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Economic Impact of Natural Disasters - Shreya Seth, IIM Nagpur

In the month of August 2018, Kerala was struck with one of the worst floods in the last 100 years, causing 483 deaths and affecting millions of people. With an estimated damage of over Rs 30,000 crore, the disaster also dealt a blow to the state's economy. Prior to this, Hudhud Cyclone in 2014 and 2015 Chennai floods had also caused severe economic damage, which makes it imperative to study the economic impact of natural disasters.

Factors Affecting Loss

It is impossible to straitjacket the economic impact of a natural disaster. It depends on a variety of factors as well as the type of disaster. Some key factors are the enormity and duration of event, the type and expanse of geographical area affected, population density, structure of local economy and the preparedness level. An example of this is the fact that Chennai floods caused almost same economic damage as Kerala floods, even though the area affected is much larger in the case of Kerala.

Estimating the loss

Disaster losses affect the economy in many ways and it is often tricky to estimate their full impact. The most significant loss is of capital assets and infrastructure like bridges, roads, factories, farmland and other natural resources. To attempt to study the losses, it has been divided into two types : Direct and Indirect

Direct losses occur in the immediate aftermath of the disaster and are easier to calculate. It is divided into Direct Market Loss and Direct Non Market Loss. Direct Market Loss is the cost of replacement of capital assets and loss of income from goods and services which are traded on market and the prices for which can be estimated. It mainly includes physical losses such as roads, buildings, embankments, godown inventories and other manufactured items.It can be estimated through observed prices and present value of income stream from lost assets. Direct market losses are often covered by insurance.

Non-market Direct loss includes damages and loss of income that are not reflected in market. It mostly includes intangible assets. Some examples are the loss of lives , ecosystem losses, damage to places of historical and cultural importance, loss of leisure time and other psychological effects. It is difficult to estimate non market Direct loss.

The Kerala floods direct economic loss is being pegged at about Rs 15000-20000 crores. Nearly 10,000 km of national, state highways and 60,000 km of panchayat roads have been damaged or not in use due to Kerala floods. Power production is down by 33% and could lead to huge opportunity losses.

Indirect losses is a long term consequence of a natural disaster and are complex and difficult to discern. It is the loss due to reduction in economic output of the affected region. It includes the lost wages, reduction in sales and profitability, business cycle interruption, cost of re-establishing supply chains, fall in demand, dip in tourism industry and fall in tax receipts, among others. Some non monetary effects may be increase in poverty and inequality and health crisis affecting productivity. Estimating indirect loss is very complex and often leads to unsatisfactory results as estimating the value of life and ecosystem services is a controversial subject. The indirect cost of Kerala disaster has been pegged at Rs 10,000 to 20,000 crores with some industries such as FMCG taking a 30% hit on their topline figures for the state.

The disaster also affects the financial market and could lead to increase in NPAs and reduced demand for loans in the short to medium term. It is estimated that there could be a 15% increase in NPA from Kerala State post the floods.

Post Disaster

Post disaster recovery efforts can often serve as an opportunity to improve the future trajectory of the economy. Rebuilding efforts lead to uptick in construction activities and consequent employment opportunities across the supply chain. Damaged or destroyed goods are replaced and there is a general increase in demand for non perishable essential home items. This leads to increased economic activity and spurs recovery of tax receipts. A positive impact of this is that it leads to new structures which are more technologically advanced and can lead to increased productivity.

The speed of recovery also depends on insurance cover.This is because the direct loss is lessened for insured items and therefore, there can be quicker recovery as only indirect costs have to be compensated by the economy.The insurance cover was only 7.5% of total damage in Kerala whereas it is nearly 90% in advanced countries, thus affecting our recovery efforts.

Conclusion

Disasters cause unwanted and mostly unknown perturbation in economy. Preparedness and increase in insurance coverage can help the country in reducing the economic impact as well as faster post disaster recovery. While mourning the unfortunate event of Kerala floods, we must also take lessons to mitigate future disaster losses. As

Winston Churchill said " Never let a good crisis go to waste ".