Groundwater Management in Indian Agriculture: Policy Instruments
Source: Flickr, Michael Foley
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In recent decades, groundwater levels have declined steadily in key aquifers across India, leading to serious environmental concerns and impacts.

A recent paper in Water Economics and Policy investigates the divergence in Indian agriculture between current groundwater consumption patterns and levels, which are declining, and an optimal path in which groundwater levels are stabilized through better demand-side management. The paper also assesses the trade-offs achieved through alternative policy instruments that attempt to modify the behaviour of agricultural water users.

The study develops an analytical framework that illustrates the behavioural dimensions of groundwater use, and how it relates to energy usage to identify possible entry points for policy intervention. This analytical framework consists of an agricultural producer as a rational profit-maximizing actor that seeks to maximize the net revenue that accrues from irrigated agricultural activities and includes the economic costs of groundwater usage (based on the depth of groundwater levels and costs of electricity used for pumping).

The study applies this analytical framework to an empirical example of a village, Hivre Bazaar, in the state of Maharashtra, combining information on the local hydrology and the agricultural economy into an integrated analytical framework in which the usage of groundwater in agricultural production can be studied. This can then be used to prescribe necessary adjustments to the cropping patterns aimed at reducing the consumptive use of water to a sustainable level. The study achieves this through comparing a myopic (short-sighted) user/system and optimal user/system over 10 planting cycles. The myopic extracting agent begins at a much higher level of pumping in first planting cycles, and is then forced to drastically reduce pumping in later periods, due to the rising marginal cost of groundwater extraction, as the distance between the groundwater table and the ground surface increases. The dynamically optimizing agent, on the other hand, is able to maintain a much more even pattern of groundwater withdrawal over time. The data for the model was largely taken from the small village-level agricultural survey that was conducted in 2007–2008 as part of a World Bank study on community based groundwater management in the ‘hard-rock’ aquifers of central India.

The study finds clear differences in the impacts on the groundwater table under the two methods of extraction. Under the myopic extraction system, the groundwater depth increases rapidly from 5 metres during the first planting cycle, to 20 metres by the 6th planting cycle, to 22 metres by the 10th planting cycle. By contrast, under the optimal extraction system the groundwater depth remains relatively stable increasing from 5 metres during the first planting cycle to 6 metres by the 10th planting cycle. These results also suggest that the nature of the economic agents time preferences has a profound effect upon the long-term sustainability of the groundwater resource with the optimally extracting agent able to maintain the resource at a stable level over time, while the myopically extracting agent ‘mines’ it steadily over time.

The study also measures the difference in welfare (income) achieved between these two extraction paths, by looking at how the net benefits from the extraction and use of water in agriculture compare over time. The study finds that adopting the dynamically-optimal path can lead to a gain of around 9,500 rupees per household over the projection horizon. In the first two planting seasons the myopic user earns more but due to the increased costs of pumping at increased depths the forward-looking user exercising the optimal extraction rule earns more consistently for the rest of the planting seasons. However, as the authors point out, these differences are quite minor when measured as the sum of discounted net benefits over the entire projected horizon. This does not necessarily mean that better management of groundwater is not important economically, but rather that the gains to optimal management, when measured only in terms of the direct agricultural net benefits of water withdrawal are rather small and might not fully capture the wider social benefits of stabilizing the groundwater resource. These additional, non-agricultural benefits might derive from the use of groundwater for household use, which is not captured here, or perhaps other environmentally-related, ecosystem benefits. Capturing these other effects is an active area of current research in the groundwater management literature.

Based on these results, the paper investigates how a more socially-optimal outcome, whereby the total cumulative groundwater pumped equals 50 percent of that pumped under the myopic scenario, can be achieved through policy instruments or interventions. The first policy discussed focuses on the imposition of a direct tax on groundwater pumping, by imposing various levels of pumping tax directly on the myopic model the cumulative reduction in groundwater pumping is achieved when the pump tax is around 6,000 rupees per m-ha of water pumped. However, the study highlights that implementing such a policy is difficult in practice due to the measurement difficulties facing the regulator (when dealing with lots of very small farmers). Another policy option discussed focuses on enforcing a reduction in crop area. The study finds that such a policy would be the most practical to implement as crop areas are more easily observable than crop water use (and on-farm pumping of groundwater). The study also argues that this would not have a significant impact on farmers’ incomes as it expects that farmers will maximize the per-hectare net returns and chose the most profitable crops. However, the study highlights that this is not an approach that has been advocated in national or state-level policy, due to the perceptions that such a policy would favor larger, wealthier and more commercialized growers.

In conclusion, the paper highlights that the comparison of these policies illustrates the trade-offs that are entailed when a regulator tries to balance the practical implementation of a policy instrument with the goal of reducing welfare loss and enhancing economic efficiency. The policy options are further compounded in India due to the politically-charged nature of the subsidies that are given to agriculture, for instance in the form of free (or heavily subsidized) electricity. The paper suggests that groundwater management in India could benefit from a dual approach that changes people’s awareness of resource scarcity, while also directly influencing cropping patterns (through, for instance, adopting water conserving varieties) in order to reduce the overdraft and unsustainable demand levels on groundwater resources.

By: Bas Paris

Photo credit:Flickr, Michael Foley