Impact of a Drought in South India on the Indian Economy: An Application with the TERM-India Model

Unlike other countries, economy-wide modelling in India generally has treated the Indian nation as one entity even though one recognises that the states/regions differ significantly in respect of their resource base and factor endowments. Of course, a few models at the state level exist. However, these models do not capture the transmission channels from the rest of India since these types of models treat the rest of India as merely a balancing mechanism. A few of the existing research studies for India using a Computable General Equilibrium model use a top-down approach to analyse state-level issues. A major drawback of this approach is the lack of consideration for region-specific price effects, for which the effect of state-sponsored programmes or imperfect factor mobility or disparities across regions cannot be captured in these models. Our study is the first attempt to develop a bottom-up model--TERM (The Enormous Regional Model)-for India. The model is utilised to understand the implications of a hypothetical drought in a region (South India) and how the effect transmits to the rest of India, through a 52 commodity sector TERM model for 7 regions in India encompassing 31 states and Union Territories. Each region within the model has its own input–output database and agricultural product mix, and the simulation in this static TERM model depicts short-run effects. The study shows that despite being limited to some states in South India, the drought is likely to have a moderate impact on the Indian economy. Both GDP and employment are going to be affected at the national level, and the parameters are affected in several states in India, that are not necessarily situated in the southern region. The interconnectedness of the regions causes reduction in employment and the wage rate, leading to migration of labour and redistribution of investment.