# **1. Introduction**

This paper seeks to discuss interactions between several types of distortions resulting from subsidized electricity to agriculture, in cases where distortions related to the over-extraction of groundwater used for agricultural production interacts with other types of distortions. The idea is to draw some conclusions about the nature of the main distortions, how they can be alleviated, and what policies are in case required. The basic problem scenario to be discussed involves the following main issues:

- 1) Under-pricing of electricity to farmers, leading to generally inefficient use (over-use and/or rationing with differences in users’ marginal valuations).

- 2) Most of the electricity is used for extracting groundwater. Very likely, such extraction is socially excessive; this problem is compounded by a common-pool problem related to groundwater extraction.

- 3) Connected to under-pricing is the fact that electricity is supplied erratically and inconsistently (during only part of the day; perhaps not every day; and with erratic charge). In consequence, many or most agricultural consumers are effectively rationed, and the allocation of electricity supply across users and user groups, and for a given user, is inefficient.

- 4) There is illicit extraction which reduces the amount of electricity available for legal supply. The resulting consumption may go toward general household supply, or to agriculture; but perhaps mostly the former.

- 5) Under-pricing of electricity by power utilities leads to sub-par incentives to provide good supply by the same entities. This is, in part, the direct cause of the problem under point 3.

- 6) Under-pricing of electricity adversely affects the efficiency of electricity use among agricultural consumers. Depending on circumstances, this could result in either excessive or deficient private investments in equipment to be used for extracting groundwater, such as pumps and tube-well construction.

- 7) Inefficient cropping patterns including general choice of too water-intensive crops.

Such issues have been subject to substantial analysis and discussion, much of it in the context of Indian agriculture, focusing in particular on the problem of excessive groundwater extraction in Northern India, and distortions of crop choices in that context. Some key reference studies are Briscoe and Malik (2006), Banerji et al (2006), Ray (2008), Reddy (2005), Shah (2009), and Vaidyanathan (2006). Additional discussion of electricity issues for the agricultural sector is provided by Dubash (2005a, b), and Ramachandra Murthy (2009). See also the newly released World Bank (2010) study discussing a variety of measures against excessive groundwater extraction. This literature generally stresses that low electricity prices to the agricultural sector in India is a major factor behind this excessive groundwater extraction, which currently affects between 15 and 25 percent of Indian agriculture (World Bank 2005, 2010). If nothing is done to correct current developments, there could be drastic consequences for a large share of India’s population, in years with only rather marginal natural water scarcities. A more recent study by Birner et al (2010) provides an extensive discussion of political economy aspects of the “energy-groundwater nexus”, with particular application to India.

The World Bank (2010) and Birner et al (2010) studies indicate a number of policy measures that can be used to help reduce the problem of excessive groundwater extraction. These 2