Droughts, Distress and a Conditional Cash Transfer Program to Mitigate the Impact of Drought in Bihar, India

Avinash Kishore ([email protected]), PK Joshi ([email protected]) and Divya Pandey ([email protected])

International Food Policy Research Institute NASC Complex, CG Block Dev Prakash Shastri Road (Opp. Todapur) Pusa, New Delhi 110012 India Fax: +91 11 2584.8008 / 2584.657

Abstract

Paddy—Bihar’s staple crop—is vulnerable to droughts, primarily due to high cost of irrigation. In 2008, Bihar government launched a conditional cash transfer scheme to subsidise diesel for irrigation in drought affected areas. We show that this scheme has not been effective in mitigating the impact of drought on paddy production. A primary survey of potential and actual beneficiaries shows that low awareness and penetration among smallholders, alongside uncertainties and delays in the disbursal of the subsidy, make it ineffective. We suggest that in states with limited capacity, such ad-hoc subsidies are unlikely to protect smallholders from weather shocks.

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1. Introduction

Agriculture in India has always been vulnerable to the vagaries of monsoon (Kumar et al., 2004). The rainfall related volatility in agricultural production is a big concern for food security, economic development, and household welfare in India and other tropical countries (Rosenzweig & Hillel, 2008; World Bank, 2007). These concerns have grown in recent years as altered rainfall patterns have become frequent, resulting in short run crop failures and long run production declines.

Bihar, the third largest and the poorest state of India, has been facing such heightened concerns in recent yearsi. Large parts of the state (Table 1) have experienced droughts in four out of the five years between 2009 and 2013ii (Figure 1) with terrible consequences for the state’s agricultural economy and its 110 million people. Recent work by the Indian Council of Agricultural Research (ICAR), suggests that such weather irregularities are likely to become more common in Bihar in years to come, as 24 of 38 districts in the state are extremely vulnerable to climate change (Sehgal et al., 2013).

In 2008, Government of Bihar launched a large conditional cash transfer (CCT) scheme to mitigate the impact of drought on crop area and production in the state. The scheme encourages farmers to sustain area and yield of their kharif crops by increasing application of groundwater in drought affected areas through a non-distortionary subsidy on diesel. Almost three million farmers applied for diesel subsidy in the paddy season of 2013 and since its launch, the scheme has delivered USD 284 million to farmers in drought affected areas of the state (see Table 2). It is one of the largest CCT schemes meant to mitigate the impact of drought on crop production anywhere in the developing world. It has the largest budget outlay among the array of drought mitigation schemes implemented by government of Bihar (Kishore et al., 2014). The large and growing budgetary allocation to this scheme by a state with scarce resources and other possible options to make agriculture more resilient to droughts, heightens the need to evaluate it for its effectiveness in achieving its goals. We present the first assessment of this large CCT scheme in Bihar. To the best of our knowledge, this is the first such assessment of an agriculture focused CCT programme anywhere in Asia or Africa.

1.1. Cash transfer programmes in agriculture

This paper contributes to two strands of literature on agricultural policies. The first strand is the somewhat sparse literature on the impact and functioning of cash transfers programmes in agricultural sector. There have been very few CCT programmes conditioned upon specific agricultural inputs or practices. As a result,

2 there are not many studies of such programmes. Mexico’s Programa de Apoyos Directos al Campo or PROCAMPO, launched in 1994, is a prominent exception. Under the programme, eligible farmers were provided with a fixed payment per hectare, which was conditioned on the production of nine key crops. Sadoulet et al. (2001) find that the transfers through this programme did allow the beneficiaries to increase their purchase of agricultural inputs, though the gains for households with small landholdings were lower than that for medium and large farmers. To the best of our knowledge, ours is the first study outside of Latin America, to assess the impact (or lack thereof) of a large CCT programme conditioned on agricultural inputs or actions.

Many evaluations of CCT programmes, not conditioned on agricultural inputs or practices, have reported direct or indirect impact of the cash transfer on agricultural outcomes. For example, Veras Soares et al. (2010), find that a CCT programme in Paraguay, called Tekoporã, led to increase in investment in agricultural production even when the cash transfer in this programme was conditioned on school attendance, visits to health clinics, and updating of immunizations. The beneficiary households had invested up to 50 per cent more in agricultural production than non-beneficiary households. Similarly, Todd et al. (2010) find that Mexico’s Oportunidades programme, though conditioned on health and nutrition related activities, also led to increase in spending on crop production, land usage, livestock usage, and consumption of food from own production. Red de Protección Social, a poverty reduction programme in Nicaragua with conditioned upon on school attendance and health related activities had a weak, but positive effect on spending on agricultural activities (Maluccio, 2007).

Apart from CCTs, studies of unconditional cash transfer schemes for poverty reduction have also reported similarly positive effect on investment in agriculture. For instance, a study of the social cash transfer (SCT) scheme for poor and vulnerable households in Malawi found that the extra cash enabled even the most poverty stricken families to invest in agricultural tools and livestock (Covarrubias et al., 2012). Another study of the same SCT programme by Boone et al. (2013), also found that the beneficiary households had invested more in agriculture and noted an occupation shift from casual labour to agriculture.

These studies suggest that direct cash transfer programmes, conditional or unconditional, may help farming families, especially the smallholder families, to overcome credit and liquidity constraints and increase investments in productive activities and assets. The CCT scheme, we study, is operational in Bihar—a state where almost 90 per cent of the farmers are smallholders. These farmers are often financially constrained and even more so in drought years. Our findings on the ability of this 0.3 billion USD diesel subsidy scheme to mitigate the impact of drought on crop production adds to the growing literature on the impact of cash

3 transfers in productive investments in agriculture. Ours is the first study to evaluate the impact of a CCT programme meant specially to increase the resilience of agriculture to droughts.

The second strand, this study contributes to, is the literature on adaptation policies to mitigate the impact of adverse climate realizations on crop production. Increasing subsidy on fuels (diesel or electricityiii), to reduce the cost of irrigation in drought years is a popular policy for drought proofing in South Asia. Besides government of Bihar, many other state governments in India, the federal government of India, and governments of Bangladesh and Nepal have used or seriously considered using this policyiv. However, the effectiveness of such subsidies in drought proofing agriculture remains largely unstudied. We believe that our study in Bihar—a poor state with predominantly small farmers who face high cost of irrigation—can offer useful lessons for other parts of India and other smallholder agrarian economies in Asia and Africa that face similar challenges from unpredictable weather, have similarly high levels of dependence on agriculture, and poor state capacity to help smallholders in adverse conditions.

The rest of the paper is organised as follows. Section 2 describes primary and secondary data used in the paper. We briefly present suggestive evidence of the impact of drought on area and yield of kharif paddy in Bihar in recent years in Section 3.1. Sections 3.2 introduces the diesel subsidy scheme and section 3.3 presents our assessment of effectiveness of this scheme in mitigating the impact of drought. We report some of the major shortcomings in the implementation of the scheme in section 3.4 using data from our survey of 240 farmers in Nalanda district of Bihar. Section 4 presents our conclusions and policy recommendations.

2. Data

We use both primary and secondary data to understand the impact and the functioning of the diesel subsidy scheme in Bihar. We use district level data on rainfall in monsoon months (June to September) from the Indian Meteorological Department (IMD) and crop area and crop yield data published by the Ministry of Agriculture, Government of Bihar to assess the impact of drought on area and yield of paddy in Bihar. Following IMD, we classify a district as drought affected if the total rainfall in a given monsoon season (June to September) is 80 per cent or below its long term mean.

We collected district level data on allocation and uptake of diesel subsidy in different years in Bihar from the unpublished records of government of Bihar. We use this data in combination with published data on number of pumping sets (from the minor irrigation census of India) in each district and other agricultural data like net sown area, crop yields and total value of crop output to identify various factors that drive the large inter-district variation in use of diesel subsidy. Published secondary data on area and yield of paddy by

4 district in combination with rainfall data allows us to assess the effectiveness of diesel subsidy in reducing the impact of drought.

Finally, we supplement the analyses based on secondary data with our findings on the functioning of the diesel subsidy scheme from a primary survey of 240 farmers in 16 villages of Nalanda district in Bihar. We visited these farmers twice in kharif 2013-2014 to collect data on their use of diesel subsidy in that season. Besides surveying real and potential beneficiaries of the diesel subsidy scheme, we also interviewed block and panchayat level government officials who are responsible for grassroots monitoring and implementation of this scheme.

3. Results and Discussion 3.1. Impact of droughts on agricultural output in Bihar

The current streak of droughts in Bihar started in 2009, when the average rainfall in the state was only 79 per cent of its long term average (India Water Portal, 2012). The state government declared drought in 26 of 38 districts (India MoA, 2014). Total production of paddy, declined from 5.8 million tons in 2008-2009 to 3.6 million tons (38 per cent decline) in 2009-2010 (Bihar DoA, 2014a), and the value of output declined from rupees (Rs) 46 billion to Rs 29 billion at 2004-2005 constant prices (India CSO, 2013). The state experienced another drought in 2010. This time drought was declared in all 38 districts. The production and the value of paddy declined to nearly half (53-54%) of what they were two years ago in 2008-2009—the most recent year of normal rainfall. Table 3 compares average cropped area under kharif paddy and its yield across districts-years when rainfall was 20 per cent or more below normal (drought) and 60 per cent or more below normal (severe drought) with district-years of normal rainfall for years 2001 to 2012. This comparison shows that area under paddy shrank by more than six per cent and the yield decreased by 22 per cent in drought years. The difference is statistically significant. As expected, severe droughts have even worse impact on both area and yield.

Besides simple comparison of the average crop yields in normal and monsoon years, we estimate the impact of drought on area and yield of paddy using a regression model as shown below:

(1)

Where is the area or yield of kharif paddy in district i in year t. is the coefficient of interest that measures the impact of drought on the dependent variable. is a dummy variable that takes value of one in a district-year when the monsoon rainfall is 80 per cent or below the long term average and

5 zero otherwise. are district fixed effects that control for all time invariant district characteristics that may affect area under a crop or crop yields (e.g., soil type) while controls for a state level time trend in the dependent variable. Since the occurrence of droughts is a random event, this regression gives us the causal impact of droughts on area and yield of paddy in Bihar.

We find that between years 2001 and 2012, incidence of drought in a district reduced paddy yield, on average, by 450 kg per hectare while the area under paddy went down by nearly 4750 hectares (Table 4). The impact on yield is indeed large and shows high vulnerability of paddy, the main kharif crop and the largest crop in Bihar, to droughts.

3.2. The cash-for-diesel scheme to mitigate the impact of drought on agriculture in Bihar

Given the huge impact of droughts on crop production in Bihar, the state government launched the diesel subsidy scheme in 2008 when it offered a subsidy of Rs 10/litre of diesel to farmers in drought affected blocks of the state to encourage them to provide one crop saving irrigation to their kharif paddy. At the time, diesel sold at Rs 44/litre. A farmer could claim subsidy for ten litres of diesel (which amounts to Rs 100/acre) for every acre of his land under paddy. The subsidy amount was quickly increased to Rs 15/litre (or Rs 150/acre/irrigation) and then to Rs 20/litre in view of the rising price of diesel. In 2014, when diesel sold at Rs 63/litre in Bihar, the subsidy was raised to Rs 25 per litre (or Rs 250/acre/irrigation). Also, now, the government provides subsidy for more than one round of irrigation if drought condition persists. A farmer can get the subsidy on the purchase of ten litres of diesel per acre up to five times during a crop season, including two times during the sowing of paddy seeds, and thrice after transplantation of the seedlings, so that the standing crops are protected. Farmers can also collect diesel subsidy for three irrigations for their kharif maize crop and two irrigations for kharif vegetables (Bihar DoA, 2014b). A farmer can claim subsidy for as much land as he has under kharif crops. With these changes, total budgetary allocation for diesel subsidy has increased more than ten folds from Rs 631.6 million in 2008 to Rs 7690.6 million in 2014. Assuming zero leakage—an obviously farfetched assumption—this amount is enough to provide 40 per cent subsidy (Rs 25/litre) on the current price of diesel for three irrigations to 4.1 million hectare of land, which is nearly three-fourth of the net sown area of Bihar and more than the entire area under kharif paddy in a year with normal rainfall.

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3.3. Has the diesel subsidy scheme mitigated the impact of drought? : Exploratory Evidence from district level data

3.3.1. Inter district variation in uptake of diesel subsidy for irrigation in Bihar

There is a large inter district variation in uptake of diesel subsidy. The subsidy uptake as percentage to total allocation in 2013-2014 varied from low two per cent in Paschim Champaran district to almost 100 per cent in Katihar district. What are the factors responsible for this large inter-district variation in uptake of this subsidy? We run a panel regression with random effects (equation 3), using district level data on uptake of diesel subsidy for four years from 2010 to 2013, to identify characteristics associated with higher uptake of diesel subsidy in a district.

(3)

Where, is the uptake of diesel subsidy per hectare of net cultivable area (in rupees) in district i in year t. is a vector of controls that includes percentage deviation from mean monsoon rainfall in a district in a given year, pump density measured by the number of pump sets per hectare net cultivable area, average landholding size of the district (in hectares), per hectare agricultural GDP of the district which is an indicator of productivity levels of agriculture in the district. Except for deviations in rainfall, which is measured contemporaneously, we use data from the period before the launch of diesel subsidy scheme for other independent variables to avoid endogeneity. controls for state level time-trend in the dependent variable and and are between and within error terms. We chose random effects model after doing Hausman test to assess if the unique errors ( ) are correlated with the regressors. The null hypothesis is they are not (Greene, 2008). We fail to reject the null hypothesis.

Table 5 shows the regression results. We find that the uptake of diesel subsidy by farmers is increasing over time across all districts of Bihar. However, in a given monsoon season, the uptake rate is higher in districts with higher pump density (measured as number of pump sets per hectare of cultivable land). In a district with one more pump per hectare of cultivable land, farmers collect Rs 1167 (it can pay for 46 litres of diesel) more in subsidy per hectare of land. Further, agriculturally more productive districts use more diesel subsidy per hectare of land. Interestingly, the per hectare subsidy uptake is not significantly correlated with the extent of shortfall in monsoon rains. In other words, controlling for other factors, uptake of diesel subsidy per hectare of land was not higher in districts, which experienced more severe drought conditions. Thus, our analysis suggests that agriculturally more progressive districts, and not the more drought affected ones, use more diesel subsidy. 7

3.3.2. Impact of diesel subsidy on paddy output

We use published secondary data on district-wise net sown area, the area and the yield of kharif paddy, and the unpublished data on amount of diesel subsidy disbursed in each district in 2010 and 2012 to assess the effectiveness of this subsidy transfer in mitigating the impact of drought on this crop.

We estimate the following fixed effect regression model to estimate the impact of diesel subsidy:

Except for the interaction term ( ), this equation is exactly the same as equation 1. is the coefficient of interest in this equation. It measures how the impact of drought on the dependent variable changes with change in total diesel subsidy disbursed in a district per hectare of net cultivable area. While the amount of diesel subsidy disbursed in a district may itself be correlated with omitted characteristics that may also affect area or yield of paddy in that districtv, the interaction term is exogenous. Hence, gives us the causal estimate of the impact of diesel subsidy on area or yield of paddy in a drought affected district.

Results in table 6 show that the coefficient of the interaction term are positive for paddy yield and negative for paddy area, but statistically not significant in both regressions. This implies that an increase in per hectare diesel subsidy has no incremental impact on reducing the effect of drought on area or yield of paddy crop in Bihar. Thus, the diesel subsidy scheme does not seem to be achieving its intended purpose of mitigating the impact of drought on the kharif paddy crop in Bihar. We would have been more confident of this inference if we had a household level panel data on area and production of paddy and amount of diesel subsidy received in drought years. We use the district level panel data because the household level data are not available.

3.4. Shortcomings in the functioning of the diesel subsidy scheme: Findings from primary survey in Nalanda district, Bihar

We carried out a primary survey of 240 farmers from 16 villages of Nalanda district to understand the possible reasons why this large scheme has been ineffective in mitigating the impact of drought on cropped area and crop yields in the kharif season. In the following sections, we briefly discuss results from our primary survey in Nalanda district of Bihar and highlight the various factors limiting the effectiveness of the scheme.

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Limited awareness of the scheme: It appears that farmers in Bihar are still not aware of the diesel subsidy scheme and even among those who are aware of it, a large number do not apply for subsidy even when affected by drought. For example, in 2012, a drought year, the International Water Management Institute (IWMI) surveyed 406 tubewell owners in three villages of Vaishali district. Only one in five farmers in the sample was aware of the diesel subsidy scheme and only 17 of the 406 had actually collected any subsidy. More recently, we interviewed 240 farmers in 16 villages of Nalanda district in 2012, for their awareness and use of diesel subsidy. Nalanda was affected by drought in 2012 and 2013. Though most farmers in our sample were aware of the scheme, awareness levels were slightly lower among marginal farmers, and those who did not own diesel pumps (Tables 7 and 8). Additionally, many farmers showed limited awareness of some of the key provisions, as well as the application requirements of the subsidy scheme. For instance, besides paddy, the subsidy can also be granted for three irrigations of kharif maize and two for kharif vegetables (Bihar DoA, 2014a). Farmers, and even the block development officials we spoke to, were unaware of this provisions.

Furthermore, limited awareness of the eligibility conditions of the scheme, prevents the sharecroppers from benefiting under it. According to a claim, around 35 per cent of the cultivable area in Bihar is under sharecropping, but sharecroppers do not have any legal status in the state (Bandyopadhyay, 2009). Sharecropping is an almost entirely informal arrangement with no public records to show who is a sharecropper. Earlier, a farmer was required to furnish the land revenue receipt (called malguzari raseed in local parlance) with his or her application for diesel subsidy. Sharecroppers do not have this receipt, and so, they were left out of the scheme’s benefits. The state government simplified the application process. Now, a farmer can apply for diesel subsidy even if he does not have the revenue receipt. He only needs a signature (or thumb imprint) from one of his neighbouring farmers validating that he has cultivated and irrigated paddy. The state government’s sanction order makes it explicit that all cultivators are eligible for subsidy under the scheme. Yet, 85 per cent of the farmers in our sample who were aware, but had not applied for the subsidy, believed that they could not avail the scheme’s benefits because they did not possess a malguzari raseed.

High transaction costs: The uptake of diesel subsidy is often low even among farmers who are aware of the scheme. High transaction costs involved in collecting the subsidy is a big reason. A typical farmer in our sample lived seven kilometres away from the block headquarters and the nearest petrol pump (often in the same place) and reported incurring a cost of Rs 80 to collect each instalment of the subsidy. For this expenditure and hassle, an average marginal farmer in our sample collected only Rs 100 in diesel subsidy.

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The net gains from this subsidy, as it is delivered now, are too small for marginal farmers to be attractive to them. No wonder, we find a notable disparity in application of the diesel subsidy scheme between the marginal and non-marginal farmers in our sample (Table 7). In its current form, the diesel subsidy is highly regressive as it discourages and misses out the poorest and the neediest farmers.

Poor targeting of the scheme: Most farmers in Bihar are water buyers (Kishore, 2013) and have to purchase water from diesel pump owners. All farmers are required to furnish receipt of purchase of diesel to collect subsidy. Water buyers often do not buy diesel; the pump owners do. Therefore, water buyers have to make a special trip to the petrol pump and pay money to the manager to get the receipt for diesel they did not buy. Petrol pump managers in rural Nalanda charge farmers a small amount of Rs 10 for each fake receipt. The requirement to furnish the receipt of purchase of diesel makes it harder to collect the subsidy for farmers who do not own pump sets. Again, we see in table 8 and table 9 that that a non-owner of diesel pump sets is less likely to apply for diesel subsidy (35% vs. 65%) than a pump owner.

Thus, both farmer level primary data and district level secondary data on up take of diesel subsidy show that it is poorly targeted as of now. Larger farmers who have their own pump sets and districts with higher productivity levels and higher tubewell density capture a higher share of this subsidy while the poorer farmers and water buyers who often pay higher price for irrigation water (Shah, 2007) benefit much less from it.

Delays and uncertainties in disbursal of subsidy money: In 2013, the year of our survey, the government of Bihar announced diesel subsidy for drought affected districts on 24th of July. The subsidy was to be granted on the diesel purchased till October, 2013 for the eligible crops. All the applications were to be submitted to the block development office by 15th November, while the money was to be disbursed by 30th November. Half of all farmers in our survey in Nalanda, however, complained about delays in disbursement of subsidy. In early January 2014, farmers in Nalanda were still waiting for the last instalment of subsidy due to them—weeks after the crop had already been harvested. Also, farmers had previously received the subsidy for only a fraction of the land for which they had applied the subsidy (Table 7), despite submitting all the necessary documents to concerned authorities. We were told by the block level officers that farmers received only partial allocations because the state government did not disburse the required amount to districts authorities, perhaps, because of shortage of funds. Delays in disbursal of subsidy and uncertainties regarding the amount a farmer will receive, render it less useful for farmers, especially the poor farmers who are risk averse and often liquidity constrained.

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The delay in disbursal of subsidy happens primarily because of the long and cumbersome process followed. First, the state government takes time to collect, collate and process rainfall data and declare a block as drought affected.vi Farmers in a block are entitled to the subsidy only if it is officially declared to be affected by drought, which happens if the rainfall in a given period is less than the long term mean rainfall by 20 per cent or more. Once drought is declared, the subsidy amount is sent to the block development officers from the district headquarters. The block development officers provide the amount to the mukhiyas (elected village heads) of respective panchayats (village councils) for disbursement to the farmers, on production of the purchase receipt of diesel and land revenue receipt. The mukhiya disburses subsidy and submits details of utilization of the subsidy amount in his or her panchayat to the block development officer, who collates utilization certificates from all panchayats in the block and sends it to the district headquarters. There are delays in each step of the process that slow down the disbursal of subsidy to farmers and release of the next instalment of subsidy. From the time of application, it took at least 20 days, and often as long as a month, for the farmers in our sample to receive the subsidy amount for the first and the second instalments. There is, thus, a lingering uncertainty regarding the payment, which prevents the credit constrained farmers of Bihar, from factoring the benefits of the subsidy at the beginning of the cropping season. In other words, as the farmers are not sure of getting the money, the scheme does not influence their decision on how much area to plant and whether to provide supplemental irrigation to save the crop. Therefore, for most farmers of Bihar, especially the small and marginal farmers, the scheme does not offer a substantive motive for maintaining irrigation intensity and/or area under rice cultivation, during droughts. The scheme, thus proves to be less effective in achieving its goals of maintaining the crop area and crop production at normal levels in drought affected regions.

4. Conclusion

Diesel subsidy in Bihar is designed as a CCT programme where a farmer in a drought affected block gets cash subsidy (Rs 250/acre/irrigation) if she irrigates her crop. Like all CCTs, it is meant to encourage the “desirable” behaviour—of growing some crops in her land instead of leaving it fallow even in a drought year and irrigating it to realise maximum possible yield. It is not meant to be an ex-gratia payment for victims of a natural calamity. However, at present, it works more like a drought relief programme where some farmers, often the better-off ones, get some cash from the state in a poor monsoon season and not like a CCT or a drought mitigating programme that would encourage farmers to do something they would not otherwise do—maintain their cropped area and crop yields by using more groundwater to make up for the shortfall in rains.

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Thus, even if the CCT for diesel subsidy helps some farmers who receive it, it is not effective in mitigating the impact of drought on Bihar’s agriculture, unlike assured canal irrigation and electricity powered groundwater irrigation do in north western states of Punjab, Haryana and western Uttar Pradesh. The scheme is less effective than it could be because subsidy is disbursed with a considerable lag and is perceived to be uncertain. The provision of subsidy on diesel does not weigh in on farmers’ decision on how much area to crop in a bad monsoon year and whether to irrigate the crop, because payments come long after the decisions have been made and are not even certain to come at all.

We suggest three changes, which Government of Bihar should make in the current process of transferring the subsidy to farmers to make the scheme more effective.

First, it should do away with the requirement to produce the diesel purchase receipts. The requirement to produce these receipts only increases paper work dissuades water buyers from applying for the subsidy and causes unnecessary delays. There is no evidence to suggest that asking for this proof of utilization of subsidy reduces leakage or misuse. Farmers, even genuine beneficiaries among them, frequently use fake purchase receipts of diesel for this scheme. To circumvent this issue, the state government should directly transfer subsidy to the bank accounts of eligible farmers as is being done for the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS). For the large number of farmers in Bihar who do not have bank accounts, near universal access to mobile phones should be capitalized on. Almost all the farmers in our sample in Nalanda, owned a mobile phone. The state government should set up a system where money could be transferred to farmers using their mobile phones. The technology is widely and successfully used in countries such as Kenya (AFI, 2010). Government of Bihar should emulate this system. Removing three layers of bureaucracy (Mukhiya, block development officer and district headquarters) from the subsidy disbursal will not only speed up the process, but will also make it more meaningful to the smallholders by reducing transaction costs.

Second, the state government should make rules of declaring a block drought affected more transparent and widely known to farmers, lower level government functionaries and people’s representatives. The declaration of a block as drought affected, which acts as a trigger for the scheme, is currently not automatic and rule based, and the decision is often left to bureaucratic procedures. There should instead be clearly defined rules and procedures for declaration of drought and the provision of this subsidy. Clear rule based declaration of droughts and provision of subsidy would reduce uncertainty around the subsidy and allow farmers to take timely decision. Government can use meteorological data collected for payment under the weather based crop insurance scheme for disbursement of diesel subsidy also. The state government should

12 advertise the subsidy scheme more aggressively in districts where utilization rate of subsidy has been low through local newspapers, radio, television, farmer helplines and village or panchayat level agricultural extension workers.

Finally, considering the inability of the current extension system to effectively impart information on the scheme’s provisions and application process, the government should consider sharing required information through text messages sent to mobile phones of the farmers. This would be an effective way to regularly provide farmers with updates regarding the scheme, and would especially be instrumental in providing key information and updates to all categories of farmers.

While we suggest changes to improve the diesel subsidy scheme, we want to stress that the government of Bihar should shift resources from such ad-hoc subsidies and invest them to create permanent irrigation infrastructure that will provide assured irrigation to all farmers—small and marginal—at affordable costs in a sustainable way. Contingent schemes like diesel subsidy for irrigation, even if non-distortionary, are unlikely to be very effective, especially in areas where we have a large number of very small and resource poor farmers scattered over a vast countryside served by a state with limited capacity. Transaction cost of reaching them will be high; targeting will be challenging—as it is in so many welfare programmes in India (Niehaus & Sukhantkar, 2010)—and errors of exclusion will be relatively high. Climate change induced alterations in weather patterns is a long term challenge that requires long term adaptation and mitigation strategies. Contingent and ad-hoc approaches, even if modelled on other successful welfare programmes, are not the best response to this challenge. The experience of Bihar offers this policy lesson that is useful not only for Bihar and other states of India, but also for other low income agrarian economies in Asia and Africa facing similar challenges and striving to formulate effective responses to them.

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Tables

Table 1 - Number of districts affected by droughts in Bihar during 2009-2013 Year Number of drought affected districts 2009 26 2010 38 2012 25 2013 33 Total Districts in Bihar 38 Source: Bihar, DoA (2014a).

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Table 2 - Declared amount of diesel subsidy for irrigation in drought affected blocks of Bihar (from 2008 to 2014)

Year Allocation (million rupees) 2008 630.60 2009 3000.00 2010 1796.89 2012 2142.91 2013 2359.486 2014 7690.60 Grand total (2008-2014) 17,620.49 Source: Bihar, DoA (2014b).

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Table 3 - Average yield (kg/ha) and area (ha) under kharif paddy in districts affected by droughts in Bihar (2001 to 2012) If there was a Number of Average paddy yield Average paddy area drought districts (kg/ha) per district (ha)

Normal 259 1,606 93,442

Drought 175 1,252 87,404 (≥20% below normal rainfall) Severe drought 16 854 51,639 (≥60% below normal rainfall) Note: We did a t-test and the results are highly significant. We did the same for wheat (2001-10)—a winter crop—and did not find statistically significant effect of drought on area or yield of wheat.

Source: Bihar, DoA (2014a) and India, DES (2014).

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Table 4 - Impact of drought on district average yield (kg/hectare) and area (hectare) of paddy in Bihar

(1) (2) VARIABLES paddy_yield paddy_area

if_drought -452.5*** -4,747* (56.46) (2,497) year 86.98*** -855.3** (7.776) (343.8) Constant -173,188*** 1.839e+06*** (15,600) (689,758)

Observations 450 450 R-squared 0.530 0.757 district dummies YES YES Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

Source: Bihar, DoA (2014a) and India, DES (2014).

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Table 5 - Determinants of uptake of diesel subsidy (Rs/ha of land) across drought affected districts of Bihar from 2009 to 2013 (1) VARIABLES uptake_perha

rainfall_deviation1 -0.189 (0.629) tubewells_perha2 1,167*** (274.9) agGDP_perha3 136.6*** (39.51) avg_landholding_ha4 51.89 (119.9) year 72.28*** (13.87) Constant -145,530*** (27,901)

Observations 112 Number of district_id 38 Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 Source: 1Bihar, DoA (2014a), 2India, MWRD (2001), 3Bihar, DES (2014), 4India, ACD (2010).

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Table 6 - Impact of uptake of diesel subsidy (Rs/ha of land) on area (ha) and yield (kg/ha) across drought affected districts of Bihar from 2010 to 2012

(1) (2) VARIABLES paddy_yield paddy_area

if_drought -446.7** 4,807 (207.7) (17,094) if_drought*dieselsubsidyperha 0.267 -29.86 (0.425) (34.68) 2010b.year 0 0 (0) (0) 2012.year 1,356*** 13,384 (120.7) (11,926) Constant 1,395*** 75,019*** (189.0) (15,567)

Observations 75 75 Number of district_id 38 38 Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1

Source: Source: Bihar, DoA (2014a) and India, DES (2014).

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Table 7 - Application and receipt of diesel subsidy by marginal and other farmers in Nalanda district (Bihar) in 2013 Variables of interest Farmers with land Farmers with land holding <1 ha holding >=1 ha

(n = 120) (n = 97)

Number of farmers in the sample who 32 82 applied for diesel subsidy in 2013

Number of farmers who did not know 15 3 anything about the diesel subsidy scheme in 2013

Percentage of farmers who knew about 61 12 the diesel scheme, but did not apply for it

Area for which the diesel subsidy was 0.67 0.77 received/Area for which the subsidy was applied

Average subsidy received (in rupees) per 100.90 593.73 farmer in 2013

Average subsidy amount received per 494.71 545.68 unit area of land (in rupees/hectare)

Source: Primary survey conducted by authors in Nalanda district (2013–2014).

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Table 8 - Application and receipt of diesel subsidy by pump owners and non-owners in Nalanda district (Bihar) in 2013 Variables of interest Diesel pump owners Not owners of diesel pump (n = 128) (n = 88)

Number of farmers who applied for 83 31 diesel subsidy in 2013

Number of farmers who did not know 8 9 anything about the diesel subsidy scheme in 2013

Percentage of farmers who knew about 29 55 the diesel scheme, but did not apply for it

Source: Primary survey conducted by authors in Nalanda district (2013–2014).

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Table 9 - Probit model to identify characteristics associated with a household applying for diesel subsidy in Nalanda district (Bihar) in 2013 (1) VARIABLES ifsubsidy

land_owned_ha 1.036** (0.406) if_owndieselpump 0.809*** (0.193) 2.caste_farmer -1.765 (1.141) 3.caste_farmer -2.250** (0.879) 4.caste_farmer 9.606*** (1.329) 5.caste_farmer -0.990 (0.912) Constant 1.883** (0.775)

Observations 193 village dummies YES

Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 Source: Primary survey conducted by authors in Nalanda district (2013–2014).

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Figure Figure 1 - Rainfall in Bihar during South-West (SW) monsoon from 2009-2013

Source: India Water Portal (2012).

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i Addressing an [name withheld to ensure integrity of the review process] workshop in Patna, Bihar, Mr. Nitish Kumar said that in eight years of his reign as Chief Minister of Bihar from 2005 to 2013, either floods or droughts gave him nightmares every single year.

ii 2009 to 2013 have been the driest five years in the last 113 years of Bihar. Of the 38 districts in the state, five (Khagaria, Pashchim Champararn, Saharsa, Siwan and Seohar) have experienced droughts in all five years from 2009 to 2013; 14 experienced droughts in four out of these five years; another 14 saw three years of drought while the remaining five saw two years of drought. iii Electricity utilities in India often increase the hours of power supply from the normal levels in the event of drought (See - http://zeenews.india.com/news/maharashtra/no-cut-in-power-supply-to-farmers-in-drought-areas_766685.html ). This leads to increase in the flow of energy subsidy to farmers. iv For diesel policy announcements in different countries please see the following. http://pibmumbai.gov.in/scripts/detail.asp?releaseId=E2014PR2236 (Maharashtra state, India); http://timesofindia.indiatimes.com/india/Govt-announces-diesel-seed-subsidy-to-drought-hit-areas/articleshow/39820406.cms (Federal government of India); Hossain et al., 2012 (Bangladesh); and http://www.thehimalayantimes.com/fullNews.php?headline=LPG%26sbquo%3B+diesel+subsidy+thru+agriculture%26sbquo%3B +education+ministries+&NewsID=326690 (Nepal). v For example, there is a possibility that more capitalized farmers in more agriculturally progressive districts of Bihar may have collected more diesel subsidy per hectare of cultivable land. vi The Chief Minister of Bihar complained in the State Assembly that district level bureaucrats were misleading him about the drought situation in the state (http://timesofindia.indiatimes.com/city/patna/Bihar-CM-says-he-is-misled-by-his-own-babus/articleshow/38939890.cms)

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