Aggregate Shocks, Regional Trade Collapse and Supply Chain Realignment

Using two novel administrative datasets containing monthly sales and input-sourcing information for plants and products with regional heterogeneity within India, we find that the inter- to intra-region trade ratio declines sharply after the COVID-19 induced lockdown in March 2020. The ratio settles at a 5 percent lower value in the last quarter of 2020 even though the movement restrictions were lifted by August 2020. The inter-region trade collapse is higher for plants more dependent on inter-region sales (inputs) before the shock as they switch to intra-region sales (inputs). The impact is persistent and intra-region sales (inputs) increases by 8 percent (6%) for a one-standard-deviation increase in inter-regional dependence. This switch leads to a recovery in aggregate output while inter-regional trade languishes. We identify products more likely to realign sales and find that the realignment channel contributes 7.6 percent to the sales growth in India in the last quarter of 2020