A recent study conducted by researchers at the Indian Institute of Technology (IIT) Bombay analyzed the financial impact of floods and cyclones across 25 states in India. The study, which covers a span of 23 years (1995–2018), highlights how the damage caused by these natural disasters severely affects the states’ budgets on an annual basis. The research also offers solutions for better disaster preparedness and economic protection, providing a roadmap to help mitigate the financial repercussions of such crises.
Published in the International Journal of Disaster Risk Reduction, the study titled, ‘The impact of floods and cyclones on fiscal arrangements in India: An empirical investigation at the sub-national level’ is conducted by Nandini Suresh,a research scholar with the Center for Climate Studies, IIT Bombay, Professor Trupti Mishra, and Professor D. Parthasarathy of IIT Bombay.
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Traditionally, disaster response funding relies on estimating the cost of damages based on evaluating economic losses, the number of deaths, and the number of people affected. “These evaluations are often inconsistent and biased,“ Ms. Suresh said. “We relied on data from weather and geographic sources [IBTrACS and the India Meteorological Department] to accurately measure cyclone strength [using wind speeds] and flood severity [based on unusual rainfall],” she explained.
By combining this information, the researchers created a Disaster Intensity Index (DII), ensuring all types of disasters are treated fairly. This method avoids inconsistencies and biases and gives a clearer picture of disaster impacts, especially for floods and cyclones, which caused 80% of disaster-related losses in India during the study period.
The study uses a statistical model called panel Vector Auto Regression (VAR) to examine how revenue and expenditure affect each other from one year to the next few years. The model allows accounting for differences between states and ensures that past economic conditions do not unfairly influence disaster severity measurements, giving a reliable way to study the financial impacts of disasters.
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The findings from the study show that disasters put a heavy financial burden on the affected States by increasing their expenditure while also reducing their revenue. As a result, the States allocate substantial funds for immediate relief efforts such as evacuation, medical aid, food, and shelter. The government also invests in rebuilding essential infrastructure such as roads, bridges, and homes. As agriculture, trade, and business operations are frequently disrupted by these disasters, tax collection and income from these sectors also decline.
The study highlights a cycle in which increased expenditures and falling revenues lead to significant budget deficits.
Ms. Mishra said, “However, the DII shows that disasters impact States differently. Less disaster-prone States like Madhya Pradesh and Chhattisgarh, which experience droughts and occasional floods, can handle relief with their own resources and suffer less financial damage. The disaster intensity is not high enough to affect people’s income or production; hence, there is no decrease in tax or non-tax revenues. On the other hand, disaster-prone coastal States like Odisha, Andhra Pradesh, and West Bengal, which frequently experience cyclones and floods, have higher recovery expenses and higher revenue losses. As a result, they often need to rely on external funding like loans, increasing state debt and making it difficult to fund other development projects.”
The assistance offered by the National and State Disaster Response Funds (NDRF and SDRF) could be optimised for improved efficiency and faster disbursal. “Certain regulations, such as the 25% cap on SDRF allocations for relief operations and some procedural requirements, may create hurdles in utilising these funds in a timely manner. By simplifying these processes, there may be an opportunity to enhance the overall impact of disaster relief initiatives,” Mr. Parthasarathy said.
The study emphasises the need for proactive disaster risk financing mechanisms such as resilience bonds, disaster insurance, and catastrophe bonds.
Resilience bonds encourage investments in disaster prevention projects and offer incentives for reducing the effects of disasters. Disaster insurance supports individuals, companies, or governments in recovering from losses brought on by natural disasters. Catastrophe bonds allow governments or organisations to shift disaster risk to investors who receive interest unless a disaster occurs. “These provide quick funds during emergencies and reduce the need to take external loans after disasters,” Ms. Nandini said.
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However, implementing such measures in India is challenging due to a lack of awareness and understanding among stakeholders, including governments and the public, about the benefits of such instruments, she added. The other key challenges include the high cost of disaster insurance premiums and a lack of a clear financial and legal framework for issuing resilience bonds or incorporating them into state budgets.
Public-private partnerships are also essential for building a climate-resilient economy. Governments can offer tax incentives for businesses to invest in climate resilience infrastructure and enforce sustainability regulations.
Diverting funds from other projects is a usual way for governments to handle disasters while staying within budget. However, it is difficult to move money from fixed expenses like debt payments, salaries, or pensions as these take up most of the budget and are already set by law. Governments need flexible budgets, backup plans, and quick ways to adjust spending based on what is required so that they can quickly reallocate funds during emergencies.
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“The states need to invest in early warning systems, cyclone shelters, and resilient infrastructure and promote sustainable land use that can minimise the economic impact of climate change and lower the long-term costs of dealing with disasters. Many states have already made progress: Tamil Nadu has installed advanced cyclone monitoring systems, Kerala has adopted climate-adaptive urban planning, and Odisha and many others have introduced budget tracking for climate-related spending,” Ms. Nandini said.
With climate change driving an increase in the frequency and intensity of disasters, the researchers warned that Indian states will face even greater financial challenges in the future. However, by adopting the recommended measures, they believe India can mitigate long-term financial risks, protect lives and infrastructure, and work toward building a stronger, more sustainable future.
Published – January 31, 2025 06:01 am IST
