Opinion
Why India must be wary of trading in ‘water futures’
Summary
- Market promises of superior price discovery and allocation must contend with our ground realities.
India has 18% of the world’s population with only 4% of its water resources, making it one of the most water stressed geographies in the world. Climate change is likely to exacerbate this pressure on water resources. Ironically, India faces drought and flood at the same time in different parts. The centrality of water in agriculture, business and human existence makes this scarcity and uncertainty difficult to ignore.
One solution being suggested is the creation of a formal water market for its trading. In an unprecedented move, the Chicago Mercantile Exchange launched water trading, like for oil, gold, etc, in 2020. Water-commodity contracts, known as ‘water futures’, have been linked to California’s $1.1 billion spot water market. The Murray-Darling basin in Australia is another example; it allows water trading at the regional level using tradable permits. Along similar lines, the Maharashtra Water Resources Regulatory Authority Act, 2005, is experimenting with bulk-water entitlements as a precursor to introducing individual water entitlements and eventually trade in water. India is planning to start water trading at commodity exchanges. The Niti Aayog is in the process of putting out draft recommendations for public consultations, pitching various options, including futures and spot trading of water and tradable licences.
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The aim is to establish water as an economic asset, as scarcity will increase its value exponentially. Also, once a market is created, voluntary trading between rational buyers and sellers would help in efficient price discovery. An efficient price would guide water resources to its highest valued use and help establish relative values, which is essential to understand the value of competing use cases. It also helps in achieving allocative and productive efficiency.
Besides, rain-dependent agriculture could be insured against droughts by locking in prices in the water futures market, which would substantially reduce the government’s expense on drought relief. It would also attract investment, leading to better technologies adopted and water wastage reduced.
In reality, however, given high transaction costs, asymmetries of information, power dynamics and weak institutions, the gains from trade may not be as high as economic theory suggests. Also, it is not always obvious that the creation of a market would solve the problem. Before taking the initial steps towards a market, we must recognize that existing trading systems in the US, Australia, China and Chile are more of an exception than the norm. Against this backdrop, this policy intervention requires careful analysis. Here we present a few challenges with Indian realities in mind.
The first step towards creating any market is defining property rights to the assets that are to be traded. Currently, rights over water resources in India are linked with land—the owner of a piece of land effectively owns the groundwater. This limits the supply of water to the economically vulnerable. Water futures can help solve this problem, but a lot depends on how our legislation is crafted. How, for example, to calculate the water available for futures contracts? It is important that the baseline should be set only after fulfilling basic domestic needs of water. Such water markets are known as right-based; China and Australia follow this model. Further, if such a market is not regulated well, it will lead to corporates and high-value users dominating the sector. There is also the possibility of cartels arising, which could hinder the access to water of a majority of people. There is also a potent risk of the fundamental rights of equality and life being infringed. Note that about 80% of ground water is used in agriculture, which employs about half of our workforce. Commercial commodification might have implications for the rights to food, employment and water that must be assessed. Finally, India faces massive water conflicts between states, making it critical for the political economy.
There is a thriving informal water market in the country, as we witness neighbourhood supply through water tankers increase during summer months. This unregulated market ensures the right to water is protected without the obligation being placed entirely on the state. But this comes at a cost, both in terms of its price and the quality of water supplied. Here, there is a critical trade-off between water as a basic human right and an economic asset. The key is to regulate it in a way that rights are protected and speculators/cartels do not get the upper hand. Perhaps the big challenge is to administer water rights: grant licences, permits or other legal titles, i.e, that allow for tradable rights and extraction from water bodies.
Roopa Madhav & Aasheerwad Dwivedi are, respectively, a professor of law and an assistant professor of economics at National Law University, Delhi.
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