Can Electricity Pricing Save India’s Groundwater? Field Evidence from a Novel Policy Mechanism in Gujarat

Efficient pricing of water and energy, advocated by economists as a means of achieving more efficient allocations, is often politically infeasible, especially in developing countries. In India, for example, subsidized, nonvolumetric pricing of the electricity used to pump groundwater is politically entrenched and often blamed for groundwater depletion. Are there politically feasible ways to introduce incentives for conservation? We worked with a state government to design and test an alternative, voluntary approach, that invites farmers to install electricity meters and receive compensation for every unit they “save.” Interest in participation was high, leading to an unprecedented voluntary shift to meter-based billing, but we found no impacts on water usage. These results provide some of the first empirical evidence on the effect of incentives on water use in India, and we discuss the extent to which they are informative about other policy tools, such as full pricing.