There has been a declining trend in groundwater depths in India and subsidies on farm electricity contribute to over-extraction of groundwater raising concerns about its sustainability for irrigation. In this paper, I estimate the reduction in groundwater pumping under volumetric pricing of farm electricity for Punjab where farm electricity is free. I use parcel-level cost of cultivation data from the Ministry of Agriculture for 2011-12 to 2013-14 to estimate the production function for paddy using the instrumental variable approach. I find that the estimated marginal product of water function is relatively flat at the level of the average water application. The average marginal product of water is 34 kilograms for an additional thousand cubic meters of water per hectare, which is very low. Simulations show that increasing the price of electricity from current level of zero to the true cost of electricity supply leads to sharp cutbacks of about 72 percent in water extraction using electric pumps. However, the decline in average paddy yields is not that high. I quantify the average lump-sum subsidy that can be given to farmers as direct transfers to keep their surplus unchanged and I show that this can be financed using collections done by the state electricity board from pricing electricity.