The Paddy Lock-In: Groundwater, Free Power and a ₹7,000 Incentive
In a canal-and-tube-well block of 22,000 hectares in central Punjab, 92% of cropped area is under paddy and wheat. The block has 4,100 tube wells, almost all electric, and farmers pay no marginal cost for power. In twenty years the water table has fallen from 16 m to 31 m, and 18% of wells now fail in June.
Paddy yield has been flat near 6.2 tonnes/ha for a decade. The block's farm budget data for 2023–24 show a net return of ₹48,000/ha for paddy, ₹31,000 for maize, ₹26,000 for tur (arhar) and ₹35,000 for cotton. About 60% of paddy fields are burnt after harvest.
The state proposes three things: continue free power and MSP procurement; pay ₹7,000/ha to any farmer who shifts at least 25% of his area out of paddy; or extend the canal to 6,000 more hectares. Farmers' groups say they will support whichever option protects income, and the state wants a defensible choice on sustainability grounds.
1. Explain, in economic terms, why free power plus MSP keeps the block locked into paddy despite a falling water table.
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The mechanics of the lock-in
- MSP removes price risk. Assured procurement at a declared price makes paddy revenue nearly certain. Maize and pulses have thin procurement and volatile prices, so a risk-averse farmer prefers a certain ₹48,000 to a variable ₹31,000 - the gap is not just return, it is risk.
- Free power makes the marginal cost of irrigation zero. Groundwater here is a common-pool resource with no price and no rationing at the point of use. Each farmer's private marginal cost of pumping is approximately zero; the social marginal cost is the 15 m fall in the water table, borne by everyone and by the future.
- Together they make paddy simultaneously the highest private return and the lowest private risk - precisely the combination any diversification policy must beat.
- Sunk capital: 4,100 electric tube wells and paddy-specific machinery make switching costly, and the subsidy reduces the cost of staying, not of leaving.
- Residue burning is the cheapest disposal route because there is no market for the straw; soil carbon and air quality are unpriced externalities.
Result: an individually rational choice - deepen the well, keep sowing paddy - produces a collectively ruinous outcome. This is a textbook common-pool problem with a subsidy layered on top. 18% of wells failing in June is the physical signal that the private calculus is now wrong, and the price system is not transmitting it.
2. Evaluate the ₹7,000/ha incentive using the block's own net returns, and state what would make it work.
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Use the block's own numbers. Per hectare shifted out of paddy:
| Alternative | Net return ₹/ha | Income forgone vs paddy | ₹7,000 incentive | Net position |
|---|---|---|---|---|
| Maize | 31,000 | 17,000 | +7,000 | −10,000 |
| Tur | 26,000 | 22,000 | +7,000 | −15,000 |
| Cotton | 35,000 | 13,000 | +7,000 | −6,000 |
The incentive covers at most half the income forgone, and in the best case still leaves a ₹6,000 loss. On a 10 ha farm, shifting 25% (2.5 ha) to maize loses ₹42,500 and receives ₹17,500 - a straight ₹25,000 loss, before any consideration of price risk. A rational farmer takes the ₹7,000 only if he was already shifting; that is why such schemes report high participation and little actual area change.
What would make it work
- Price the water, not the crop. Replace free power with a direct income transfer that does not vary with the volume pumped, or pay per unit of electricity saved. This attacks the root distortion instead of compensating for it.
- Assured procurement for maize and pulses at a declared price, to match paddy's risk profile, not merely its return.
- Pay on verified area shifted (remote sensing), committed for three years so the farmer can plan.
- Create a buyer within 30 km - a maize-based feed mill or a pulses mandi. A crop with no buyer is not a diversification option.
3. Compare the canal extension with the diversification incentive on sustainability grounds, and recommend one, justifying the criterion you apply.
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Canal extension to 6,000 ha
- Gain: adds surface water, reducing pressure on the aquifer - but only if it substitutes for tube-well pumping, and there is no mechanism here guaranteeing that.
- Risk: canal water is also unpriced. Historically, cheap canal water in Punjab encouraged the expansion of paddy, not its retreat. An unpriced additional supply tends to raise cropping intensity in the same water-intensive crop.
- Side effects: fixed command-area cropping, tail-end inequity, and waterlogging/salinity in the lower reaches.
The ₹7,000 incentive
- Gain: keeps the farmer's choice open, is withdrawable, and costs little per hectare relative to a canal headworks.
- Flaw: too small (it covers at most half the loss) and it leaves both the price of water and the risk of the alternative untouched.
Criterion applied: does the measure change the relative private return in favour of a lower-water-use crop?
- A free canal does not - it adds unpriced supply to the existing crop.
- A flat ₹7,000 does not - ₹17,000 of forgone income minus ₹7,000 is still a loss.
Recommendation: neither as designed. Make canal supply conditional - allocate the 6,000 ha only against a verified shift out of paddy, with metered or rotational delivery - and redirect the diversification money into procurement and a buyer rather than a flat per-hectare transfer. That combination changes the farmer's calculus; each measure alone does not.