Agricultural electricity subsidies in India have been meant as a lifeline to farmers, allowing the spread of irrigation using electric pumps to extract groundwater. Instead, they have locked rural India into a destructive cycle of groundwater depletion and bad power supply. Farmers, given electricity nearly for free, use too much, draining groundwater, worsening poverty, and bankrupting electricity distributors. In turn, distribution companies resort to rationing supply.
Economic theory suggests that, given the distortion caused by pricing power below cost, a Pareto improvement is possible—both farmers and the distribution companies could be made better off if subsidies, instead of being tied to power use, which promotes over-consumption, were given as a lump-sum transfer. This project is a unique collaboration with the Government of Rajasthan to design such a Pareto-improving tariff reform by implementing a direct cash transfer instead of per unit tariff subsidies. A similar project is underway in Punjab as well where a lump-sum transfer is implemented “in-kind” via an electricity savings target.
For this project, the Energy Policy Institute gratefully acknowledges generous research support provided by the Shakti Sustainable Energy Foundation, Governance Initiative (J-PAL GI), Payments and Governance Research Initiative (PGRP), Department of Economics – Yale University and The United States Agency for International Development (USAID).