Takshashila Issue Brief - Reform Inter-State Water Sharing before Water Trading
As per recent media reports, NITI Aayog is working towards proposing water trading in India and inviting public consultations on the issue. It is understood that NITI Aayog will be “pitching all options, including futures and spot trading of water and tradable licenses.” This will pave the way for commodity trading in water in the country.
India faces significant water scarcity and water management issues. The effects of climate change are likely to exacerbate the problem. The incentives for water conservation by industries and individuals are low. Water trading has been touted as a means for the price discovery of water resources and efficient allocation and distribution of water among alternate uses. It is also likely to reduce the wasteful use of water and leakages.
However, water is a sensitive subject, both culturally and politically. Apart from efficiency, water distribution should also meet equity considerations, particularly for drinking water during drought and other crises.
While NITI Aayog’s detailed proposal remains to be seen, it is worthwhile to consider bulk-water entitlements as a first step before introducing full-fledged water trading akin to a securities market. A proto-water trading system in terms of bulk entitlements with monetary incentives can potentially be implemented for water sharing between states which seek water from the same resource, usually a river. A suggestion to this effect was made in the Takshashila Discussion Document - Kaveri Dynamic Water Management & Livelihood Protection System, towards a sustainable solution for the Kaveri water dispute between the states of Karnataka and Tamil Nadu.
A New Model of Water Distribution Between States
Instead of court-ordered administrative allocation of river water through tribunals, we propose a three-tiered system consisting of basic entitlement, overdraw entitlement, and super overdraw facility. The system will be managed by an independent water authority, set up with the help of the initial corpus contributed by the Union Government and the states involved. Subsequently, the capitalisation of the fund will take place through the charging mechanism described below.
While a state may draw water up to its basic entitlement free of any charge, drawing water from the overdraw entitlement shall be charged at fixed rates. Further, the super overdraw facility may be accessed only through competitive bidding in water auctions. And finally, states which draw less than their basic entitlement will receive a compensation benefit to the extent of less consumption, as an incentive for water conservation and promote the judicious use of water. The compensation benefit will also be given during the years when basic entitlement is not satisfied due to water scarcity.
Benefits and Challenges
This system will function better than the status quo for multiple reasons. While providing basic water security during years of water availability, the compensation benefits will insure the livelihood and income loss in the state caused by droughts. It promotes efficient use of water by letting states plan and optimise the water intensity of their agricultural and industrial requirements while budgeting separately for any overdraw. States have an incentive to reduce water dependency in the long run.
To make the fund sustainable, the water authority can invest in contrarian assets (e.g. water treatment plans and infrastructure). The surplus from the fund can also be used for the construction of water reservoirs, educating farmers, citizens, and industries on sustainable water practices, and helping people transition their livelihood to low-water intensive options,
The primary challenge in this model pertains to correct and timely revision of the basic entitlement of the states, preferably every 3 years. A similar revision of water prices for overdraw facilities also needs to be carried out.
Since groundwater continues to be the cheapest source of water, states must regulate extraction of groundwater to maximise the benefits of the proposed system. Moreover, larger challenges of ecological conservation in water catchment areas and reforming water-intensive agricultural patterns need to be dealt with separately.
Compiled by Shrikrishna Upadhyaya with inputs from Pranay Kotasthane.
October 14, 2022.
Further Material:
Takshashila Discussion SlideDoc - Kaveri Dynamic Water Management & Livelihood Protection System by Takshashila Staff
Like Swachh Bharat, Modi wants mission Save Water. Stop free water first by Nitin Pai
In India, the dangers of a single farming strategy by Shambhavi Naik
GCPP Primetime 15 —Unpacking India's Water Crisis by Pavan Srinath and Pranay Kotasthane
Puliyabaazi - What's the Real Cost of Free Water? By Pranay Kotasthane, Saurabh Chandra, and Khyati P
