Advertisement

Economic growth in the aftermath of floods in Indian states

  • 43 Accesses

Abstract

Flood disaster is a recurrent phenomenon in India. The geo-climatic conditions are a major cause for higher flood damages in Indian states. This study employs the pooled mean group (PMG) approach to examine economic growth in the aftermath of floods in 14 non-special category states in India using flood disaster data over the period 1981–2011. The PMG estimates show that flood impacts in terms of area affected, the population affected, and economic losses due to floods decline real per capita GSDP growth in the long run after taking into account growth-enhancing factors. Moreover, instrumental variables (IV)-two-stage least-squares (2SLS) estimates also confirm that states experience lower real per capita GSDP growth due to higher flood impacts. The results, further, show that higher urbanization and enrollment of higher education increases real per capita GSDP growth in the long run. For robustness check, the study investigates the impact of floods on real per capita GSDP growth after taking into account government capital expenditure and per capita power consumption. The PMG and IV-2SLS estimates produce same results and confirm that flood impacts reduce real per capita GSDP growth, while government capital expenditure and per capita power consumption enhances real per capita GSDP growth. Overall, results confirm that flood management policies are essential to minimize the adverse impacts of floods on the growth of real per capita GSDP.

This is a preview of subscription content, log in to check access.

Access options

Buy single article

Instant unlimited access to the full article PDF.

US$ 39.95

Price includes VAT for USA

Subscribe to journal

Immediate online access to all issues from 2019. Subscription will auto renew annually.

US$ 99

This is the net price. Taxes to be calculated in checkout.

Fig. 1
Fig. 2

Notes

  1. 1.

    One-eighth of the country’s geographical area is prone to flood (see the Report of Working Group on Flood Management and Region Specific Issues for XII Plan, 2011, Planning Commission, Government of India).

  2. 2.

    Global Climate Risk Index, 2017 has constructed the overall Climate Risk Index as well as estimated the annual average disaster fatality and average economic losses in million US$ (Purchasing Power Parity) in 181 countries over the period 1996–2015.

  3. 3.

    Ibid.

  4. 4.

    Ibid.

  5. 5.

    Financing Rapid Onset Natural Disaster Losses in India: A Risk Management Approach, The World Bank, August, 2003.

  6. 6.

    Ibid.

  7. 7.

    There are some limitations to estimating damages due to flood by the respective State Governments in India. We argue that damages due to floods are not accurately measured in various states of India for the following reasons. First, in the case of developing economies like India, there is inadequate insurance coverage for private properties such as house and crops. Second, the State Governments do not follow specific criteria to estimate the exact amount of disaster damages. Finally, the State Governments submit inflated disaster damage figures to the Central Government to receive high disaster grants.

  8. 8.

    In the regression analysis, we added an integer one to all observations of the flood impact variables “area affected,” “the population affected,” and “economic losses due to floods” to get rid of zero values of the flood impact variables. Then, we took the natural logarithm of the flood impacts variables.

  9. 9.

    We have used heterogeneous dynamic macro panel data (T > N).

  10. 10.

    The panel autoregressive distributed lag (ARDL) model is used if the variables are non-stationary in level I(0) and stationary in first difference I(1).

  11. 11.

    We selected the second lag for our flood impact measuring variables barring growth determinant variables because our interest lies in examining flood impact on economic growth, controlling for growth-enhancing factors. We have also estimated flood impact on economic growth using the first lag of flood measure variables, and we find the same results in the long-run. We could not, further, increase the lag of the flood impact variables because the time dimension is not enough for further extension of the lag length of the variables and it reduces degrees of freedom. In macro panel data, one can impose at most two or three common lags across panel variables (Loayza and Ranciere 2006; Pesaran et al. 1999).

  12. 12.

    We have taken lagged one period value of urbanization to mitigate potential endogeneity bias.

  13. 13.

    Tables 5 and 11 show the F-Stat in the first stage regression, and their p values are significant, which implies the validity of the instrument. In other words, the instrument variable, “population density” is correlated with the endogenous variables such as “area affected,” “the population affected,” and “economic losses due to floods,” but uncorrelated with the error terms. In the 2SLS method, the p value of the F-Stat is not sufficient to conclude the validity of the instrument. To ensure the validity of the instrument, F-Stat should be more than 10 (Stock et al. 2002). If F-Stat is less than 10, it implies that the instrument is weakly correlated with endogenous variables, and in that case, the IV-2SLS produces the biased estimates. Poi (2006) and Stock et al. (2002) suggested that the limited information maximum likelihood (LIML) model performs better than the 2SLS method. In our case, F-Stat is less than 10, except for model 3 in Table 11. This is the limitation of our instrument, and therefore, we estimate the LIML model to reduce the biasedness of our estimates. Our estimates produce the same results. Results are available upon request.

References

  1. Ahlerup, P. (2013). Are natural disasters good for economic growth? Retrieved 23, May 2019 from https://gupea.ub.gu.se/bitstream/2077/32311/1/gupea_2077_32311_1.pdf.

  2. Albala-Bertrand, J. M. (1993). Natural disaster situations and growth: A macroeconomic model for sudden disaster impacts. World Development,21, 1417–1434.

  3. Baltagi, B. H., Griffin, J. M., & Xiong, W. (2000). To pool or not to pool: Homogeneous versus heterogeneous estimators applied to cigarette demand. Review of Economics and Statistics,82(1), 117–126.

  4. Banerjee, L. (2007). Effect of flood on agricultural wages in Bangladesh: An empirical analysis. World Development,35(11), 1989–2009.

  5. Belasen, A. R., & Polachek, S. W. (2008). How hurricanes affect wages and employment in local labor markets. American Economic Review,98, 49–53.

  6. Blackburne, E. F., & Frank, M. W. (2007). Estimation of nonstationary heterogeneous panels. Stata Journal,7(2), 197–208.

  7. Cavallo, E., Galiani, S., Noy, I., & Pantano, J. (2013). Catastrophic natural disasters and economic growth. Review of Economics and Statistics,95(5), 1549–1561.

  8. Cunado, J., & Ferreira, S. (2014). The macroeconomic impacts of natural disasters: The case of floods. Land Economics,90, 149–168.

  9. Datar, A., Liu, J., Linnemayr, S., & Stecher, C. (2013). The impact of natural disasters on child health and investments in rural India. Social Science and Medicine,76, 83–91.

  10. Drabo, A., & Mbaye, L. M. (2015). Natural disasters, migration and education: An empirical analysis in developing countries. Environment and Development Economics,20(6), 767–796.

  11. Evans, R. W., Hu, Y., & Zhao, Z. (2010). The fertility effect of catastrophe: US hurricane births. Journal of Population Economics,23(1), 1–36.

  12. Favara, G. (2003). An empirical reassessment of the relationship between finance and growth. IMF Working Paper No. 03/123.

  13. Felbermayr, G., & Gröschl, J. (2014). Naturally negative: The growth effects of natural disasters. Journal of Development Economics,111, 92–106.

  14. Fomby, T., Ikeda, Y., & Loayza, N. V. (2013). The growth aftermath of natural disasters. Journal of Applied Economics,28, 412–434.

  15. Government of India. (2011). Disaster Management in India. New Delhi: Ministry of Home Affairs.

  16. Hornbeck, R., & Naidu, S. (2014). When the levee breaks: Black migration and economic development in the American South. American Economic Review,104, 963–990.

  17. Kahn, M. (2005). The death toll from natural disasters: The role of income, geography, and institutions. Review of Economics and Statistics,87, 271–284.

  18. Karim, A., & Noy, I. (2016). Poverty and natural disasters—A qualitative survey of the empirical literature. The Singapore Economic Review,61(01), 1640001.

  19. Klomp, J. (2016). Economic development and natural disasters: A satellite data analysis. Global Environmental Change,36, 67–88.

  20. Klomp, J., & Valckx, K. (2014). Natural disasters and economic growth: A meta-analysis. Global Environmental Change,26, 183–195.

  21. Kreft, S., Eckstein, D., & Melchior, I. (2017). Global Climate Risk Index who suffers most from extreme weather events? Weather-related loss events in 2015 and 1996 to 2015. Bonn: Germanwatch Nord-Süd Initiative eV.

  22. Loayza, N. V., Olaberria, E., Rigolini, J., & Christiansen, L. (2012). Natural disasters and growth: Going beyond the averages. World Development,40, 1317–1336.

  23. Loayza, N. V., & Ranciere, R. (2006). Financial development, financial fragility, and growth. Journal of Money, Credit and Banking,38(4), 1051–1076.

  24. Mohan, P. S., Ouattara, B., & Strobl, E. (2018). Decomposing the macroeconomic effects of natural disasters: A national income accounting perspective. Ecological Economics,146, 1–9.

  25. Neumayer, E., & Plümper, T. (2007). The gendered nature of natural disasters: The impact of catastrophic events on the gender gap in life expectancy, 1981–2002. Annals of the Association of American Geographers,97(3), 551–566.

  26. Noy, I. (2009). The macroeconomic consequences of disasters. Journal of Development Economics,88, 221–231.

  27. Noy. I., & Nualsri, A. (2007). What do exogenous shocks tell us about growth theories? University of Hawaii Working Paper, 07-28.

  28. Noy, I., & Vu, T. B. (2010). The economics of natural disasters in a developing country: The case of Vietnam. Journal of Asian Economics,21, 345–354.

  29. Ouattara, B., & Strobl, E. (2014). Hurricane strikes and local migration in US coastal counties. Economics Letters,124, 17–20.

  30. Parida, Y., Dash, D. P., Bhardwaj, P., & Chowdhury, J. R. (2018). Effects of drought and flood on farmer suicides in Indian States: An empirical analysis. Economics of Disasters and Climate Change,2, 159–180.

  31. Pesaran, H., & Smith, R. (1995). Estimating long-run relationships from dynamic heterogeneous panels. Journal of Econometrics,68(1), 79–113.

  32. Pesaran, M. H., Shin, Y., & Smith, R. P. (1999). Pooled mean group estimation of dynamic heterogeneous panels. Journal of the American Statistical Association,94(446), 621–634.

  33. Planning Commission. (2011). Report of working group on flood management and region specific issues for XII plan. New Delhi: Govt of India.

  34. Poi, B. P. (2006). Jackknife instrumental variables estimation in Stata. Stata Journal,6, 364–376.

  35. Raddatz, C. (2007). Are external shocks responsible for the instability of output in low income countries? Journal of Development Economics,84, 155–187.

  36. Raddatz, C. (2009). The wrath of God macroeconomic costs of natural disasters. Policy Research Working Paper 5039, The World Bank, Development Research Group Macroeconomics and Growth Team.

  37. Rajapaksa, D., Islam, M., & Managi, S. (2017). Natural capital depletion: The impact of natural disasters on inclusive growth. Economics of Disasters and Climate Change,1(3), 233–244.

  38. Rodriguez-Oreggia, E., De La Fuente, A., De La Torre, R., & Moreno, H. A. (2013). Natural disasters, human development and poverty at the municipal level in Mexico. The Journal of Development Studies,49(3), 442–455.

  39. Roodman, D. (2006). How to do xtabond2: An introduction to difference and system GMM in Stata. Center for Global Development, Working Paper No-103.

  40. Roy Chowdhury, J., Parida, Y., & Agarwal, P. (2018). How floods affect the rural labour market. Unpublished version.

  41. Shabnam, N. (2014). Natural disasters and economic growth: A review. International Journal of Disaster Risk Science,5(2), 157–163.

  42. Skidmore, M., & Toya, H. (2002). Do natural disasters promote long-run growth? Economic Inquiry,40, 664–687.

  43. Stock, J. H., Wright, J. H., & Yogo, M. (2002). A survey of weak instruments and weak identification in generalized method of moments. Journal of Business and Economic Statistics,20, 518–529.

  44. Strobl, E. (2012). the economic growth impact of natural disasters in developing countries: Evidence from hurricane strikes in the Central American and Caribbean Regions. Journal of Development Economics,97, 130–141.

  45. Toya, H., & Skidmore, M. (2007). Economic development and the impacts of natural disasters. Economic Letters,94(1), 20–25.

  46. Tripathi, S. (2019). Effect of disasters and climate change on poverty and inequality in India. Retrieved 23, May 2019 from https://mpra.ub.uni-muenchen.de/94132/1/MPRA_paper_94132.PDF.

  47. Wooldridge, J. M. (1995). Score diagnostics for linear models estimated by two stage least squares. In G. S. Maddala, P. C. B. Phillips, & T. N. Srinivasan (Eds.), Advances in econometrics and quantitative economics: Essays in honor of Professor C. R. Rao (pp. 66–87). Oxford: Blackwell.

  48. World Bank. (2012). Disaster Risk Management in South Asia: A Regional Overview. Washington, DC: The World Bank.

Download references

Acknowledgements

We gratefully acknowledge two anonymous reviewers for their comments and suggestions. We also thank Prof. B. N. Goldar, Dr. Rashmi Rekha Barua, and Dr. Parul Bhardwaj for valuable comments and suggestions. An earlier draft was presented at 4th International Conference on South Asian Economic Development, Faculty of Economics, South Asian University, New Delhi, February 22–23, 2018. This research did not receive any specific grant from funding agencies in the public, commercial, or non-profit sectors. This manuscript is a part of Mr. Yashobanta Parida’s PhD thesis.

Author information

Correspondence to Swati Saini.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Appendices

Appendix 1

See Fig. 2 and Tables 6 and 7.

Table 6 Average flood impact in 14 major Indian states during 1981–2011
Table 7 Summary statistics of the variables

Appendix 2

In our econometric analysis, we have used 14 major non-special category states for the following reasons. First, special category states in India are heavily dependent on central government assistance because these states are unable to generate adequate revenues to meet their expenditures. Second, these states marginally contribute to national GDP due to an inadequate expansion of manufacturing, services, construction sectors, and due to the poor resource base. Third, these states are historically disadvantaged as compared to other states in terms of different socioeconomic indicators such as higher vulnerable population (i.e., tribal population), the geographical location of the states, inadequate infrastructural facilities as well as low population density. Fourth, the financial market is inadequate to enhance further economic growth due to poor resource allocation. Fifth, according to the Normal Central Assistance (NCA), special category state receives 90% grant and 10% loans from the central government, while the ratio between grants and loans is 30:70 for non-special category states.

Moreover, there are 17 non-special category states in India since 2011. We have considered 14 major states and did not consider 3 non-special categories such as Goa, Chhattisgarh, and Jharkhand for the following reasons. For Goa and Chhattisgarh, the data on the area affected and the population affected by floods are not available and data on economic loss due to flood are available for 7 years over the period 1981–2011. In the case of Jharkhand, flood impact data such as area affected, the population affected, and economic loss due to flood data are not available. In sum, due to the reasons described, we could not include 3 non-special categories states in our analysis (see Tables 8, 9, 10, 11).

Table 8 Robustness test: area affected by floods and economic growth
Table 9 Robustness test: population affected by floods and economic growth
Table 10 Robustness test: economic losses due to floods and economic growth
Table 11 Robustness test- flood impact and economic growth: estimation method: IV-2SLS

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Parida, Y., Saini, S. & Chowdhury, J.R. Economic growth in the aftermath of floods in Indian states. Environ Dev Sustain (2020). https://doi.org/10.1007/s10668-020-00595-3

Download citation

Keywords

  • Per capita GSDP growth
  • Damage due to flood
  • Urbanization
  • PMG estimation
  • IV-2SLS
  • India

JEL Classification

  • Q54
  • O44
  • P18