We revisit the negative association between ethnic diversity and development. We show how the diversity-development association is conditional on spatial segregation. We introduce a new census-scale micro-dataset from the Indian state of Karnataka (n= 36.5 million rural residents). Using the first-ever spatially explicit enumeration and
coding of endogamous Indian caste groups (jatis), we develop a multi-group metric for measuring local spatial segregation. We find that diversity is a bane for development only when it is also accompanied by high levels of spatial segregation. Our results contribute to the emerging research on the implications of inter-group contact and spatial proximity for economic outcomes.