Economics behind natural disasters

Natural disasters are tragedies which tests the human race's preparedness to survive under adverse situation. It also tests the ability of the government and the country to tackle the adverse economic impact. With cyclone Phailin ready to cause disaster in the eastern and southern part of the country  let's understand the economic implication of the same:

1. Revenue from the affected area comes to naught for a short period of time.

Agriculturalists are the worst hit in third world countries as they do not have huge savings. They have a hand to mouth existence and such disasters force them to borrow at exorbitant interest rates from moneylenders/ MFI’s / chitfunds/ pawnbrokers etc.

Impact: Here the effectiveness of the government to provide economic aid is of paramount importance. In countries like India the money generally flows through intermediaries and does not reach the individuals on time.  

2. Price of essential commodities and generators (depending upon affordability) increase due to mismatch between demand and supply.

Impact: It is well-nigh impossible to get the disaster management team to provide essential commodities on time due to logistic problem caused by destruction during such periods.

3. If the insurance coverage is high in the area (both life and non-life) insurance claims increase.

Impact: The cost of insuring life and property would increase as the probability of occurrence of such disasters will be more likely going forward.    

4. Black marketing of essential commodities increase.

Impact: The impact of black marketing depends on the government’s ability to control such activities. In India historically the government has not been successful in controlling such activities.

5. Tourism revenues are adversely impacted for a period of 6 months to 12 months.

Impact: Most of these businesses have huge fixed cost hence a lot of new players and marginal (small players) have to close shops. Cyclones hit areas in and around sea, which depends on tourism.

6. Demand for infrastructural development will increase as renovation and rebuilding expenses will increase.

Impact: Infrastructural spending would depend on government spending, donations and grants by NGO’s

                       7  . Pharmaceutical companies, pharmacists and hospitals would see an increase in revenue.

     Impact: Even though it does sound unnerving this is the time when these sectors make  windfall gains.

Author: Abhishek Sinha

Abhishek Sinha has approximately 8 year of experience in equity research, business research and consultancy. He has also had the privilege of managing a small portfolio of INR 3 million. However, his interest lies in teaching and "demystifying concepts." He has taught students right from the age of 3 years at PP1, to 40 years at executive courses and believes teaching is not about knowing the concepts; it is about relating the concepts to the audience. At present he is "gainfully employed" at Vignana Jyothi Institute of Management, Hyderabad; where he loves to teach finance to an enthusiastic bunch of management students. His hobbies include analyzing income statement, balance sheet and cash flow.> Google +