India’s location and tropical monsoon climate make the region highly vulnerable to natural disasters such as floods and cyclones, especially in coastal and river areas. Each year, the country experiences five to six tropical cyclones, with two or three being severe. These disasters cause not only immediate loss of life and property but also put a significant financial strain on the government.
The state government bears much of the disaster response cost after natural disasters such as floods and cyclones, impacting its budget. A recent study by Ms. Nandini Suresh, Prof Trupti Mishra, and Prof D. Parthasarathy of the Indian Institute of Technology Bombay (IIT Bombay) analysed the financial impact of floods and cyclones on 25 states over 24 years (1995–2018). The research is published in the International Journal of Disaster Risk Reduction.
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. Instead,
“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),” says Ms Nandini Suresh.
By combining this information, the researchers created a Disaster Intensity Index (DII), ensuring all types of disasters are treated fairly. The 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 don’t unfairly influence disaster severity measurements, giving a reliable way to study the financial impacts of disasters.
The findings from the study show that disasters put a heavy financial burden on affected states. First, disasters increase the state’s expenditure. The government must allocate substantial funds for immediate relief efforts such as evacuation, medical aid, food, and shelter. After the disaster, it must invest in rebuilding essential infrastructure such as roads, bridges, and homes. Secondly, these disasters reduce the government's revenues. As agriculture, trade, and business operations are often disrupted, tax collection and income from these services are reduced. The study highlights a cycle in which increased expenditures and falling revenues lead to more significant budget deficits.
However, based on the created DII, the study 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.
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,” says Ms Nandini.
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. 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’s 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.
The study also suggests states 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.
With climate change increasing the frequency and intensity of disasters, Indian states will face greater financial challenges.
“By adopting these measures, India can mitigate long-term financial risks while protecting lives and infrastructure and build a stronger, more sustainable future,” concludes Ms Nandini.