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In this section we summarize the main insights about the economic impact of dams oered
by the case-study literature on Indian dams, and provide a simple conceptual framework to
understand the likely economic impact of dams.
2.1
Literature Review
The main purposes served by dams are irrigation, hydropower and flood control. Irrigation
is the primary purpose of over 95% of large Indian dams, and dams built for this purpose
form the focus of our discussion.3
   Most irrigation dams in India are embankment dams. That is, an artificial wall is built
across a river valley, and water is impounded behind this wall in a ‘reservoir’. A system of

spillways and gates conveys normal stream and flood flows over, around, or through this wall,
and artificial canals channel water from the reservoir to downstream regions for irrigation.
The area upstream from which water and silt flow into the reservoir, and the area submerged
by the reservoir, form the catchment area. The area downstream from the reservoir that is
covered by the dam’s canal network makes up the command area.
    Dam construction may increase economic activity in the catchment area. Reservoirs
may provide a source of fishing, and are often developed as tourism sites. However, the
main economic benefit of dams has been realized in agriculture, and this benefit accrues
in the command area (here we draw upon the review in Thakkar (2000)). By 2000, dam
irrigation accounted for 38% of India’s irrigated area. Between 1951 and 2000 India’s food
grain production nearly quadrupled. Two-thirds of this increase was in irrigated areas. The
most optimistic calculations suggest that roughly a quarter of India’s increased food grain
production over the last half century can be attributed to dam-irrigated areas. The main
channels through which dam irrigation increases productivity are greater multi-cropping and
the cultivation of more profitable water-intensive cash crops such as sugarcane (Singh 2002).
   Clearly, the benefits linked to irrigation should not be entirely attributed to dams, since
without them some areas would have been irrigated by other means. The fraction of increased
food production in dam irrigated areas that is attributable to dam irrigation rather than, say,
the concurrent uptake of mechanized agriculture also remains controversial, with estimates
varying from 10% (World Commission on Dams 2000b) to over 50% (Gopalakrishnan 2000).
   In defense of large dams, authors such as Biswas and Tortajada (2001) and Dhawan
(1989) argue that other forms of water harvesting, such as ground water and small dykes,
are relatively cost ineective and incapable of meeting the demands of large and growing
populations in countries with highly seasonal rainfall. Another major benefit of dams, not
shared by other means of irrigation, is their ability to prevent floods and droughts by reg-
ulating the flow of water downstream. For very large dams, the flood control eect may
extend thousands of miles downstream. There is, however, a trade-o between using dams
for flood control (which requires emptying the reservoir) and their use for irrigation or elec-
tricity (which requires filling the reservoir). Another potential benefit of a large dam is
seepage from its canals which recharges the aquifers that provide groundwater (Dhawan
1993). However, the extent of such groundwater recharge remains controversial.
    In fact, critics of large dams argue that the more important consequence of such water
seepage is waterlogging, and increased soil salinity; both of which make land less productive.4

The Indian Water Resources Ministry estimated that, in 1991, about 2.46 million hectares
of the command area of dams suered from waterlogging, and 3.30 million hectares from
salinity/alkalinity (World Commission on Dams 2000b). This is roughly a tenth of the area
irrigated by dams. The other main costs of dam irrigation are land submergence for con-
struction of the reservoir and the displacement of people living on this land. The reservoir
of a large dam can submerge up to 10% of an Indian district’s total area. The World Com-
mission on Dams (2000b) estimates that dam construction submerged 4.5 million hectares
of Indian forest land between 1980 and 2000. Using data for 140 large dams, they estimate
that the average dam displaces 31,340 persons and submerges 8,748 hectares. These figures,
however, remain controversial. A World Bank review in the mid-1990s, for instance, esti-
mated that each new large dam dispaced, on average, 13,000 people (Cernea 1996)). Total
displacement figures vary from 16 million to over 40 million people. It is also widely agreed
that the historically disadvantaged tribal populations who are more likely to live in uphill
areas in river valleys have borne the brunt of displacement. Ocial figures for 34 large dams
show that Scheduled Tribes, who make up 8% of India’s population, constituted 47% of
those displaced (World Commission on Dams 2000b).
    The Land Acquisition Act of 1894, which empowers the government to acquire any land
for public purpose and to pay cash compensation, has formed the the basis for rehabilitation
of dam-displaced populations. Resettlement and compensation is, typically, the responsibil-
ity of the relevant project authorities, and is based on project-specific government resolutions.
A number of studies suggest that actual compensation depends on the displaced population’s
political power and organizational abilities (Thukral 1992). Rights of the landless and those
without formal land titles to compensation have typically not been recognized. Further, as
the compensation is typically insucient for the displaced to replace lost land by its equiv-
alent in quality and extent elsewhere, the payment is often used as a temporary means of
subsistence (J.Dreze, M.Samson, and S.Singh 1997). Finally, while an individual receives
compensation after being displaced, development activities and land prices in the dam vicin-
ity often decline as soon as a dam is planned, and the compensation rarely reflects takes this
into account.
    Another often-cited consequence of dam construction is adverse health consequences for
those living near the reservoir. A reservoir provides a natural ground for vector breeding,
and hence for diseases such as malaria, schistosomiasis, filariasis and river blindness (see
Sharma (1991)).
   The role of dams in increasing irrigation is largely undisputed. However, whether this

increase in irrigation has, relative to a reasonable counterfactual, translated into substantial
productivity gains remains controversial. As the discussion in this section should make
clear, a distinctive feature of large dams is that the costs and benefits associated with
dam construction vary by area. The benefits from irrigation accrue mainly to those living
downstream to the dam site, but within its command area. In contrast, those living in the
vicinity of the reservoir and immediately upstream (the catchment area) obtain no irrigation
benefits.5 Moreover, schemes that divert water upstream of the dam are often banned so
as to ensure sucient water flow to the dam (TehriReport 1997). This may further reduce
irrigation potential in the catchment area. Finally, the displacement costs are largely borne
by those in the catchment area of the dam. It has been suggested that compensation to
those displaced has been inadequate.
   Our objective is to provide a rigorous analysis of these claims. While investigating all
the channels through which dams aect productivity and welfare is beyond the scope of this
paper, we will evaluate the impact of dams on aggregate agricultural production, poverty,
disease and a range of related outcomes.
2.2
Conceptual Framework
We provide a simple framework which summarizes the economic implications of dam con-
struction. Assume that agricultural output is a function of labor inputs L, land surface
K, land quality A, inputs such as fertilizer, seeds and electricity I, climate r (rainfall and
temperature), farmer’s ability u and a productivity shock . Denote the production function
for land without access to an irrigation system (via pump or canal) as
y = F1 (L, K, A, I, r, u, )
and the production function for land with access to an irrigation system as
y = F2 (L, K, A, I, r, u, )
Farmers pay a one time fixed cost c for access to irrigation. This is the cost of a well or
tube-well in a region with no dams, and the cost of accessing canal irrigation in a dam’s
command area.6

Evenson and McKinsey (1999) estimate these production functions using Indian data,
and find that irrigation mitigates the eect of rainfall shocks and temperature on farm
net revenue for all crops. Further, irrigation and agricultural inputs, such as fertilizer,
electricity and seeds for High Yielding Variety (HYV) crops are complements. HYV seeds
are highly sensitive to water timing and require regular and controlled irrigation. Finally,
multi-cropping and irrigation are also complements, which suggests that labor inputs are
also likely to be complementary to irrigation.
    We assume farmers can obtain the optimal set of inputs. Each farmer will compute her
expected profit with and without irrigation. She will invest in irrigation if its cost is less
than the long-run dierence between the value function with irrigation and that without
irrigation. The decision process follows a threshold rule: if the productivity shock exceeds
some threshold in a given period, the farmer switches in that period.
    As the costs and benefits of dam irrigation vary by region, we separately discuss the
eects of dams on the catchment and the command areas.
    In the command area, which is downstream to the dam, a dam lowers the fixed cost of
irrigation. A farmer who has already paid the sunk cost of accessing ground water irrigation
will not switch to canal irrigation. However, the set of farmers who would have chosen ground
water irrigation in this period will now choose dam irrigation. Further, of the farmers who
would have otherwise not irrigated their land, some will opt for dam irrigation. Demand for
labor, fertilizer and seeds will increase and dependence on rainfall will decrease. Wages and
profits will increase, and this will increase consumption and lower poverty.
   Until now, we have not allowed for dierences in farmer characteristics. However, the net
impact of a dam on agricultural productivity is sensitive to dierences in these. For instance,
if farmers only dier in their cost of accessing ground water irrigation then, dams will have a
large positive eect on productivity by making irrigation accessible to productive farmers. If
instead, farmers face the same cost of irrigation but dier in their (idiosyncratic) productivity
then the marginal farmer’s productivity will be below that of the average farmer. In this case
the eect of dams on agricultural productivity will be muted. The distribution of farmer
characteristics will also aect the implications of dam construction for inequality.
   The catchment area, which lies upstream from, and in the vicinity of, the dam, has
three types of land. First, there is the land that is submerged by reservoir construction.
Production on this land will stop, as will input and labor use. Second, there is land in the
immediate vicinity of the reservoir. This will see more waterlogging and salination, and a
worsening of land quality. Irrigation on such land is less profitable but fertilizer use may

increase, since poorer soil requires more nutrients. Finally, some land in the catchment
area will be physically unaected. If restrictions on water use upstream from the dam are
enforced then such land may see irrigation costs increase. On balance, in the catchment
area, we expect a decline in cultivated land, and, potentially, a reduction in irrigated area
and yield. This suggests a fall in wages and profits (and, therefore, higher poverty).
    Data on the geographic extent of the catchment and command area is unavailable for
most Indian dams. Our analysis uses data on the administrative unit within the Indian state
– the district. We know the district in which a dam is located, and the districts downstream
from it. A dam’s catchment area usually falls in the district in which it is built, while its
command area may include parts of the district in which it is located and parts of neighboring
downstream districts (to identify the extent of the average dam’s command area we will also
examine its impact on non-neighboring downstream districts in the same river basin). The
estimated eect in the district where the dam is built combines the eects in catchment,
command and unaected areas, and is a priori ambiguous. In contrast, part of the dam’s
command area may fall in the downstream district. Hence, the economic impact of a dam
in the downstream district will reflect the eect of the dam on the command area.

by Esther Duflo and Rohini Pande

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