Seed Capital: The Impact of Agricultural Output on Local Economic Activity in India ∗ PRELIMINARY AND INCOMPLETE - PLEASE DO NOT CITE

To what extent do firms rely on rural output for demand and capital? We provide new evidence on this classic development question by examining the impact of agricultural output on local economic activity. Rainfall provides exogenous and significant variation in rural earnings. We find that such fluctuations have a lasting impact on urban firms, with effects concentrated in the manufacturing sector. Using variation in both location and industry characteristics of firms, we demonstrate that the evidence best supports a capital channel by which rural surplus provides capital to small, credit-constrained manufacturing enterprises. We argue that given these constraints, a complete understanding of the impact of agriculture must assess changes in both rural and nearby urban firms. JEL Codes: O12, O13, O14, O41, Q19 ∗We are thankful for highly useful discussions with Lorenzo Casaburi, Gary Chamberlain, Shawn Cole, Ram Fishman, Ed Glaeser, Raymond Guiteras, Ricardo Hausmann, Richard Hornbeck, Lakshmi Iyer, Supreet Kaur, Asim Khwaja, Michael Kremer, Sendhil Mullainathan, Rohini Pande, Andrei Shleifer and David Yanagizawa-Drott. Sandesh Dhungana, Eric Dodge, and Pranav Gupta provided excellent research assistance. PC Mohanan of the Indian Ministry of Statistics has been invaluable in helping us use the Economic Census. This project received financial support from CID, IQSS and the Warburg Fund, all at Harvard University. All errors are our own.