Indians are facing a crippling water shortage and the government has not adequately responded to the situation. Illegal water mafias have emerged, profiting from the distress of the poor, while offering just enough water at exorbitant prices to get through another day. The solution to better manage water and prevent these local water mafias is to introduce water markets in India in a more systematic way.

While we drink only a few litres of water a day, an enormous amount of water goes into growing food. The largest consumer of water in India is agriculture, which uses about 85% of the country’s water resources. Water for domestic use is only about 7-8%, with industry, energy and others accounting for the rest. So, the main focus on water management should be directed towards the agriculture sector.

Unfortunately, incentives for water use in the agriculture sector are quite perverse. Our highly centralized system of water management, using dams and canals, has not met farmer’ needs and most rely on rainfall and groundwater. No single farmer has any incentive to conserve groundwater because it will be tapped into by others drilling for groundwater. So the incentives are such that each individual farmer should use as much groundwater as possible while it lasts, leading to over-drilling and rapid depletion. Poor political incentives make the problem worse. Giving farmers free electricity in exchange for votes makes them drill groundwater more recklessly. Consequently, the tragedy of commons of groundwater has now become the tragedy of 600 million Indians struggling for water in the blistering summer.

Water can be recycled, conserved and harvested in different ways. Some countries are recycling sewage water for agriculture and, simultaneously, solving irrigation needs and protecting rivers from waste. But there is no incentive to conserve groundwater or harvest rainwater or recycle waste water in India.

Groundwater rights in India are bundled into land rights, and those who own a parcel of land are incentivized to drill and use as much water as possible for their individual gain. The solution lies in incentivizing farmers to conserve and recycle groundwater, by allowing them to profit from water conservation, and simultaneously incentivizing them to use groundwater more efficiently by making them pay the real costs of the water resources by eliminating water and electricity subsidies. This can be done by creating property rights in water and creating a market or exchange for water rights for use by individuals or local governments.

Water markets or exchanges have been introduced with considerable success in other countries, most notably in Australia. To create an exchange for water rights, individual farmers need to be given property rights for water, which can be used and traded. These rights should be assigned based on priority and use and need to be recorded systematically and enforced by the state. Once these water rights are assigned, a water exchange works a lot like any stock exchange, but instead of selling stocks, sellers offer short-term and long-term transfers of water to buyers.

A decentralized pricing system through a water exchange has many advantages. First, it incentivizes individual farmers to find ways to conserve water. Farmers are in the best position to determine if water is best conserved by using biotechnology and seeds which require less water, or choosing crops that require less water, or giving up on un-arable parts of land.

By conserving water, farmers can profit by directly selling their surplus on the water exchange. Second, the price of water on the water exchange will provide information on where water is needed the most, especially in times of drought. Third, a water exchange also simultaneously allowing for a water futures market will incentivize individuals to store water in times of surplus for use later in times of shortage; smoothing out water consumption over time.

Another way to create a water exchange in India is to completely devolve water management and distribution to local governments; and allow them to trade on the water exchange. If local bodies are completely responsible for water management, they can be incentivized to sell water surpluses to regional and national exchanges for fiscal gain or buy from the exchange in times of shortages if their citizens are willing to pay.

Water management is done best at the very local level as some areas are better suited for rainwater harvesting, while others are better suited to changing their crop mix, and still others are best off buying water from other areas.

India already has a functioning Energy Exchange, where different electricity generation and distribution companies are participants. The Energy Exchange has only 6,400 registered participants, but India has 250,000 Panchayati Raj institutions and urban local bodies, making it possible to have a thick market for water.

Like everything else, only when users bear the full cost of use or reap the full benefits from conservation, is the resource used efficiently. Water is no different. It is impossible to govern water resources in a country like India centrally. However, creating property rights in water and prices through a decentralized water exchange system will incentivize individuals or local governments to more efficiently manage water.

Shruti Rajagopalan is an Assistant Professor of Economics at Purchase College, State University of New York

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