Fiscal Repercussions of Natural Disasters: Stylized Facts and Panel Data Evidences from India

Abstract

Natural disasters may create serious fiscal problems, especially for the developing world by causing disruption in economic activities, destroying tax bases, and increasing the financial burden of postdisaster response, recovery, and reconstruction on the governments. To shift the focus of the research regarding the fiscal impact of natural disasters from the national level to the subnational level, we compile a panel data of 24 selected Indian states over the period 1990–2015. Using the augmented panel vector autoregression models (PVAR-X), we examine the dynamic responses of the state-level fiscal variables namely, budget balance, revenues, expenditures, intergovernmental transfers, and public debt following natural disasters (in this case, floods). We innovate by using a more comprehensive, nonmonetary measure of disaster intensity (Noy’s life years lost index). The results show that in the wake of floods, public expenditure increases significantly along with the intergovernmental transfers from the central government at various levels that cover a major part of state governments’ postdisaster expenses. At the same time, a state government’s own-source revenues (tax and nontax) decline while their borrowings increase significantly. As a result, the overall budget balance decreases and the effect on the same persists over several years following floods. The fiscal impact of floods largely persists in the medium-term (cumulatively over 5 years), but they are found to be absent in the long-term (cumulatively over 10 years). However, for severe floods, adverse responses of the fiscal variables are observed to be more pronounced and also found to persist in the medium to long-term. Our findings highlight the funding needs of both the central and state governments in the aftermath of natural disasters. Going forward, India cannot avoid recurring and costly natural disasters; therefore, policymakers should look to invest more in proactive measures of disaster risk financing.