Electric power for rural pumpset usage is subsidized by all the states in India, the subsidy being estimated at 1.1 percent of GDP. Users are charged a highly subsidized, flat, annual fee that varies with pumpset size. This fixed charge has encouraged waste and raised subsidies over time. Unwilling to bear these costs any longer, states have proposed a range of strategies, including independent regulation, metering of agricultural pumpsets, and raising prices.

This paper seeks to answer the question: By how much may prices be raised? The answer is partly a matter of political acceptability, since raising prices will presumably reduce the affordability of power for marginal farmers, and thus lead to political problems. At the very least, however, prices could be raised for everyone to the level that the marginal user of power is willing to pay for the power he consumes--assuming that he is willing to pay more than he does currently. This willingness is termed the marginal willingness to pay (MWTP) and has been extensively measured in India.