Electricity Prices, Groundwater, and Agriculture: The Environmental and Agricultural Impacts of Electricity Subsidies in India

In this paper 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.