There is widespread concern about groundwater over-extraction in India and, in turn, the long-term sustainability of irrigated agriculture. Since groundwater is a common pool resource, its overuse imposes costs or negative externalities on others. This article estimates social losses from groundwater over-extraction in arid Northwest India, and finds that the opportunity for farmers to repeatedly re-invest in deeper wells for irrigation significantly exacerbates the externality.
Groundwater use in India has increased by 500% over the past 50 years. Increased groundwater irrigation has allowed for higher and more consistent crop yields, which in turn has improved food security and reduced poverty. However, this increase in groundwater use has led to falling water levels and widespread concern about the long-term sustainability of irrigated agriculture. The Central Groundwater Board of India estimates that 15% of the administrative blocks in India extract more water than is replenished and there is significant concern about rapid depletion. Evidence suggests these dropping groundwater levels have increased poverty and conflict and decreased agricultural profits.
On one level, this pattern of falling groundwater levels is not surprising economically. Groundwater is a common pool resource, which means multiple users compete for access to the same water. As a result, individual users impose a cost, or externality, on their neighbours in the form of lower water levels and higher pumping costs. In this situation, economic theory predicts that groundwater will be overused in the absence of mechanisms to restrict usage. On the other hand, these concerns about overuse are in direct contrast with much of the groundwater economics literature, which finds that the social losses associated with the common pool externality are relatively small in real world scenarios. This result, first identified by Gisser and Sanchez (1980), suggests that while groundwater levels may be falling faster than optimal, the resulting welfare losses are negligible. This result has been termed the ‘Gisser-Sanchez effect’ and has been found empirically to hold in a diverse array of contexts.
Estimating social losses from groundwater over-extraction
In recent research (Sayre and Taraz 2019), we explore this apparent contradiction between the economic theory and the reality on the ground in India. We construct a Gisser-Sanchez style model that includes three critical features of the groundwater situation in India: first, that changes in well capacity, rather than the cost of extraction, are the primary impact of reduced water levels on farmers; second, that well capacity can be increased through private investment in well deepening and stronger pumps; and third, that subsidised flat electricity tariffs exacerbate the common pool externality. We then estimate the size of the externality losses for the arid alluvial aquifer region of Northwest India.
To estimate the social losses from groundwater over-extraction, we compare two scenarios. First, we estimate an unregulated scenario (or ‘common pool regime’) in which individual farmers ignore the impact of their pumping on future water levels, but make decisions about well investments based on their expectations about future groundwater levels. The second scenario we consider is an ‘optimal management regime’ in which both groundwater pumping and well investment decisions are made optimally, by a central planner, who is seeking to maximise the benefits from groundwater use, while factoring in the negative impacts of groundwater over-pumping on future groundwater levels.
Previous work on groundwater depletion in India has documented the impact of electricity subsidies on increased pumping, but we explicitly link three market failures1 – an electricity cost subsidy, a pumping cost externality, and an entry/investment cost externality – in a framework that provides numerical estimates of the potential gains from management. These market failures are reinforcing in that the problems associated with each externality compound the others. For instance, while Badiani and Jessoe (2017) find relatively small losses from the electricity subsidies, we find that these subsidies substantially increase the common pool externality by increasing investment in deeper wells that are socially wasteful. Although there is variation in the magnitudes, our finding of substantial societal losses is robust to a variety of changes in the fundamental parameters of our model. In addition to efficiency losses, under some scenarios we also reveal equity issues. Specifically, as investment costs rise or benefits fall, some farms are driven out of irrigated agriculture – either shifting towards dryland agriculture, exiting from agriculture, or migrating out of the region – consistent with results found by other researchers (Fishman et al. 2017).
Although the importance of well capacity is receiving increased attention in the groundwater economics literature, the linkage between well depths and investment has not been explored in detail. These repeated well investments function like a form of entry. As water levels fall, farmers must continually ‘re-enter’ the irrigation industry by upgrading their technology in the form of deeper wells with stronger pumps. We should expect this entry to continue as long as the net benefit of entry is positive. But each decision to ‘re-enter’ lowers the profits of all neighbours because it reduces the length of time before another round of investment will be required. The net benefit of irrigation to individual farms, inclusive of the investment costs, will eventually be driven close to zero. Moreover, these investments serve only to maintain a prior status quo and can only temporarily address the fundamental challenge in the region: that the available water is not sufficient to irrigate all the land farmers wish to cultivate.
Our results are consistent with widespread concern about groundwater over-extraction in India. Understanding the issue of groundwater sustainability in India is especially critical in the context of climate change, which may lead to more erratic rainfall and increased demands on groundwater usage as farmers adapt to new rainfall patterns (Zaveri et al. 2016; Taraz 2017, Fishman 2018). Policies that have been suggested to address groundwater over-extraction include changing the electricity price; rationing water use with fixed quantitative ceilings on water and electricity per hectare; instituting local regulations on drilling depth and the distance between wells; and encouraging farmers to switch crops or adopt precision irrigation technologies.
Our analysis focused on a particular region in India that has already experienced severe declines in groundwater levels with accompanying substantial investments in well deepening, but our work is also relevant to other regions that are at earlier points in their groundwater development. Roy and Shah (2002) describe a common path of groundwater use in numerous regions as moving “from a stage where [an] underutilized groundwater resource becomes instrumental in unleashing [an] agrarian boom to one in which, unable to apply brakes in time, the region goes overboard in exploiting its groundwater resources.” Our work illustrates the critical role that investment in deeper wells can play in driving this cycle, especially when government policies exacerbate, rather than dampen the natural challenge. In many regions, governments have initially subsidised investments in groundwater irrigation hoping to trigger expansion of irrigation and reductions in poverty. If these subsidies are not removed once irrigation takes off, they can quickly become pathological and lead individual users to compete away all or most of the gains from irrigation in a competitive drilling and deepening race. Our results thus indicate the importance of caution as new regions like eastern India seek to expand groundwater irrigation.
- Market failure occurs when the allocation of goods and resources by the free market is not efficient.
- Badiani, R and K Jessoe (2017), ‘Electricity prices, groundwater and agriculture: The environmental and agricultural impacts of electricity subsidies in India’, in W Schlenker (ed.), Understanding productivity growth in agriculture, University of Chicago Press.
- Fishman, Ram (2018), “Groundwater depletion limits the scope for adaptation to increased rainfall variability in India”, Climatic Change, 147(1):195–209.
- Fishman, R, M Jain and A Kishore (2017), ‘When water runs out: Adaptation to gradual environmental change in Indian agriculture’. Available here.
- Gisser, Micha and David A Sanchez (1980), “Competition versus optimal control in groundwater pumping”, Water Resources Research, 16(4):638–642. Available here.
- Roy, AD and T Shah (2002), ‘Socio-ecology of groundwater irrigation in India’, in MR Llamas and E Custodio (eds.), Intensive use of groundwater: Challenges and opportunities, CRC Press. Available here.
- Sayre, Susan Stratton and Vis Taraz (2019), “Groundwater depletion in India: Social losses from costly well deepening”, Journal of Environmental Economics and Management, 93:85–100.
- Taraz, Vis (2017), “Adaptation to climate change: Historical evidence from the Indian monsoon”, Environment and Development Economics, 22(5):517–545.
- Zaveri, Esha, Danielle S Grogan, Karen Fisher-Vanden, Steve Frolking, Richard B Lammers, Douglas H Wrenn, Alexander Prusevich and Robert E Nicholas (2016), “Invisible water, visible impact: Groundwater use and Indian agriculture under climate change”, Environmental Research Letters, 11(8):1–13.