Conference Agenda

There has been a declining trend in groundwater depths in India and subsidies on farm electricity contribute to over-extraction of groundwater raising concerns about its sustainability for irrigation. In this paper, we estimate the reduction in groundwater pumping under volumetric pricing of farm electricity for Punjab where farm electricity is free. We use parcel-level cost of cultivation data from the Ministry of Agriculture for 2011-12 to 2013-14 to estimate the production function for paddy using the instrumental variable approach. We find that the estimated marginal product of water function is relatively flat at the level of the average water application. The average marginal product of water is 34 kilograms for an additional thousand cubic meters of water per hectare, which is very low. Simulations show that increasing the price of electricity from current level of zero to the true cost of electricity supply leads to sharp cutbacks of 59 percent in water extraction using electric pumps, while the decline in average paddy yields is 11 percent, keeping all the other inputs constant. Allowing adjustment in all the inputs and assuming Cobb-Douglas production function, we find that the reduction in average groundwater pumping is even sharper at about 79 percent. However, the reduction in paddy yields roughly triples due to reduced use of other inputs. The saved up resources have the potential of being utilised for diversifying to crops with lower water requirements. Finally, we quantify the average lump-sum subsidy that can be given to farmers as direct transfers to keep their surplus unchanged and we show that this can be financed within the system using collections done by the state electricity board from pricing electricity. The paper provides an important policy framework which allows for efficient use of scarce water resources along with protecting farmers’ incomes, and ensuring food security for sustainable agricultural and economic development.