How have subsidies of electricity skewed income distribution among farmers in Punjab?

Term Paper, 2022

10 Pages, Grade: 82/100

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India's history with agriculture extends back to thousands of years and the country has remained predominantly an agrarian economy even after independence. Prior to 1991 LPG reforms, a large part of agricultural growth especially in poster agro states like -Punjab is attributed to the Green Revolution which was a package deal. Following Green revolution , schemes related to input subsidization (fertilizers, electricity, etc.) were passed that led to improvements in 'production technology,' which ultimately resulted in an increase in food grain production. Subsidies mostly benefited bigger farmers, owing to their access to more land, numerous electric connections, and several submersible pump sets. The demand for tube wells began to rise, but the water table began to fall. While such measures benefited the wealthy, smaller farmers were not appropriately indemnified . This practice of awarding these electricity concessions widened the economic divide between the ‘haves’ and the ‘have-nots’. Better access to electricity, both in quantity and quality, reduced the cost of production for the "haves." Although this scheme improved the lives of some, on a larger scale, it resulted in increased income inequality (due to lower revenue generation and higher production costs for smaller farmers) and depletion of the water table.

1. Background

India is the top-most user of the groundwater in the world and is responsible for nearly 25% of the groundwater extraction all over the globe (Kiruthika & Kumar 2021). During the 1950s , less than one fifth of India’s irrigated land used groundwater but as of 2011 , groundwater irrigation was required for about 60% of the irrigable land ( Sarkar 2011 a). About 70-80% of the irrigated production value relies on groundwater, mainly because of its reliable supply which aids in the important stages of plant growth (Pingali et al. 1997, cited in Kiruthika & Kumar 2021; Bhattarai et al. 2001 , cited in Kiruthika & Kumar 2021 ; Dubash 2007). As per (GOI 2007, cited in Sarkar 2011 a) , Punjab has shown the highest level of groundwater mining.

Over the past few decades, access to groundwater has been made fairly easy due to an eclectic number of reasons ranging from cheap power subsidies to absence of well defined property rights and not-so-good groundwater irrigation legislations (Kumar and Palanisami 2019, cited in Kiruthika & Kumar 2021). Leaf (1983, 254-255) pointed out that the fall in the flat rate for electric connection from Rs 95/month for a 5-horsepower motor in 1970 to Rs 65/month in 1978 played a crucial role in helping the farmers identify various alternatives to use water which included growing water intensive crops like rice , thereby showing a change in the cropping pattern . This in turn has resulted in an increase in the growth of water intensive crops like rice which offer high economic gains which again worsens the divide between the different classes of farmers (Shergill 2007) . However while the inequality worsens , the groundwater table is also depleting .Srivastava et al. (2015) showed that the production of highly water intensive crop like paddy puts groundwater resources under a situation of “jeopardy”.

2. How is Groundwater relevant

‘Punjab Water Syndrome’, as has the water crisis been termed in Punjab is essentially nothing but the aftermath of engineering-construction-extraction-centered approach which highlights the theme of ‘control over nature’ and provides further motivation so as to not underestimate the crisis and bring in a paradigm shift in terms of use of resources like groundwater ( Kulkarni & Shah 2013).

As per (Kiruthika & Kumar 2021) the availability of land and easy access to groundwater are of imperative importance when it comes to affecting the level of agricultural produce and therefore income distribution among farmers and massive inequality is evident in how the irrigable land is distributed across farm size classes and this is lower than the inequality in the distribution of land. Theil’s entropy measure was used to analyze inequality in inter-farm size for both - country level and all states level which showed a bit of a mixed trend in the 70s and 80s (Selvarajan et al. 2001, cited in Kiruthika & Kumar 2021). Using that as a source of motivation ,this paper uses various inequality measures including Gini coefficient and Theil’s entropy measure to see the extent of unequal distribution of groundwater resource and the results show that the net area for irrigation using groundwater sources increased significantly ( from 32.6% in 1960 to 62.82& in 2015) while that using irrigation via canal and tanks decreased (Kiruthika & Kumar [2021 ,609]) . Small and marginal farmers, because of the deficiency of their savings depend on canal water , in case of mixed irrigation ,even though it is unreliable and therefore have lower yields than large and medium farmers who can afford to buy multiple submersible pumps and have greater access to groundwater and therefore have higher yields and higher incomes ( Sarkar 2011 a).

The reason groundwater is so popular as a resource is because of its easy availability and how it enhances productivity . Another reason this is so popular especially as compared to surface water for irrigation is because of its relative insensitive nature to rainfall variability which helps farmers to obtain it as and when needed (Kiruthika & Kumar 2021).

There is huge disparity in terms of access to groundwater as groundwater rights are linked with the land rights and most of the land is skewed towards the large farmers from where stems the problem of inequality of groundwater ( Srivastava et al. 2015). While the practice of sharing of water does take place , it is to a great extent determined by ‘social relations’ between the farmers and even they (small and marginal farmers) can’t use the tube wells as and when needed but instead have to use them at odd hours when they are not being used by their owners (Sarkar 2011 a)

Shah (1991) however says that the existence of a water market can be good thing for the poor and they are better off with it rather than without it as the landless may benefit with more seasonal employment opportunities and better wages as they provide labour to get access to water .

3. How have electrical subsidies contributed to the problem

Anindita Sarkar (2011 a) extrapolates on how these electrical subsidies have worsened the divide between the large and small farmers by pointing out that these subsidies , to a large extent , are consumed by the large and wealthy farmers who , although a minority , have large areas of cultivation under them and own a good number of modern water extracting machines and thus the poor aren’t able to take advantage of these financial grants ( free electricity).

The report by IISD (2020) , showed that the dependence of Punjab on direct subsidy dependence has increased from 22% in the fiscal year 2016 to 26% for the year 2019. (Kiruthika & Kumar 2021 ; Singh 2000) suggest the reason the demand for groundwater increased enormously is because of the electric subsidies provided to farmers which in turn led to a crop pattern shift with farmers tending towards more water intensive crops . The rationale behind the implementation of the subsidy scheme was to provide farmers a helping hand so as to ease the transition from the traditional rainfed system to irrigated agriculture which would in turn help especially the rural poor to gain in terms of production and livelihood opportunities ( Chaudhuri et al. 2021) , however this has just worsened the divide between the rich and the poor farmers.

Due to this persisting inequality among the farmers, the larger farmers are able to devote the majority portion of their land for the cultivation of highly water intensive crops like rice and gain because of high Minimum Support Prices(MSP) from the government and thereby this scheme of free electric subsidy only aggravates this problem. (Sarkar 2011 b; Bhullar & Sidhu 2007 ; Chand 1999 ; Sarkar & Das 2014) . However, literature also suggests that in Punjab , within regions of high groundwater scarcity and because of the larger farmers having an upper hand , small farmers have resorted to growing crops like maize which are relatively less profitable as compared to highly irrigated crops ( Sarkar 2011 a)

The effect of these subsidies on the profits generated derived from the production of a certain crop also depends on its electricity and irrigation requirements (Singh 2012) and thus the main recipients of the subsidies provided are highly water intensive crops like rice which need 24-28 irrigations in a production period of four months and because of such high irrigation intensity , the demand had to be met via tube wells operated via electricity and not with canal water (Bhullar and Sidhu 2007). The power subsidies provided for the whole agricultural sector in the decade of 90s was Rs 10470 million (Bhullar & Sidhu [2007,5355]).

It has also been seen that the electrical consumption increased from 50321 GWh in 1990-1991 to 191151 GWh in 2016-2017 which again explains the overuse of groundwater (Kiruthika & Kumar 2021) . It can be seen that these subsidies given have been helping only a handful and not the whole population of the intended . At the same time this is also increasing more burden for the main provider (Sarkar 2011 b).

It was seen that Punjab State Electricity Board (PSEB) suffered losses of Rs 1382.51 in the year 2007-08 due to this subsidy scheme (Kaur & Singh 2013). (Gulati 1989) has suggested quantifying the losses accrued by State Electricity Boards as a means to measure the subsidies provided to the agricultural sector. Certain bodies of evidence also show that the whole subsidy allocation for the agricultural users wasn’t going to them completely because of the consumption being unmetered (Gulati & Narayanan 2000). Another body of literature in Kaur & Singh (2013) suggests that in spite of having free electricity , farmers are finding it difficult to work . In this paper (Kaur & Singh 2013) , the authors categorized farmers on the basis of their land size and grouped them as small, medium and large and later surveyed them using a detailed questionnaire , the results of which suggested that while the larger farmers were bigger reapers of the subsidies given to them , because of more land access and electric motor connections , the majority of the farmers had been using more costly diesel pumps due to irregular power supply and would be willing to pay regular bills , if given regular supply of electricity . The argument has been supported by other studies as well (Dubash 2007) and it suggests that although there is subsidized electricity , the irrigational costs are a very large fraction of the farmer’s income because of poor quality of power . (Gulati and Narayanan 2000) also concur with the above argument and point out how black-outs and brown-cuts have become a part of the farmers’ lives because of irregular power supply . However this change of events is very different from what had initially happened . AS ( Gill 1983) suggests , the newly formed state government reduced the flat rates on tubewells in 1977 and even directed the State Electricity Board (SEB) to prioritize new connections which caused a marginal decline in the tube wells operated via diesel whereas increasing the demand for the ones running by electricity. (Badiani & Jessoe 2011, cited in Badiani et al. [2012, 249]) shows that a 10% decrease in electric subsidies reduced groundwater extraction by 4.3% but also led to a fall in the agricultural produce to 13% thereby showing a trade-off.

4. Possible policy interventions

As mentioned in (Dubash 2007),the scheme of stating flat rates instead of metering the consumption has been criticized by many and one of the main reasons this scheme was implemented was to capture the vote bank by the politicians. However Dubash (2007) also points out various issues with the metering system like the heavy transaction costs that would incur , harassment by meter readers etc could have made a contribution as well in swaying the decision towards a flat rate system.

However (Parikh 1999 a , cited in Gulati & Narayanan 2000) points out a possible solution for at least one of the above issues by suggesting the installation of read remote meters which prevent meter readers from going over to the consumer’s location and therefore it avoids their collusions.

The old school scheme of imposing tariffs along with metered connections can help in mitigating the issue of depletion by helping farmers see the issue of scarcity of water (Dubash 2007).

B.D Dhawan(1993) pointed out how the policy of a flat power tariff was not the best system in operation as it has led to cultivation of crops that are irrigated heavily and points out that this policy has made farmers over-irrigate the crops up to the extent where the groundwater’s marginal product value is nearly nil . The author even sheds light on the PAU ( Punjab Agricultural University ) survey of 93 which showed that in spite of having a recommendation to apply 25 waterings to paddy , farmers applied 32 (Dhawan 1993).

As per Kumar et al. (2021), one of the most common policy instruments that could help in the problem of groundwater depletion is ‘pro rata’ pricing of electricity . Another key instrument that as an idea has emerged in China , Iran and some middle eastern nations is doing ‘energy rationing’ which means fixing quota for energy ( Kumar et al. 2011 , cited in Kumar et al. 2021).

Kumar et al. (2021) talks about the Direct Power subsidy model was an idea that was first executed as a pilot in Punjab in 2018 and the scheme’s goal which was multipurpose in nature i.e not just to halt the groundwater depletion but also save electricity. The approach used here was somewhat out of the box and focused on not penalizing but instead incentivizing the farmers with cash to consume less electricity and said that if a farmer was able to keep his units of electricity consumed to about 1000 units less than the quota said, he would receive a cash transfer of Rs4000 (Kumar et al., 2021) . The pilot project revealed that out of 135 farmers, about 60% of them had made a reduction in their electricity consumption and although initially it seemed as a somewhat success , going further into the study , it was revealed that the rich farmers were still benefiting off it as most of them had oversized pumps and a good number of deep wells and because of this , they were still able to avail the cash rewards ( Kumar et al. 2021). Small and marginal farmers on the other hand , with a pump of low capacity and irregular power supply end up using the full quota , maybe even going beyond and thereby not being eligible for the scheme and Thus this left them still dependent on large farmers with no access to groundwater resources( Kumar et al. 2021).

It is for the cultivation of rice that so much groundwater is actually used , it has also been suggested to incentivize farmers in a way so that they diversify into other crops (Kulkarni & Shah 2013) . Srivastava et al. (2015) suggests methods like raising the marginal cost of water by decreasing the amount of subsidies , promotion of ‘integration of water resource utilization’ while strictly adhering to the code of Punjab Preservation Of Sub -Soil Water Act and using water conserving technology like direct seeded rice , system of rice intensification ( SRI ) which can help in controlling the water table depletion.

5. Conclusion

From the above discussion , we are able to get some insights as to how the provision of these subsidies have acted as catalysts in widening the gap between the resource rich and poor farmers. Large farmers have access to better connections , larger land holdings and therefore have a way more competitive edge over the smaller farmers which helps them capitalize on their situations.

We also see that these subsidies have lead to huge financial losses for the state electricity board of Punjab over the years . Various studies have also pointed out at various policy measures that could be adopted which include pro rata pricing , remote reading etc , and while every measure has its own cost to bear , it’s safe to say that almost all studies are against and discourage flat rate pricing . After surveying the literature , we can see the high MSPs given to the farmers also adds to the inequality as it’s mostly the rich farmers who are able to cultivate profit yielding high irrigable crops which is again possible because of the electric concessions given to them. Thus we now know , how these subsidies have caused inequalities between the groups of farmers in Punjab.


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How have subsidies of electricity skewed income distribution among farmers in Punjab?
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punjab, subsidy electricity farmers income
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Raunak Jha (Author), 2022, How have subsidies of electricity skewed income distribution among farmers in Punjab?, Munich, GRIN Verlag,


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