Buying liquid diamonds

Buying liquid diamonds

Two centuries earlier Adam Smith contrasted the value of water with those of diamonds. He declared water as a useful but worthless good and diamonds as nearly useless but far more valuable. A British economist is turning Smith’s ideas on their head. An Indian minister seems to understand that.

Willem Buiter, chief economist at Citigroup, recently recommended that investors put their money in water companies. He also envisioned a future where there would be a globally integrated water market—with its on supply chains—and grading of water much like the “light", “sweet" and “sour" varieties of crude oil today. India, Buiter says, “will have to engage in investment on a scale comparable to that seen today in China to produce clean water in the best locations and transport it to where the household, industrial and agricultural users are."

Futuorlogy apart, the idea has merit. It is based on a simple observation: as the demand for water rises, so will its price. It is this elementary fact that governments refuse to understand, much less heed today. The National Water Policy of 2002 has not a word about pricing of water. All that one can read are planning priorities, rights of water users, participatory approach to water management and similar ideas. These belong to a bygone age.

Fortunately, the new Union Water Resources Minister, Pawan Kumar Bansal, is making the right noises. “The fact that water is limited is a pointer that water either needs to be rationed or adequately priced," he said on Wednesday. It will, however, take more than a ministerial utterance to change matters.

Water markets have existed in India for centuries. In Gujarat and some other arid parts of the country, water is used efficiently. But is a pan-Indian water market feasible, especially if serious investment is to be realized in the water sector?

One criticism leveled against Buiter’s idea is that water cannot be a good investment as its value-to-volume ratio would be too low to enable a global market for it. This may be true of Western economies but is certainly realistic for India with its 1.4 billion people. The number and the continental scale of the country make a pan-Indian, if not South Asian, water market a possibility.

The point to be understood is that the best way to promote efficiency is to price a good. The way ahead is clear: the government should get out of “managing" water at the tap end. That is a job for private firms. Where the government’s help is needed is in creating first rate water transportation and storage infrastructure and networking this across the country. Distribution is best left to private firms.

Government or markets: who should handle India’s liquid wealth? Tell us at