Nexus of Drought, Relief Finances, and Economic Growth: Evidence from Indian States

Abstract

Droughts significantly affect India’s agricultural sector and overall economic growth in dry, arid, and semi-arid regions. Around 50% of crop areas depend on the south-west monsoon, making them vulnerable to deficient rainfall. Droughts redirect financial resources to relief efforts, impacting other sectors negatively. This study examines the relationship between droughts, relief finances, economic growth, and agricultural sector growth across 28 Indian states from 1991–92 to 2015–16. Findings show that droughts reduce state agricultural gross domestic product growth by approximately 1.53%, 17.67%, and 13.93% across all states, least irrigated states, and moderately irrigated states, respectively. The impact on overall economic growth is influenced by the availability of infrastructure, such as irrigation and is negatively but not significantly affected, as drought effects are localized. However, postdrought relief finances have a significant positive impact on moderately and least irrigated states, underscoring the need for appropriate drought risk management policies in these areas. This study critically examines the repercussions of droughts on India’s agricultural sector and overall economy across 28 states from 1991–92 to 2015–16. The findings underscore a substantial reduction in state agricultural gross domestic product (SAGDP) growth due to the adverse effects of droughts. The impacts vary across states, with differing degrees of severity observed. Importantly, the study sheds light on the localized nature of overall economic growth effects, contingent upon the presence and efficiency of irrigation infrastructure. Droughts necessitate the redirection of financial resources to relief efforts, consequently impacting sectors beyond agriculture. However, a noteworthy positive trend emerges postdrought, where relief finances showcase a significant impact, particularly in states with limited irrigation facilities. Practitioners and policymakers are strongly urged to prioritize targeted interventions and resource allocation, especially in regions lacking robust irrigation infrastructure. The research underscores the critical importance of proactive drought risk management policies, emphasizing the positive role that relief finances play in mitigating the economic consequences of droughts. Implementation of these practical insights holds the potential to fortify India’s resilience to droughts, safeguarding both the agricultural sector and overall economic stability, thereby contributing to sustainable and adaptive policy frameworks for the nation’s prosperity.