Meenakshi, J.V., Banerji, A., Mukherji, A. and Gupta, A, 2013. Does marginal cost pricing of electricity affect groundwater pumping behaviour of farmers? Evidence from India, 3ie Impact Evaluation Report 4. New Delhi: International Initiative for Impact Evaluation (3ie)Link to Source
The primary goal of this project is to evaluate a key component of the Indian state of West Bengal’s power sector reforms- the metering of agricultural tube wells. The study will attempt to measure the impact of change in the mode of electricity tariff (from flat rate to metered tariff) on pump owners, water buyers and ground water markets.
Most farmers West Bengal have small landholdings and have to therefore depend on groundwater markets for meeting their irrigation requirements. The financial incentive for larger farmers to sell groundwater to smaller farmers is influenced by the way in which electricity is priced. In theory, the incentive is greater if pump owners face a high, flat rate tariff, as they must recover a large sum of revenue to justify their investment in a pump. Thus the high, flat rate tariff coupled with the small landholdings of pump owners and abundant groundwater led to the emergence of a vibrant groundwater market. These markets were fairly competitive and helped millions of small and marginal farmers gain access to irrigation. When electricity tariffs increased by more than 10 times from 1995 to 2007, the price at which water was sold increased by only 3 times. This was due to the inherent incentive structure of the flat tariff system that motivated pump owners to sell water to recover the high flat rate tariff. In 2007, West Bengal began metering agricultural tube wells. Volumetric pricing, without a flat rate tariff did away with incentives.
Hence a change in pricing policy can reduce the effective supply of groundwater available to small-scale farmers. To date, 70% of the tube wells are metered, while another 30% are still charged on a flat rate basis. Additionally, there are diesel pump owners who are not directly affected by the change in pricing structure. The change in electricity pricing policy and the staggered pace of implementation, therefore, provide a natural experimental setting in which the impacts of change from flat tariff rate to metered pricing can be examined.
This evaluation measures the impact of metering agricultural tube wells on groundwater users (pump owners and water buyers) and informal groundwater markets in the Indian state of West Bengal. The study takes advantage of the natural experimental setting that the change in mode of electricity tariff (from a flat-rate to a metered tariff) and its staggered pace of implementation offered. Baseline data were collected in 2004 and 2007, when most electric tube wells were still subject to a flat-rate tariff. The 2004 sample includes 580 randomly chosen farmers from 40 villages located in 14 districts of West Bengal, whilst the 2007 sample comprises 155 farmers from 15 villages located in the same agro-ecological areas as the 2004 sample. To address sample-size problems, the researchers selected 18 additional villages and surveyed in 2010 an additional group of 222 farmers. Surveys collected information on agricultural households, crop economics, pump technology, water sellers and water buyers. In 2011, the authors collected follow-up data for agricultural years 2008-2009 and 2009-2010 on the basis of a recall survey.
The primary tool of analysis is a difference-in-differences estimation, which compares the changes observed in metered villages with those observed in non-metered ones. The main specification used includes a village-level dummy variable indicating treatment status interacted with a farmer-level dummy variable indicating whether the individual owned an electric pump. The analysis investigates the effects of the metered water tariff scheme on three main outcomes: the total number of hours of groundwater pumped, the number of hours of groundwater used for personal irrigation and the number of hours of groundwater sold to other farmers.
Overall, the findings do not show any significant impact on any of the three outcomes assessed. However, results disaggregated by season reveal a significant drop (a coefficient of –309) in the number of irrigation hours pumped by owners of electric pumps during the summer season. Disaggregated estimates for total pumping hours and the number of pumping hours sold remained unaffected by the modified tariff regime. The authors also examined the impact of the policy change on secondary outcomes such as cropping patterns and productivity, but the absence of significant effects prevailed for all secondary outcomes, aggregated and disaggregated. The researchers suggest that decreased pumping hours recorded in the summer season did not negatively affect cropping patterns or output, because water was probably pumped more than was needed prior to the policy change, implying that a drop in water use could hardly affect agricultural results.
The authors note that whilst most results lack statistical significance, many estimates have the negative sign that was expected by the research team, implying that the sample of the study might have been underpowered to capture detectable effects. Nonetheless, simple-difference estimates obtained using an augmented sample do not show any significant result either. The study concludes by stressing that additional research should be carried out before drawing any policy conclusion from the present findings. The authors notably call for further investigation to confirm that water was actually overused by pump owners before the intervention. They also mention that alternative tariff schemes and policies should be designed to foster the acquisition of pumping systems by water buyers so that equity in water access can be improved.
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