Firms and Farms: The Impact of Agricultural Productivity on the Local Indian Economy

• Departmental Seminar

Date and Location

Wednesday, January 20, 2016, 4:10 PM - 5:30 PM
ARE Library Conference Room, 4101 Social Sciences and Humanities

Abstract

How do agricultural productivity shocks propagate through the local economy and affect firms? I combine firm, household and district-level data from India, and exploit weather-induced agricultural volatility, to estimate the response of manufacturing firms to changes in agricultural productivity. I show that negative agricultural productivity shocks reduce firm production and employment. This holds true even though the local wage decreases. The effect is driven by firms that produce locally-traded goods, suggesting that the decrease in local demand induced by lower incomes plays a key role. I then examine whether the introduction of a large-scale rural workfare program affects the response of the local economy to agricultural volatility. I show that the program acts as a stabilization policy and attenuates the pro-cyclical response of local wage, consumption, and firms’ outcomes to agricultural productivity shocks. The results highlight the importance of local rural demand for a large share of manufacturers and underscore how rural development policies that target households can strongly affect the industrial sector because of general equilibrium effects.