How Does Climate Change Affect Fiscal Imbalances? A State-Level Analysis of India

Developing countries face severe disasters related to climate change, leading to increased government expenditure and higher budgetary deficits. The present research, considering India as a case study, answers the following questions: Does climate change affect fiscal deficit management? Does the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 reduce thefiscal deficit? How do flood events affect fiscal imbalances in Indian states through changes in revenue mobilization, expenditure commitments, and fiscal deficits? The analysis is carried out by considering state-level data from 1990 to 2020 and estimating Feasible Generalized Least Squares (FGLS) regression models. Climate change is measured by seven variables related to damage from severe floods, and five key fiscal indicators measure state-level fiscal imbalances. The results suggest that flood-related damages intensify fiscal imbalances by weakening own tax revenue (OTR) and increasing Capital Expenditure (CE) and Social Sector Expenditure (SSE), and thereby widening Gross Fiscal Deficits (GFD), while the effects on own non-tax revenue (ONTR) are limited. The implementation of the FRBM Act is associated with higher CE, SSE, and ONTR, while its effects on OTR and GFD are less consistent. Finally, the study suggests several essential policies to combat the fiscal imbalances in India in light of climate change. This lesson can help many other developing countries cope with similar problems.