Climate Change and Economic Activity in India: A State-Level Dynamic Causal Analysis

Meenal Badki^*

• The University of Texas at Dallas, Richardson, United States

This study investigates the heterogeneous effects of climate change on economic activity across 29 Indian states over the period 1980-2019. As one of the most climate-vulnerable countries, India exhibits substantial regional variation in exposure, adaptive capacity, and economic structure, necessitating a disaggregated empirical approach. Using a Cross-Sectionally Augmented Autoregressive Distributed Lag (CS-ARDL) framework, we estimate the long-run and short-run impacts of temperature and precipitation anomalies on state-level GDP, while accounting for cross-sectional dependence, unit root properties, and parameter heterogeneity. Robustness is checked via DCCE and panel FMOLS. Results show that a 1% increase in temperature anomaly leads to an average 0.78% decline in economic output, with more severe effects in agrarian and poorer states. Precipitation variability also has nonlinear effects depending on baseline aridity.The paper contributes to the climate-economy literature by applying a novel panel estimation method to India's state-level data and identifies region-specific vulnerabilities and adaptation priorities that are critical for sub-national climate policy formulation. The Gross State Domestic Product (GSDP) growth is forecasted to exhibit a decline varying between 5.25% and 24.51% from 2020 to 2100 when transitioning from the Stringent Mitigation scenario (SSP1-2.6) to the Business-as-Usual scenario (SSP5-8.5). Overall, we are trying to define on how does climate variability impact economic activity at state level in India given that India is one of the most climate-vulnerable countries, and the states vary in economic structure and climate exposure, where previous studies lack state level dynamic causal analysis.