Water Related Subsidies in Agriculture: Environmental and Equity Consequences

1. 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.

2. 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.

3. 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.

4. 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.

5. 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)

6. 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.

7. 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.

8. 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.

9. 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. Revenue Expenditures Per Hectare

10. Irrigation Expenditures and Revenues • Revenue receipts however have consistently fallen below expenditures. Average Share of Revenue Expenditures Recovered (1990-2000)

11. Measuring Canal Irrigation Subsidies

12. 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.

13. 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.

14. The Magnitude of Canal Irrigation Subsidies (1997/98) * Assumes 100% collection efficiency and takes account of non-agricultural users.

15. 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.

16. 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.

17. 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.

18. 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’.