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Electricity Prices, Groundwater, and Agriculture

Electricity Prices, Groundwater, and Agriculture

The Environmental and Agricultural Impacts of Electricity Subsidies in India

(p.157) 5 Electricity Prices, Groundwater, and Agriculture
Agricultural Productivity and Producer Behavior
Reena Badiani-MagnussonKatrina Jessoe
University of Chicago Press

In developing countries energy subsidies are significant, and nearly half of these subsidies are directed at rural households, primarily as electricity subsidies. In this chapter 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.

Keywords:   electricity subsidies, groundwater extraction, agriculture, India

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