Electricity Prices, Groundwater, and Agriculture: The Environmental and Agricultural Impacts of Electricity Subsidies in India
In this paper we estimate the effect of agricultural electricity subsidies in India on groundwater extraction and agricultural output. Our empirical approach exploits changes in state electricity prices over time controlling for aggregate annual shocks and fixed district unobservables. Electricity subsidies meaningfully increase groundwater extraction, where the implied extensive margin price elasticity is –0.18. This subsidy-induced change in groundwater extraction impacted agricultural output and crop composition, increasing the value of water-intensive output and the area on which these crops are grown. These subsidies also increase the probability of groundwater exploitation, suggesting that they may come at an unintended and long-term environmental cost.
Thanks to Soren Anderson, Jim Bushnell, Richard Carson, Colin Carter, Larry Karp, Pierre Merel, Kevin Novan, David Rapson, Leo Simon, Wolfram Schlenker, Nick Ryan and Jon Strand. This paper also benefited from seminar participants at NEUDC, PACDEV, UC Berkeley, TREE, the NBER Conference on Understanding Productivity Growth in Agriculture and UCSD. Suzanne Plant provided excellent research assistance. Research support for this project was provided by the Giannini Foundation. The authors, alone, are responsible for any errors. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the World Bank and its affiliated organizations.