard the government(s) against the disaster-induced losses are largely based on a reactive approach consisting of post-disaster financing means such as budgetary (re)allocations, donor funding, and debt financing. With almost non-existent support from the private sector, the central and the respective state governments are therefore left with a huge fiscal burden to bear and they often struggle to effectively mitigate and absorb the losses following disasters. Therefore, disasters can pose a serious threat to the economic and fiscal stability of India while the reactive risk financing approach contributes heavily to India’s vulnerability to such threats. In this backdrop, this thesis has the following broader objectives. First, it explores the relationship between disasters and economic growth using cross-country data while considering the role of economic development in reducing the impact of disasters. Second, this study reviews the risk financing and management policies and practices along with the existing budgetary and non-budgetary sources of disaster-related financing in India. Finally, this thesis explores proactive disaster risk financing (DRF) solutions and examines the challenges that hinder their introduction in India through a survey of stakeholders who are directly or indirectly involved (or could involve) in the DRR and risk financing activities at national and state levels. The existing growth theories do not provide clarity on the economic impact of disasters, which has motivated the earlier empirical research in this domain. However, the existing literature largely remains ambiguous with studies reporting contradictory findings. Most such studies are conducted at the national level using cross-country data, and there are limited systematic evidences available on the regional or sub-national level on the economic impact of disasters. A similar scenario may be observed in the case of the studies examining the fiscal impact of disasters, especially at the sub-national level. A review of the theoretical and empirical literature has been provided in this thesis. While examining the macroeconomic impact of disasters, this study uses a panel data of 102 countries over the period 1981-2015 while considering the difference between moderate and severe disasters, and developed and developing countries. The results of this analysis indicate that disasters may have diverse effects on the macroeconomy that may vary across economic sectors depending on the disaster types and their intensities. Disasters of severe intensity are found to have a relatively stronger and adverse macroeconomic impact. Further, despite the fact that the direct disaster damages are more in developed countries (in absolute terms), this analysis confirms that the macroeconomic impacts of disasters are relatively stronger in developing countries. On average, the effects of disasters in developing countries are found to be at least three times stronger in magnitude than those in developed countries. Moving from national to sub-national level, this study provides one of the first empirical estimates of the economic and fiscal impact of disasters in India. Using the augmented panel vector autoregression (PVAR-X) models, the average economic and fiscal impact of disasters is estimated not only in the year of the event, but also in the subsequent years and cumulatively over five (medium-term) and ten years (long-term) following the event. To examine the impact of disasters (in this case, floods) on aggregate GDP and sector-specific GDP, this study uses a panel data of 24 selected Indian states compiled over the period 1990-2015. The results of the analysis reveal that floods largely have a negative impact on the state-level growth indicators except for the agricultural sector. Unlike moderate or typical floods, severe floods almost always have a negative impact on the growth variables; even on agricultural growth. As a consequence, significantly longer recovery periods for the growth of respective sectors are observed following severe floods compared to that in case of moderate floods. The states, where the level of human development is relatively lower are found to be more sensitive (up to ten times stronger impact) to the shocks of floods in comparison to the states where it is higher. These results further confirm that levels of development have a significant influence on the extent of disaster impact. Using the same methodology, this study examines the impact of disasters on the state finances in India. The results of this analysis indicate an upsurge in government spending and the intergovernmental transfers from the central to the state governments in the aftermath of floods. Unlike spending, the state governments’ own-source revenues are found to be experiencing a decline following floods especially, in the year of the event. The overall budget balance variable responds accordingly showing a significantly negative impact cumulatively over five years. Most of these effects persist in the first few years of the event, but they are absent in the long-term. However, for severe floods, the adverse responses of the fiscal variables are found to be more pronounced and persisting in the medium and long-term as well. As part of this thesis, a survey of selected stakeholders was also conducted during August 2019- December 2019 to explore the possibilities and challenges with regard to ex-ante or proactive DRF solutions for India. The stakeholders were selected using purposive sampling and following a systematic review of the organizational structure, decision-making hierarchy in disasterrelated issues, and the existing policies and plans for DRR in India. The stakeholders were divided into two broad groups: government and non-government stakeholders. The data was collected through semi-structured interviews. The results of the stakeholder survey indicate that the existing financial arrangements against disaster risks in India are mostly reactive and response-based with a little element of proactive planning and preparedness. Based on the analysis of the views expressed by the stakeholders, there may be multiple DRF solutions available to the policymakers in India which may be implemented at different levels of governance i.e. state and national levels. For example, the government(s) may utilize relatively expensive but quick risk financing tools such as reserve funds, mitigation funds and contingent credit for their immediate funding needs while for the post-disaster recovery and reconstruction where a large amount of funds is required, they may look for CAT-bonds and other marketbased instruments. This study also identifies key challenges to the introduction of proactive DRF solutions along with the enabling factors for the success of such solutions in India. The merit of this thesis stands on the pluralistic understanding of the economic and fiscal impacts of disasters along with the investigation of the possibilities and challenges for proactive DRF solutions specifically for India. The findings of this study have important policy implications for both national and state governments in India. This study highlights the disaster-related funding needs of both the national and state governments in India, and suggests proactive DRF solutions for the government(s). The study puts forward the need for a comprehensive DRF policy and recommends a policy development framework. Going forward, India cannot avoid the recurring and costly disasters, therefore, the policymakers should look to invest proactively in the resilience-building measures. Further, the findings of this study encourage the policymakers to ensure that the DRR goals are aligned to the sector-specific and overall developmental goals so as to build India’s resilience against frequently recurring disasters.