Electricity subsidies for agriculture: Evaluating the impact and persistence of these subsidies in India DRAFT

In India, expenditure on electricity subsidies for agriculture, an input subsidy aimed at improving agricultural productivity and the incomes of the agricultural work force, exceeds that spent on health or education. Yet the benefits and beneficiaries of these policies have been unexplored. This paper develops and empirically tests a model that describes the channels through which these subsidies should impact agricultural productivity. To isolate the impact of electricity prices on groundwater extraction and agricultural revenues, we exploit year-to-year variation in state electricity prices across districts that differ in hydrogeological characteristics. We find that a 10 percent decrease in subsidies would reduce groundwater extraction by 4.3 percent, costing farmers 13 percent in agricultural revenues. As predicted, electricity subsidies increased agricultural productivity along both the intensive crop yields and extensive crop acreage margins. We calculate small inefficiency costs from these subsidies; roughly 96 to 97 paise of every Rupee spent by the government is passed along to consumers and producers. ∗World Bank †Dept. of Agricultural and Resource Economics, UC Davis ‡Corresponding author e-mail: [email protected]; phone:(530)-752-6977 Thanks to Soren Anderson, Meredith Fowlie, Leo Simon. This paper also benefited from seminar participants at UC Berkeley. Suzanne Plant provided excellent research assistance. The authors, alone, are responsible for any errors.