Namratachindarkara, Yvonne Jie Chena, and Shilpa Satheb

Impact of Farm Electricity Supply Management on Farm Households – Evidence from a Natural Experiment in India

29 September 2018

NamrataChindarkara, Yvonne Jie Chena, and Shilpa Satheb

aAssistant Professor, Lee Kuan Yew School of Public Policy, National University of Singapore

469C Bukit Timah Road, Singapore 259772

bSenior Research Associate, Singapore Management University

Corresponding author: ; Tel: +65-65168360

Abstract

Managing agricultural and non-agricultural grid electricity supply through feeder segregationis being highlighted as an innovative reform to address India’s electricity supply issues. While this has a direct implication on the availability of grid electricity for farm operations, there is no rigorous empirical evidence available on the effects of feeder segregation onfarm households.This paper exploits exogenous variation in quantity and quality of farm electricity supply resulting from Gujarat’s feeder segregation program, “Jyotigram Yojana” (JGY),and examines its impact on farm households. Using the 2004-05 and 2011-12 India Human Development Survey (IHDS) data and applying a difference-in-differences framework, we analyse the impact of rationed but high-quality farm electricity supply on investments in fixed and variable farm inputs and net farm income per acre.We find that, on average, JGY does not lead to an increase in ownership of electric pumps. However, it decreases ownership of diesel pumps. On average, farmers own more tubewells as exposure to JGY increases. In particular, it is the medium-to-large farmers who significantly increase ownership of tubewells. There is a corresponding statistically significant increase in the likelihood of irrigating with a tubewell for farmers across all land sizes. This is accompanied by anincrease in per acre cost of purchased water for irrigationfor farmers across land sizes. The consequent effect on net farm income per acre on average is a statistically significant decrease, which is more pronounced for medium-to-large farmers. This seems to be driven mainlyby an increase in cost of purchased water for irrigation as we do not observe an increase in labor cost or increase in investments in other farm inputs including fertilizers, pesticides, and tractors. Using supplementary analysis we also rule out lower crop yieldsas the mechanism underlying decreased net farm income.

Keywords:farm electricity supply, farm income, impact evaluation, difference-in-differences, India

Authorship statement

NC conducted preliminary field research, performed the data analysis, and wrote the full paper. YJC conducted preliminary field research and provided inputs on data analysis and paper framing. SScollected the administrative data on JGY and performed data analysis.

Acknowledgments

We thank Ms. Xiao Yun and Mr. Venu Gopal Mothkoor for their excellent research assistance. We are grateful for the financial support provided by the Lee Kuan Yew School of Public Policy. The findings, interpretations, conclusions, and any errors are entirely those of the authors.

1.Introduction

Agriculture continues to occupy a centre-stage in the Indian economy employing about 56% of its labor force and contributing about 17.5% to the national GDP (Census of India, 2011; World Bank, 2016). The sector is critical toachieving national goals such as reducing poverty, providing food and nutritional security, supplying raw materials to major industries, and earning foreign exchange (Kalamkar, et al., 2015).A key input necessary to sustain agricultural growth is farm electricity, which powers irrigation pumps and other farm equipment. Approximately 83% of the total irrigation energy demand is estimated to be met through grid electricity with diesel accounting for about 17%. Solar electricity makes up less than 1% owing to high initial costs (NITI Aayog Government of India, 2016). For this reason, grid electricity to agricultural consumers continues to be heavily subsidizedin India (World Bank, 2013). These subsidies impose two significant costs – financial and environmental.

Subsidies for farm electricity have a long history in India starting from the Green Revolution in the 1960s(Badiani, et al., 2012; Swain & Mehta, 2014). The high-yielding crop varieties depended on access to irrigation. However, availability of surface water irrigation was low and the focus therefore shifted to groundwater irrigation (World Bank, 2008). To enable farmers to extract groundwater, electricity was provided either free-of-cost or at very low flat tariffs. This was further justified by the need to promote rural livelihoods, food security, and overall rural development (Swain & Mehta, 2014). Owing largely to clientelism, there has been no reform in this subsidy policy over the years (Chindarkar, 2017). While the share of electricity consumed by agricultural consumers is nearly 23%, revenue realization from agricultural consumers is only about 9% (Power Finance Corporation, 2016). It is estimated that agricultural electricity subsidies are equivalent to about 25% of India’s fiscal deficit, twice the annual public spending on health or rural development, and two and a half times the annual spending on developing surface water irrigation infrastructure (Monari, 2002). A consequence of this increased financial pressure on public utility companies has been poor transmission and distribution (T&D) in the form of interrupted and low-voltage electricity supplyto agricultural as well as domestic consumers (World Bank, 2013).

There is evidence supporting the positive correlation between subsidized electricity to farmers and increased productivity in agriculture and allied sectors measured in terms of crop yields per acre, farm income and wages, labor productivity, and water productivity(Badiani & Jessoe, 2014; Fan, et al., 2002; Kumar, 2005).[1] However, this has come at the environmental cost of increasing groundwater extraction(Badiani, et al., 2012). More than 60% of irrigation in India depends on groundwater drawn using electric pumps(World Bank, 2012). Further, as surface water irrigation is low, farmers depend heavily on groundwater irrigation as a buffer against poor monsoons. It is also argued that as groundwater irrigation gives farmers greater control over when to irrigate and how much water to use, productivity of farms irrigated with groundwater is higher than those irrigated using surface water (World Bank, 2012). Farm electricity subsidies effectively shift the preference of farmers towards increased use of groundwater irrigation as itlowers the cost of extraction. This is further reinforced by poor monitoring and regulation of tubewells and borewells mostly due to clientelism (Birner, et al., 2007). It is estimated that about 29% of districts in India are either semi-critical, critical, or over-exploited in terms of groundwater extraction, which is largely attributable to farm electricity subsidies(Suhag, 2016).

Balancing the competing policy objectives of agricultural growth, financial viability of public utility companies, and environmental sustainability is challenging yet critical(Chindarkar, 2017). Several policy tools are availableto policymakers to move towards achieving this balance. Among these are – tariff changes, direct regulation, technical innovation, and a mix of thesetools (Badiani, et al., 2012; Mukherji, et al., 2010; Shah, et al., 2008; World Bank, 2013). Tariff changes in accordance with demand and cost of supply is expected toincrease revenue generation for the utility companies and also likely to discourage over-extraction of groundwater(Badiani, et al., 2012). Direct regulation in the form of metering as well as controlling the number and depth of tubewells and borewells is also predicted to yield similar results. However, it is likely to impose significant administrative and monitoring costs(Mukherji, et al., 2010; Shah, et al., 2008). Technical innovation refers to changing the physical power supply infrastructure and segregating the non-agricultural and agricultural feeders, or in other words, separating the paid and non-paid (or nominally paid) loads (World Bank, 2013).

Implementing tariff increases for agricultural users and direct regulation continue to be plagued by political opposition, corruption, and non-compliance (Gronwall, 2014). These reforms therefore have had limited success in striking the sensitive balance between demands of competing sectors. In contrast, feeder segregation has gained considerable traction among both policymakers and consumers (World Bank, 2013). While feeder segregation has been implemented or is in-progress in several states in India and each has followed its own tailored approach, the state of Gujarat in particular, is seen as an example of successful feeder segregation(Shah, et al., 2008; World Bank, 2013).This is because Gujarat went beyond just physical segregation and combined it with intelligent supply management. This included – (i) enhancing the predictability of farm electricity supply, that is, the duration and timings when it would be available, (ii) improving quality and reliability, that is, uninterrupted and high voltage farm electricity supply, and (iii) matching the supply timings with peak periods of moisture stress (Shah, et al., 2008). However, this has not meant that the reform has been completely devoid of oppositions and criticisms.These include criticisms against rationing without taking into consideration land sizes and crop types. Further, feeder segregation was accompanied with direct regulation which entailed disconnecting unauthorized connections and imposing heavy fines for non-compliance, and this turned out to be unpopular with political opponents (Chindarkar, 2017).

Theory and evidence suggests that a change in the availability of a key farm input such as electricity, which is required to power irrigation pumps and other farm equipment,is likely to result in reallocation of factors of production and consequently affect welfare of farm households(Barnes & Binswanger, 1986; Barnum & Squire, 1979).Thus, if the quantity and quality of farm electricity supply changes then farmers are likely to change investments in other factors in order to maximize their welfare. An empirical challenge however is to generate exogenous variation in quantity and quality of farm electricity supply as it may be correlated with unobserved factors such as individual preferences of farmers and external factors such as resource availability for power generation, political environment, and administrative capacity.

This paper overcomes the empirical challengeby exploiting natural variation in quantity and quality of farm electricity supply resulting from an exogenous policy intervention. In October 2003, the state government of Gujarat implemented its feeder segregation program known as “Jyotigram Yojana” (JGY) which translates to“lighted village scheme”. JGY was launched with an investment ofUS$290 million to separate agricultural and non-agricultural feeders against the backdrop of rapidly rising electricity demand, depleting ground water tables, and heavy losses to the state electricity board(Shah, et al., 2008). As previously mentioned, JGY not only physically segregated the loads but also enhanced the predictability and quality of electricity supply to rural agricultural and non-agricultural consumers. Under JGY, farms received 8 hours of high-quality electricity while non-agricultural users received 24hoursof high-quality electricity supply. There were no significant changes to the tariffs paid by agricultural consumers (Gujarat Urja Vikas Nigam Limited, 2010).

Our outcome variables of interest are farm investments in fixed and variable inputs and net farm income per acre. We use household-level survey data for Gujarat from Wave 1 (2004-2005) and Wave 2 (2011-2012) of the India Human Development Survey (IHDS) and match it with administrative data on JGYimplementation. JGY ‘implementation’ refers to completion of feeder segregation in a given village.We compute a ‘exposure’ to JGY treatment variable, which is the cumulative proportion of villages in a district that implementedJGY in each month starting in July 2003till its completion in March 2008. Using a difference-in-differences framework we find that, on average, JGY does not lead to an increase in ownership of electric pumps. However, it decreases ownership of diesel pumps. On average, farmers own more tubewells as exposure to JGY increases. In particular, it is the medium-to-large farmers who significantly increase ownership of tubewells. There is a corresponding statistically significant increase in the likelihood of irrigating with a tubewell for farmers across all land sizes. This is accompanied by an increase in per acre cost of purchased water for irrigationfor farmers across land sizes. The consequent effect on net farm income per acre on average is a statistically significant decrease, which is more pronounced for medium-to-large farmers. This seems to be driven mainly by an increase in cost of purchased water for irrigation as we do not observe an increase in labor cost or increase in investments in other farm inputs including fertilizers, pesticides, and tractors. Using supplementary analysis we also rule out lower crop yields as the mechanism underlying decreased net farm income.Further examination of heterogeneous effects suggests that for farm households whose main income source is cultivation, there is a clear substitution away from diesel pumps and towards electric pumps. We do not find significant differences in the outcomes when households in the top/bottom 10% of the groundwater distribution are excluded.

2.Background on Gujarat and JGY

Much of Gujarat falls under arid, semi-arid, and dry sub-humid climatic zones. The state receives average annual rainfall of about 1107 mm, however, the northern and north-western regions are distinctly semi-arid or arid receiving on average between 500-700 mm rainfall annually(Department of Agriculture & Cooperation, 2013). Due to low rainfall, the state relies heavily on groundwater for irrigation. Groundwater development (GWD), which is the ratio of the annual ground water extraction to the net annual ground water availability, was 30.81% in 1984 which significantly worsened to 75.57% in 1997 (UNDP, 2004)[2]. In 2004, it remained at 76%, however, 50% of the 223 sub-districts assessed were classified either as over-exploited (GWD>100%), critical (90-100% GWD), or semi-critical (70-90% GWD)(CGWB, 2004).

Since 1988, the state has implemented a flat tariff system based on motor capacity of the electric pumps for agricultural users. Clientelism made it infeasible to increase farm electricity tariffs. The only alternative available to the severely financially stressedstate electricity board was therefore to reduce the quantity (number of hours) and quality (voltage) of farm as well as domestic electricity supply. This negatively affected both rural development and agricultural growth(Chindarkar, 2017). Against this backdrop, the state government of Gujarat launched JGY, a rural feeder separation program, which separated power loads of rural non-agricultural and agricultural consumers by connecting them to separate feeders. The program was first implemented in 8 districts in early-2003 and gradually covered the entire state by early-2008. In total, it covers more than 18,000 villages.Agriculture feeders provide 8 hours of high-quality electricity supply to farms while rural non-agriculturalusers receive24 hours of high-quality supply.

JGY involved complete transformation of the electricity infrastructure landscape with installation of new Specially Designed Transformers (SDTs), high tension lines, low tension lines, electricity poles, electricity conductors, and PVC cables. Feeders were metered to improve the accuracy of energy accounting. Apart from the infrastructural changes, concerted efforts were taken to restructure the work culture within the distribution companies (DISCOMs). Figures (1a) and (1b) illustrate the physical infrastructural changes under JGY.

3.JGYand farm households: Theory and evidence

Theory and evidence on the general impact of access to farm electricity has established that electricitycan affect farm households both through the intensive and extensive margins. Farm electricity can increase yields (intensive margin) and consequently farm incomes mainly through adoption of electric pumps for irrigation and other electric farm appliances (Barnes & Binswanger, 1986; Khandker, et al., 2013). It can also increase the value that the farmers can extract per drop of water as they can shift towards water-intensive, high-value crops (Mukherji, et al., 2010). Further, it enables farmers to expand the land under cultivation (extensive margin) as they are no longer constrained by the capacities of manual and animal labor(Bhargava, 2014).

Theoretical understanding of the impact of JGY on input choices and farm incomein particular, requires accounting for (un)certainty of farm electricity supply in the farm production function. Suppose farm households are set to maximize their farm income by choosing the optimal level of labor and machinery (such as pumps) subject to availability of land and other inputs (such as credit). Prior to implementation of JGY, farm households maximized their expected income given all factor prices and the probability of receiving electricity during production hours. The probability essentially introduced uncertainty in the farm households’ decision-making regarding choice of inputs. After the implementation of JGY however, farm households are not constrained by uncertainty but are constrained by rationed electricity supply. Because we have limited knowledge about the probability of receiving electricity prior to JGY implementation, it is difficult to derive a comparison of the maximum farm income under these two scenarios analytically.

Wetherefore consider a simple scenario of input choice where farmers have to make a decision regarding the number of electric pumps required to irrigate their fields. Suppose, is the number of pumps owned by a farmer, is the amount of water each pump is able to draw, and is the probability of being able to draw amount of water. The total amount of water the farmer is able to draw for irrigation is therefore the product . Under uncertain farm electricity supply, farmers may decide to own more units of electric pumps to maximize irrigation and consequently farm income. Under certain but rationed supply, owning more electric pump units may not be necessary. This is because while JGY rationed farm electricity to 8 hours per day it also brought about improvements suchbetter quality of supply, enhanced predictability as farmers were provided a pre-determined schedule that matched peak periods of moisture stress, and potentially lower rates of replacement of fixed inputs such as electric pumps as there were no sudden voltage fluctuations, power outages, fuse blackouts, and motor burns. However, overall shift in input choices and its consequent effect on farm income is still ambiguous as it is subject to other factors such as land size, crop choice, availability of substitutes such as diesel pumps, and so on.

Evidence on impact of farm electricity supply management and quality of supply on farm households is very scarce and largely qualitative. A recent study looks at the impact of quality of electricity, measured as hours of supply, on rural non-farm income in India and finds that it increases non-agricultural income by 28.6% during 1994-2005(Chakravorty, et al., 2014). Qualitative evidence on JGY finds that the program induced farmers to shift towards high value crops and efficient use of groundwater (S. G. Banerjee, et al., 2014; Gronwall, 2014; Mukherji, et al., 2010; Shah, et al., 2008). Overall, the literature suggests that quantity-quality trade-off due to JGY has not had negative consequences on farm households.