The impact of floods and cyclones on fiscal arrangements in India: An empirical investigation at the sub-national level

Abstract

Disasters can inflict severe devastation on communities and territories at all levels of authority. With regard to the connection between floods and cyclones and their financial impact, this study seeks to refocus national and subnational research efforts. The consequences of floods and cyclones on India's budget and economy at the subnational government level are examined in this study. The study creates a physical disaster intensity index to evaluate the impact on fiscal sustainability after disasters, as the estimated damages statistics are unreliable. Between 1995 and 2018, the study integrated disaster intensity index and budgetary data to produce a panel dataset of 25 Indian states. Using Panel Vector Autoregression, the study discovers that a state's overall government expenditure goes up, and its budget deficit worsens when floods and cyclones strike. By further breaking up the fiscal variables, we could pinpoint specific areas where disasters have exerted their influence, especially in terms of decreased own tax revenue, increased social sector expenditure and capital outlay, increased outstanding liability, increased primary deficit, and reduced transfers from the centre over time. It observed that after disasters, states more prone to disasters have higher volatility in revenue generation and expenditure patterns, and a sharp increase in outstanding liabilities. This suggests a greater reliance on borrowing for disaster recovery. Less-prone states, however, show higher utilization rates of disaster relief funds, indicating better resource allocation for disaster response and recovery. The study highlights that state governments rely highly on ex-post Disaster Risk Financing instruments, especially debt financing, as national relief and response funds couldn't manage the increased spending and budget deficit from disasters. This study thus helps policymakers and governments look for more proactive disaster financing instruments and make changes in India's fiscal framework to integrate climate change considerations.