September 2019 POLICY BRIEF - 29

Are Farmers Subsidizing the Cost of Irrigation to

Consumers? Evidence from a micro study in Karnataka
MG Chandrakanth1, Kiran Kumar R Patil2

Introduction welfare loss and is not regulated by (5) price mechanism or by

Karnataka has around 25 lakh irrigation wells with more than (6) institutions. The reciprocal externality (Partha Dasgupta,
70 % of them being borewells. The water pumped out, as 1982)4 indicates that one irrigation well drilling deeper /
well as water recharged are both estimates, and vary with extracting higher volume of groundwater will influence the
methodology used. Probability of well success is usually yield of other wells, and similar to non-point pollution, difficult
measured using the Negative Binomial Distribution (NBD). to locate well/s responsible for the influence. Studies have
Recent estimates reveal that NBD probability of success of indicated that the probability of initial, premature failure of
borewell is 0.3, due to high rate of initial and premature failure irrigation wells is increasing and currently farmers in many
of borewells. In order to obtain a successful well, farmer has areas, drill at least three wells to obtain a functioning well, as
to drill three wells of which one may function and two may the probability of well failure has reached 0.75. Over-extraction
fail. Also, dug wells / open wells numbering around three of groundwater is resulting in increasing probability of initial
lakhs in the state have already dried up. /premature failure/s of irrigation well/s, along with reduced
yield of water, reduced area irrigated on other farmers’ field.
More than 85% of water is utilized by irrigation in India
referred to as ‘consumptive use’, which implies that once Farmers by violating isolation distance between wells, impose
water is applied to crops, it cannot be recovered. Water use externality on neighboring farmer/s. Thus the cost of extraction
for domestic / industrial purposes is ‘non-consumptive use’, of groundwater is = Marginal cost MC of extraction +
where water is recoverable as waste water /sewage water. Opportunity cost incurred by neighboring farmer/s due to over
About 70 % of irrigation is met by groundwater and 30 % extraction by the farmer. Thus, the farmer imposes a social
is met by surface water in India. Hard rock areas of India cost on neighboring farmer/s forcing neighbor to drill deeper,
constitute 65% of geographical area where recharge is less or use higher capacity pump or forced to drill additional well.
than 5 to 10% of rainfall. These areas also constitute India’s This is externality measured as Marginal Externality Cost given
highest demand for groundwater resource. Therefore water by the difference between Marginal Social Cost (MSC) and
use discipline should come first from agriculture / irrigation. the Marginal Private Cost (MPC). As the farmer is not bearing
Climate change and groundwater this MEC, he is extracting yo, which is determined by the point
During 1950 - 1965, the Pre green revolution period, surface where his Marginal Private Benefit MPB = his marginal cost
water through tanks, canals were major sources of irrigation. of extraction MC. However farmer should have extracted only
Green revolution period: 1965 - 1980, with million wells y* which is the socially optimal where MPB = MSC. Thus,
scheme, thousand wells scheme, promoted rapid exploitation farmer (and the society) both ignore this negative externality
through shallow dug wells attached with manual lifts - Yetha, which is a social cost. And this results in (i) inefficiency given
Kapile, Picota, Persian wheel (bucket machine) for extracting by over extraction = yo - y* and (ii) welfare loss = the triangle
water supporting subsistence irrigation. During 1980 - 1990: abc (Fig 1). The extent of internalization of externality varies
Dug-cum-borewells in operation with around 5 HP centrifugal with farmers by way of adopting micro irrigation technologies,
pumps lifting water, and gradually wells were drilled deeper groundwater recharge, cultivating low water, high value crops,
- to cultivate - paddy, vegetables etc. Well failure began sharing well water in water markets.
surfacing. Period 1990 - 2000 witnessed shallow bore wells
with submersible pumpsets of 5 to 10 HP capacity for paddy,
maize, sugarcane, vegetables. Rate of well failure increased.
Post 2000, witnessed deep borewells with pumpsets of more
than10 HP with micro irrigation, experiencing well failure of 70
percent through initial failure, premature failure of borewells.
Conceptual framework
According to Baumol and Oates (1988)3, the six conditions
for the presence of externality are that (1) action of one agent
should result in an unintended side effect on another agent
(2) this action should enter into production / consumption
function of another agent (3) should result in inefficiency (4) Borewell recharge structure by Chitradurga farmer
1
Prof. M.G. Chandrakanth, Director, Institute for Social and Economic Change, Bengaluru
2
Dr Kiran Kumar R Patil, Assistant Professor (Contractual), Department of Agricultural Economics, University of Agricultural and Horticultural Sciences, Shimoga
3
Baumol, W. J. and Oates, W. G.,1988, The theory of environmental policy, second edition, Cambridge University press, pp: 17-18
4
Dasgupta, Partha, 1982, The control of resources, Cambridge, MA: Harvard university press.
5
(1) Kiran Kumar R Patil, Economics of coping mechanisms in Groundwater irrigation: role of markets, technologies and institutions, Unpublished PhD thesis,
Editor: S. Manasi Department of Agricultural Economics, University of Agricultural Sciences, Bangalore, 2014, (2) Nagaraj, N, Chandrakanth, M.G. and Gurumurthy, 1994,
Borewell failure in drought prone areas of Southern India: A case study, Indian Journal of Agricultural Economics, 49(1), Jan-Mar, 102-106.
 Fig 1: Negative Externality Leading to Overextraction of Groundwater

Chrysanthemum, low water intensive high value crop grown by shared well farmers
and control farmers in Chitradurga district

exists, thus, externality = 0, as all wells are functioning on the farm. If B

>A, negative externality exists. The externality on each groundwater irrigation
Notes: MSC = Marginal Social cost due to over extraction of groundwater, MPC farm is assumed as equal to the amortized investment per functioning well
= Marginal Private cost of extracting groundwater, MPB = Marginal private benefit minus amortized investment per well. If all wells are functioning on the farm,
from Groundwater irrigation, MEC = Marginal Externality Cost = MSC – MPC; there is no externality. The basis of the hypothesis is that all wells in hard rock
Inefficiency = yo-y*; Welfare loss = y*yoca - y*yoba areas succumb to cumulative interference among irrigation wells.

Why accounting for groundwater cost is crucial Variable cost of groundwater

Every input used in the production process needs to be valued / priced. The variable cost of groundwater irrigation includes, amortizing the
Groundwater is extracted / pumped by farmers, and as electricity is investment on drilling and casing of bore wells over the subsistence life
provided free, farmers think that groundwater is free. But more than 70 of bore well/s or economic life of bore well/s (whichever is relevant for
percent of the cost of groundwater is borne by farmers due to frequently the specific farmer) plus the operation and maintenance costs of the bore
drilling of wells necessitated by frequent well failures. This way they are well. The amortized investment is divided by the volume of groundwater
net subsidizing consumers instead of receiving subsidies. With 65% of extracted to obtain the variable cost of groundwater per acre-inch.
geographical area of India being hard rock area with poor recharge (of Fixed cost of groundwater
5-10% of rainfall), where groundwater irrigation dominates, it is crucial to The fixed cost of groundwater irrigation includes, amortized investment
properly account for cost of groundwater resource on irrigation pump sets, pump house, electrification charges, groundwater
Empirical framework storage structure (constructed if any), groundwater delivery pipe investment,
Estimation of reciprocal negative externality is the key for this study and drip irrigation and accessory investment for a period of 10 years. The amortized
this needs knowledge on different types of wells and costs considered. fixed investment is divided by the volume of groundwater extracted in the
Thus, four types of borewells are discernible : (1) Borewells with initial recent year to obtain the fixed cost of groundwater per hectare centimeter or
failure (or borewell/s which do/did not yield any groundwater at the time of acre-inch. The fixed cost of groundwater recharge structure if any, is obtained
drilling and thereafter); (2) Borewells with subsistence life (or borewell/s by amortizing the investment on groundwater recharge over the subsistence
which yielded groundwater for the number of years equivalent to the Pay or economic life of bore- well, whichever is relevant for the bore well.
Back Period (PBP)6; (3) Wells with premature failure ( borewell/s which Life and Age of irrigation borewells
served below subsistence life or the PBP); and (4) Wells with economic Life of irrigation bore well refers to the number of years a borewell
life/age (borewell/s which function or yield groundwater beyond the PBP). functioned or yielded water. Age of irrigation borewell refers to the number
Reciprocal Externality of years the borewell is serving at the time of field data collection. For
The existence of externality in hard rock areas, is indicated by the presence instance, if we collected field data in 2018, if a farmer has four borewells :
of well failure. Thus, if a farmer does not have any failed well, s/he has not Borewell A drilled in 2010 and suffered initial failure), B drilled in 2013 and
suffered externality. However, if a farmer has failed well/s, then this failure functioned upto 2016, C drilled in 2017 and is still functioning, D drilled in
is due to negative externality caused by cumulative interference effects of 2015 and is still functioning, then the life of well A was 0 years, life of well
irrigation wells. Therefore where the farmer suffers from well failure/s, B was 4 years, age of well C is 2 years, age of well D is 4 years. For this
the amortized cost per functioning well will be higher than the amortized farmer, the Average age or life of borewell = (0+4+2+4= 10)/4 = 2.5
cost per well (given by the amortized cost on all wells divided by the total years. The Average age or life was considered because, amortization of
number of wells (i.e. including both functioning and nonfunctioning wells). investment with time t = 0, leads to infinity.
The externality per well is thus estimated as = [(Amortized investment Choice of discount rate
on drilling and casing of bore- wells over the subsistence life of well/s or The choice of discount rate is puzzling in evaluation of public policies and
economic life of well/s whichever is relevant) ÷ [number of wells which programmes. Lind (1997) discusses regarding the choice of discount rate
served PBP + number of wells serving economic life)] minus [(Amortized which can be in the range of 5 to 10 percent or 0 to 3 percent7. Diwakara
investment on drilling and casing of bore-wells over the subsistence life of and Chandrakanth note the debate among economists Pearce et al. (2003),
well/s or economic life of well/s whichever is relevant)] ÷ [Number of all Weitzman (1998), and Gollier (2002) on the social discounting and note
types of wells on the farm]. the inverse relationship of discount rate with time8. Further they indicate
If A = (Amortized investment on drilling and casing of borewells of initially that the rate of growth of nominal investment in irrigation wells in different
failed wells and wells which served for PBP) divided by all wells on the farm; B parts of Karnataka was (i=) two per cent by considering the vintage of
= (Amortized investment on drilling and casing of borewells of initially failed irrigation wells drilled / dug by farmers. In this study too, from the sample
wells and wells which served for PBP) by the number of functioning borewells data, investment on earliest well (IEW) and the investment on latest well
on the farm, then Externality per borewell = (B-A). If B = A, no externality (ILW) were used to solve the rate of interest using IEW (1+i)n = ILW. Upon

6
The Payback period refers to the period involved in recovering the total investment on drilling, casing, irrigation pumpset, conveyance structure, storage structure, drip / sprinkler
structure, recharge structure, electrification charges of borewell, from the annual net returns on the farm.
7
Lind, R.C. (1997), ‘Intertemporal equity, discounting, and economic efficiency in water policy evaluation’, Climatic Change 37: 41–62. H Diwakara and MG Chandrakanth, 2007, Beating
negative externality through groundwater recharge in India: a resource economic analysis, Environment and Development Economics, Cambridge University Press, Vol. 12, pp. 271–296.
8
(1) Pearce, D., B. Groom, C. Hepburn, and P. Koundouri (2003), ‘Valuing the future : recent advances in social discounting’, World Economics 4: 121–141; (2) Weitzman,M.L. (1998),
‘Whythe far-distant future should be discounted at its lowest possible rate’, Journal of Environmental Economics and Management 36: 201–208 and (3) Gollier, C. (2002), ‘Discounting
an uncertain future’, Journal of Public Economics 85:149–166.
solving for interest rate, approximately the two per cent was obtained. Amortized cost of Pump set (P) and Accessories (A)
Accordingly, two per cent discount rate was used in compounding as well Amortized cost of P and A = (compounded cost of P and A) * [(1+i) 12 *
as in amortizing variable cost of groundwater. This rate of 2 percent also i / (1+i) 12 – 1]
realistically reflected the increase in the investment on borewells over time. (The working life of pump sets and accessories (P and A) is considered to
Relative influence of discount rate and bulky investments be 12 years as reflected by field data.)
in borewell irrigation Compounded cost of P and A = (historical cost of P and A) * (1+i) (say
2018 – year of installation of P and A)
The relative influence of discount rate, the bulky frequent investment
by farmers on drilling and casing and the bulky infrequent investments Amortized cost of conveyance structure
by farmers on irrigation pumpset and related infrastructure is crucial to Amortized cost of conveyance structure (CS) =(compounded cost of
analyze. Given the decreasing (increasing) probability of well success CS)*[(1+i)12 *i /(1+i) 12 – 1]
(failure), and the decreasing life and age of irrigation wells, the amortized The working life of conveyance structures (CS) is also considered to be
investment will be modestly sensitive to choice of discount rate. However, 12 years.
the cost of irrigation will largely be influenced by the frequent investments The usual mode of conveyance of groundwater is through PVC pipe and
made by farmers on drilling and casing since irrigation pumpsets serve at the Compounded cost of CS = (historical cost of CS) * (1+i) (2018 – year of
installation of CS)
least around 10 years and as they can be moved to another functioning
borewell relatively easily and hence do not farm part of the sunk cost. The study was conducted in the two most dry agro climatic regions of
Amortized Cost of irrigation Karnataka which have the greatest exposure to market forces, namely the
Amortized cost of irrigation = (amortized cost of bore well + amortized Eastern Dry Zone (Kolar district) and the Central Dry Zone (Chitradurga
cost of pump set + amortized cost of conveyance + amortized cost of district). Kolar and Chitradurga districts are characterized as the two
over ground structure + annual repairs and maintenance costs of pump groundwater demanding horticulturally dominant districts of Southern
set and accessories) Karnataka. A sample of 30 farmers having borewell(s) with drip irrigation
for narrow spaced crops in Kolar District, 30 farmers having borewell(s)
Amortized cost of borewell with drip irrigation for broad spaced crops in Chitradurga district, 30
Amortized cost of BW = (compounded cost of BW) X [(1+i)AL X i / (1+i)AL – 1)] farmers who are sharing their well water with their relatives / siblings in
Where AL = average age or life of bore well, i = discount rate considered = 2 %. Chitradurga district and 30 farmers who have recharged their borewell(s)
Compounding investment on borewells in Chitradurga district was chosen for detailed field work.
Farmers invest on irrigation well/s during different time periods, and Variable and fixed cost of groundwater – How farmers are
their wells have different vintages. In order to bring all historical costs / net subsidizing crops to consumers
investments on borewells on par, investments made by different farmers in Groundwater cost has fixed and variable cost components. Cost of
different years, are compounded to the present (say 2018) at the interest groundwater varies from Rs. 200 per ha cm to Rs. 500 per ha cm in
rate of two percent. different agro-climatic zones, excluding the cost of electricity used for
Compounded cost of BW = (historical investment on BW) * (1+i) (2018-year pumping, non-measurable due to lack of electricity metering (Tables 1,2)
of drilling)
if 2018 is considered as the reference year

Table 1: Variable cost (VC) and fixed cost(FC) and Total Cost (TC) of groundwater irrigation and Gross Returns (GR) and
Net Returns (NR) for seasonal crops in Karnataka (Rs. Per acre)
Water % TC of NR including NR excluding NR per Crop per drop
VC of FC of TC of TC of
Crop used in groundwater to Output GR irrigation irrigation rupee of = output per
groundwater groundwater groundwater cultivation
ha cms TC of cultivation cost cost groundwater ha cm
Knol kohl (qtl) 12.08 22324 3776 26100 71822 36 155 90666 18844 44944 0.72 12.83
Coriander* 4.7 11765 7328 19093 59334 32 150 75000 15666 34759 0.82 31.91
Capsicum (qtl) 8.18 17583 6067 23650 153216 15 50 180000 26784 50434 1.13 6.11
Carrot (qtl) 7.59 17349 2120 19469 77528 25 109 108571 31043 50512 1.59 14.36
Beans (qtl) 10.31 25944 4251 30195 127881 24 70 182500 54619 84814 1.81 9.22
Red onion (qtl) 9.32 19034 5625 24659 80962 30 96 136693 55731 80390 2.26 10.30
Cabbage (qtl) 10.05 24045 2304 26349 154253 17 230 230476 76223 102572 2.89 22.89
Tomato (qtl) 12.16 20840 2107 22947 166490 14 110 238689 72199 95146 3.15 9.05
Potato (qtl) 11.92 25778 762 26540 121032 22 227 211012 89980 116520 3.39 19.04
Cauliflower (hds) 8.54 7321 2308 9629 74089 13 14545 118182 44093 53722 4.58 1703.16
Note: VC: variable cost of groundwater, FC: Fixed cost of groundwater, TC : Total cost , NR: Net returns, GR: Gross returns; *(in 100 bunches); qtl: quintals
Source: Kiran Kumar R Patil and MG Chandrakanth, Crop water planning and irrigation efficiency in Rainfed Agriculture, in Special Publication of the Geological Society of
India, No. 5, 2016, pp. 36-46. (http://www.toenre.com/downloads/2016-kiran-mgc-crop-water-planning-GSI-article.pdf)

Table 2: Variable cost and fixed cost of groundwater irrigation of perennial crops in Karnataka (Rs. Per acre)
Water % TC of NR including NR excluding NR per Crop per drop
VC of FC of TC of TC of
Crop used in groundwater to Output GR irrigation irrigation rupee of = output per
groundwater groundwater groundwater cultivation
ha cms TC of cultivation cost cost groundwater ha cm
Coconut in nos. 8 6876 393 7269 33216 22 4635 36502 3286 10555 0.45 579.4
Banana (qtl) 32 18293 271 18564 95312 19 41 114531 19219 37784 1.04 1.3
Papaya (qtl) 14 21107 2494 23601 141649 17 193 233500 91851 115452 3.89 13.8
Arecanut (qtl) 12 8553 409 8962 62743 14 9 114824 52080 61043 5.81 0.8
Pomegranate (qtl) 10 17250 514 17764 169025 11 39 340540 171515 189279 9.66 3.9
Note: VC: variable cost of groundwater, FC: Fixed cost of groundwater, TC : Total cost , NR: Net returns, GR: Gross returns; qtl: quintals
Source: Kiran Kumar R Patil and MG Chandrakanth, op.cit
 Table 3: Economics of groundwater irrigation in Karnataka
Drip farms connected to Drip farm connected Borewell Recharge
Shared well farms,
Particulars narrow spaced crops, to broad spaced crops, farms, Chitradurga
Chitradurga (n=30)
Kolar (n=30) Chitradurga (n=30) (n=30)
Average size of land holding (irrigated land area) (acres) 9.38 (4.61) 7.87 (6.07) 8.17 (4.77) 15 (9.89)
Gross irrigated area per farm (acre) 6.62 (1-26) 12.2 (2.4-43.4) 7.93 (0.75-21) 17.03 (4-47)
Net irrigated area per farm (acre) 3.01 6.44 3.40 8.08
Irrigation intensity (%) 220 189 233 210
Groundwater extracted per farm (ha cms per year) 72.94 (11-261) 69.21 (15.58-267) 88.75 (16 -238) 140 (26.18-397)
Groundwater extracted per functioning well (ha cms in 2012-13) 53.37 (11-86) 32 (11-77) 71.96 (9.28-127) 56 (8.72-150)
Amortized cost of drilling and casing + O and M costs per farm 152376 67303 17732 35182
Amortized investment on over-head storage structure, drip irrigation 63115 29654 14144 46898
structure, artificial recharge structure, pump and motor, electricity
charges and conveyance structure per farm
Variable cost of groundwater (Rs per ha cm) 2089 (71%)(295-9255) 972 (69%)(68-9517) 199 (56%)(18.59-1874) 251 (43%) (43-1127)
Fixed cost of groundwater (Rs per ha cm) 865 (29%)(317-3791) 428 (31%)(156-2046) 159 (44%)(39-875) 335 (57%) (97-1564)
Net returns per ha cm of groundwater (Rs) Range 7610 (784-22603) 7398 (1470-37554) 3888 (1277-16418) 3674 (1859-14533)
Net returns per acre of gross irrigated area (Rs) Range 83786 (6980-247046) 75463 (11420-168283) 43506 (15786-355787) 43457 (20810-80536)
Net returns per functioning well (Rs) Range 406158 227609 (59018-673135) 279795 (34432-896356) 288789 (31045-561485)
Net returns per rupee of irrigation cost (Rs) Range 2.57 (0.08-15.75) 5.08 (1.74-28) 10.83 (1.6-61.88) 8.17 (1.32-18.29)
Negative Binomial Probability of well success 0.32 0.28 0.68 0.27
Note : Figures in the parenthesis indicate range
Source: Kiran Kumar R Patil and MG Chandrakanth, op.cit

It can be observed that the cost of groundwater formed around 15% of the around 25 percent of the cost of groundwater. Energy subsidy is
cost of cultivation of perennial crops, and 30 % of the cost of cultivation of often highlighted as a windfall support to farmers though farmers are
seasonal crops. This cost is totally borne by farmers implicitly. About 50 bearing major portion of cost, subsidizing the crops to the society.
% to 70% of this cost is that of investment on groundwater wells and the 3. Estimation methodology of cost of cultivation by Commission for
rest is the electricity cost which is subsidized. Farmers are continuously Agricultural Costs and Prices (GoI) does not include variable cost
incurring the variable cost of drilling wells. The free electricity cost forms of groundwater and grossly underestimates the cost of cultivation
around 25 percent of the cost of groundwater and the rest (about 70 to of groundwater crops. The CACP accordingly may modify its
755%) is borne by farmers due to frequent well failures. methodology incorporating the variable costs of groundwater
irrigation reflecting inter alia costs of drilling and casing, probability
It is crucial to recognize that the methodology of costing groundwater adopted of well failure
by the CACP to fix the MSP, does not incorporate cost of groundwater as 4. Choice of right crops, pumping right volume of water, using micro
cost of well failures is ignored and treated similar to depreciation assuming irrigation, water budgeting, focusing not on more crop per drop, but
that wells serve for around 10 years at least. Thus, the cost of irrigation on the strategy of net returns per rupee of the cost of water are crucial.
water largely varies life, age, and number of well failures and serving wells. 5. Irrigation extension, a separate wing or emphasis by Department
Accordingly, areas (farmers) irrigated by groundwater which form fifty of agriculture / horticulture, needs to be established involving
percent of the total area irrigated in Karnataka (and 70% of the area irrigated agricultural engineering and agricultural / horticultural graduates
in India) are net subsidizing the cost of groundwater irrigated crops due to educating farmers and consumers to treat water with wisdom,
increasing probability of failure of irrigation borewells and non accountability respect and equity for sustainable use.
of negative externality leading to frequent well failures. 6. Devising and installing low cost water measuring devices, promoting
low water high value crops – flowers, fruits, vegetables is crucial.
Economics of groundwater irrigation 7. Cultivation of climate smart crops such as millets harvestable in
The choice of micro irrigation technology is lead by scarcity of 70 to 80 days, saves duration, improves food, health and nutrition
groundwater and scarcity of labour. Cost of groundwater in drip irrigation security for both humans and livestock.
farms increases due to shifting to drip system after considerable initial
/ premature failure of wells. The NBD probability of well success varied References
from 0.27 to 0.68 (Table 3). 1. MG Chandrakanth, Water Resource Economics - Towards a
Sustainable Use of Water for Irrigation in India, Springer, New York,
Policy implications 2015.
This study demonstrates the application of the theory of externalities in 2. Kiran Kumar R Patil and MG Chandrakanth, Crop water planning and
costing groundwater for irrigation with the following implications. irrigation efficiency in Rainfed Agriculture, in Special Publication of
the Geological Society of India, No. 5, 2016, pp. 36-46.
1. Cost of groundwater forms around 15 percent and 30 percent of 3. MG Chandrakanth and Kiran Kumar R Patil, Internalization of
the cost of cultivation of perennial and seasonal crops respectively, externalities and costing groundwater for irrigation: Evidence from a
implicitly borne by farmers and net subsidizing consumers. micro study in Karnataka, Arthika Charche, FPI Journal of Economics
2. Currently variable costs of drilling and casing forms around 50 and Governance, Vol 3, No.2, 2018, pp. 29-40.
to 75 percent of the investment on borewells. Energy cost forms

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