In the Eye of the Storm: Firms and Capital Destruction in India

This paper examines the response of firms to the destruction of their capital stock. We rely on a measure of firm exposure to tropical storms as a negative exogenous shock. Using a panel of Indian manufacturing firms between 1995 and 2006, we establish that storms destroy up to 75.3% of the fixed assets of a firm. We quantify the response of firm sales within and across industries. Within industries, the sales of less productive firms decrease disproportionately more, while across industries capital destruction leads to a shift in sales towards industries that perform better. This build-back better effect takes place mainly at the intensive margin and is driven by firms shifting their industrial production mix.