CIAO DATE: 11/03

Farmers' Willingness to Pay for Power in India

Introduction

Electric power for rural pumpset usage is subsidized by all the states in India, the subsidy being estimated at 1.1 percent of GDP. Users are charged a highly subsidized, flat, annual fee that varies with pumpset size. This fixed charge has encouraged waste and raised subsidies over time. Unwilling to bear these costs any longer, states have proposed a range of strategies, including independent regulation, metering of agricultural pumpsets, and raising prices.

This paper seeks to answer the question: By how much may prices be raised? The answer is partly a matter of political acceptability, since raising prices will presumably reduce the affordability of power for marginal farmers, and thus lead to political problems. At the very least, however, prices could be raised for everyone to the level that the marginal user of power is willing to pay for the power he consumes-assuming that he is willing to pay more than he does currently. This willingness is termed the marginal willingness to pay (MWTP) (defined precisely in Section 2 below) and has been extensively measured in India.

In this paper, we show that MWTP is a theoretically inappropriate concept for subsidized goods that are rationed. This explains apparently puzzling empirical results that show that MWTP is equal to the current, subsidized price, despite an average subsidy of more than 85 percent of costs.

Assuming that subsidy must continue (for political reasons), an alternative to MWTP-based pricing that we consider is discriminatory pricing. This may be implemented, for example, by charging higher rates for greater usage of power. Another alternative considered is to offer better quality power-either for everyone or on a discriminatory basis-and to charge higher rates in return. We focus on two quality-improving approaches that the state might use: doing away with rostering (calibrated, discontinuous supply) and improving the supply parameters that cause motor burnout. An empirical survey is used to show that a combination of these alternatives can reduce subsidies substantially.

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