Weather Shocks and Rural Economic Linkages : Evidence from Rajasthan’s Agricultural and Non-Agricultural Sectors

This study examines the complex relationships between rainfall shocks, agricultural productivity, and rural economic activity in Rajasthan, India’s largest state. Using district-level agricultural data from 1990 to 2015, enterprise surveys from 2010 to 2016, and household consumption data from 2014 to 2016, the research analyzes three key relationships. First, positive rainfall shocks increase agricultural productivity by approximately 7 percent compared to negative shocks, with irrigation infrastructure significantly moderating this effect. Second, these weather-induced agricultural productivity changes have substantial spillover effects on rural non-farm enterprises, particularly those engaged in retail trade. Specifically, positive rainfall shocks in-crease enterprise revenues by 25.7 percent and value-addition by 30.3 percent, primarily through increased local demand for non-tradable goods. Third, rural household consumption responds positively to favorable rainfall conditions, with monthly per capita expenditures increasing by 6 percent during positive rainfall shocks. This increase is predominantly driven by higher spending on luxury goods rather than essential items, supporting the demand-side channel through which weather shocks affect non-farm enterprise performance. These findings highlight the strong interconnections between agricultural conditions and non-farm economic activity in rural areas, with important implications for policies aimed at building rural economic resilience in the context of increasing weather variability.