Agricultural trade and depletion of groundwater

Globalization can lead to either conservation or depletion of natural resources that are used in the production of traded goods. Rising prices may lead to better resource management. Alternatively, stronger incentives to extract these resources may exacerbate their decline. I examine the impact of agricultural trade promotion on the groundwater extraction in India using nationally representative data from 1996–2005. I find evidence that trade promotion led to increased extraction of the reserves. In areas deemed over-exploited by the government, groundwater depleted by an additional 0.6 of a within district standard deviation. This large decline had economically significant distributive consequences. While large and marginal farmers did not experience any real welfare changes, we detect a 1 standard deviation decline in the real mean-per-capita expenditure for small farmers. I also quantify the social cost of groundwater depletion due to increased agricultural trade. My findings indicate that the monetized value of depleted groundwater net of imported water in agricultural commodities could be at least as high as 0.3 billion US dollars in 1991 dollar terms.