Water Related Subsidies in Agriculture:
Environmental and Equity Consequences
Mona Sur, Dina Umali-Deininger & Ariel Dinar
World Bank
Paper presented at the OECD workshop on Environmentally
Harmful Subsidies- Paris, Nov.7-8, 2002.
Introduction
• Water-related subsidies in agriculture are virtually a
universal phenomenon.
• They are of concern because they are:
– fiscally unsustainable;
– environmentally harmful; and
– have an equity dimension. In fact, subsidies that affect the
environment may be more harmful when we take the equity
dimension into consideration.
• Broad policy and institutional reforms are needed to address
the consequences of water-related subsidies.
• A better understanding of the nature of water-related
subsidies, their magnitude, environmental impact and
associated issues of equity is needed.
Outline of Presentation
• How do water-related subsidies affect the behavior of
irrigators?
• The various guises of water-related subsidies.
• The possible impact of these subsidies on the environment
and the poor.
• How we measure these subsidies.
• Examining the equity dimension of these subsidies.
– Measurement and equity issues are discussed in the context of canal
irrigation subsidies in India.
• Concluding comments.
How do irrigators respond to water subsidies?
• Scenario 1: Water is subsidized however the costs
associated with the environmental externality are not
internalized.
• Scenario 2: Water is subsidized and the irrigator
internalizes the environmental cost.
– wND>wD, wS&ND>wS&D and most importantly wND<wS&ND and
wD<wS&D
• In many countries the social costs associated with treating
environmental externalities are not borne by the users of
subsidized water. Thus irrigators benefit from both a direct
subsidy via the price of water and an indirect subsidy
related to the mitigation of externalities by the tax payer.
The various guises of water-related subsidies
• Crop price and trade protection (CP & TP)
• Surface water price (SP)
• Electricity price (EP)
• Pesticide prices (PP)
• Fertilizer prices (FP)
The Possible Environmental Consequences
• CP&TP: Incentives for growing water-inefficient crops in inappropriate
regions resulting in pollution and depletion of water bodies.
• SP: Overuse of water, cultivation of water-inefficient crops and use of
inefficient technologies.
• EP: Substitution of SW with GW. Overuse of GW leading to depleted
aquifers, and contamination from intrusion of salt water.
• PP: Overuse of pesticides and inefficient management practices causing
high rates of pesticide leaching contamination GW aquifers, adverse
health consequences for humans.
• FP: Overuse of fertilizer and inefficient mgmt practices. Fertilizers can
increase soil salinity and contaminate aquifers, adverse health
consequences for humans.
The Measurement of Irrigation Subsidies
The Context- Canal Irrigation Subsidies in India
• Subsidies for canal irrigation arise from two factors: water
tariffs that are set well below the supply cost of water (or
not charged at all) and collection inefficiencies.
• The latest National Water Policy (2002) advocates for
pricing water so as to initially cover O&M costs, and
recommends eventually charging for part of the capital cost.
• However, in practice water tariffs have been set at very low
rates.
The Measurement of Irrigation Subsidies
The Context- Canal Irrigation Subsidies in India
• For the most part, state governments set prices using
non-volumetric methods. Most commonly on a per unit
area basis.
• Not only are water tariffs too low to cover O&M costs,
frequently states have failed to revise charges on a
regular basis.
• Lax enforcement of fee collection, disconnect between
user charge and service provision and lack of
coordination between departments in the sector have
exacerbated the problem.
• With increasing staff and administrative costs the
proportion of O&M funds spent for repair and
maintenance have declined.
Irrigation Expenditures and Revenues
• Capital expenditures on irrigation (major and medium) at the
national level have increased from Rs 7.65 billion in 1985 to Rs 110
billion in 2000. Revenue expenditures have also increased.
4500
4000
3500
3000
2500
2000
1500
1000
500
0
Maharasht ra
Gujarat
All-India
Punjab
1996
1995
1994
1993
1992
1991
1990
1989
1988
Rs/Ha (constant 1999/00 rupees)
Revenue Expenditures Per Hectare
Irrigation Expenditures and Revenues
• Revenue receipts however have consistently fallen
below expenditures.
Average Share of Revenue Expenditures Recovered
(1990-2000)
25
Percentage
20
15
10
5
0
AP BH GJ HY KN KR MP MH OR PJ RJ TN UP WB AI
Measuring Canal Irrigation Subsidies
Measuring Canal Irrigation Subsidies
• Simplifying Assumptions
• Per hectare subsidy calculated as:
• Data: State budget data and the 54th round of
the Indian National Sample Survey. Per ha
subsidy calculated for 5 states: RJ, MH, AP,
KN, UP.
Example from Maharashtra
• Actual O&M spending in 1997/98: Rs. 4.31
billion
• 82% of surface water used in irrigation. O&M
share of farmers Rs. 3.52 billion.
• Receipts from water revenue: Rs. 816 million;
Cost recovery from irrigation Rs. 246.5 million.
60% collection efficiency.
• Subsidy = Rs. 3.27 billion. Average subsidy
Rs. 10,685/ha.
• Assuming 100% collection efficiency average
subsidy Rs. 10,149/ha.
The Magnitude of Canal Irrigation Subsidies
(1997/98)
State
Rajasthan
Total
Subsidy
(Rs.
Million)
Subsidy/ha
(Rs./ha)
Subsidy/HH
(Rs./HH)
Subsidy/
SC/ST HH
(Rs./HH)
182
337
1431
783
Maharashtra
(*)
3,108
10,149
11,371
6,927
Andhra
Pradesh
2,021
1,382
1,956
1,183
259
242
376
237
2,777
1,117
1,303
730
Karnataka
Uttar Pradesh
* Assumes 100% collection efficiency and takes account of nonagricultural users.
The Equity Dimension of Canal Irrigation Subsidies
• The distribution of subsidies examined using the
54th round of the Indian NSS.
• Only 13% of agricultural households use canal
irrigation.
• 64% of these HH are marginal farmers, 19% are
small farmers, 11% are medium farmers and 7%
are large farmers.
• Marginal farmers receive 27% of canal irrigation
subsidies. Approximately 32% of the subsidies
accrue to large farmers.
The Equity Dimension of Canal Irrigation Subsidies
• Few poor households benefit. Only 28% of the
poor have access to irrigation
• Less than 6% of rural SC/ST HHs use canal
irrigation.The average subsidy received by
SC/ST is almost half the value of that accruing
to non SC/ST households.
Summary
• Sizeable subsidies-downward bias since estimates don’t
account for interest and depreciation costs.
• Dhawan (1997) estimates that interest and depreciation
accounted for 53% and 31% of unit costs. Therefore,
actual subsidies may be five times larger than those
computed here.
• Large share of establishment charges in O&M. So part
of the subsidy is captured by state irrigation
departments.
• Benefits of the subsidies not distributed equitably.
Conclusion
• Water related subsidies may harm the environment. They
also have an equity dimension. Negative consequences of the
subsidies are amplified because of the equity issues.
• We have presented very stylized examples. Ag. Policy
generally has multiple objectives which complicates the
calculation of the subsidy, environmental harm and
distribution.
• Looking at subsidies beyond ‘price’.