Water Market for Efficient Management of Water Resources in India

Abstract

India sustains nearly 17% of the world's population but with only 4 % of global water resources. In India, the water sector faces enormous pressure due to increased demand resulting from population growth, industrialisation, climate change, and ine cient water management policies and practices. There is a need for institutional change for managing the water resources in India. The market-based mechanism as a demand management tool is gaining attention worldwide and is being used to allocate or reallocate the water among its competing uses e ectively. Water trading can improve water productivity and overall social welfare for the entire basin as water is transferred from the lower value to high-value uses. The literature on India's water markets indicates the existence of different forms of informal water markets but lacks in the analysis of the benefit of formal water trading. In this thesis, the broad objective is to design a formal water market for efficient water management in India.

The first part of the thesis quantifies India's water scarcity and benchmarks India's major states based on their water sector performance. The multi-dimensional Water Poverty Index (WPI) using 20 subcomponents is used to capture the holistic view of water scarcity. The major states of India are facing medium to scarce water scarcity, as indicated by their WPI score, which ranges from 38.51 for Uttar Pradesh to 59.80 for Punjab. The composite WPI index has the major limitation of subjective weights for the subcomponents, and it has also been identified earlier in the literature. Therefore, to overcome the drawbacks of WPI, a new multidimensional index using Data Envelopment Analysis (DEA) using the concept of relative efficiency is developed in this thesis. The DEA results indicate that Kerala outperformed other states and achieved 100% of relative efficiency, while the least performing state was Uttar Pradesh, with 73.25% relative efficiency. The literature on water scarcity indicates that the water crisis is a direct outcome of the governance crisis. Therefore, the second objective of the thesis aims to understand the water institutions and their impact on the performance of the water sector in India. Primary data collected using an online survey from water experts in India is used in this study. An exploratory factor analysis has been performed to determine the underlying water institution's latent factors. The significance of these extracted factors on six performance aspects of the water sector was studied using multiple linear regression. The most significant predictor of water sector performance turned out to be the factor related to accountability with it's standardised beta varying in the range of 0.311 to 0.515, followed by a factor related to water transfer policy with standardised beta varies from 0.259 to 0.491.All the six linear regression models were statistically significant with R2 in the range of 39.3% to 71.4%. Part-I of the thesis indicates India's alarming water situation as most of the major states face medium to severe water scarcity. Status quo water institutions that are supply-side oriented are weak in handling India's water sector's evolving challenges. In the second part of the thesis, a public water bank based market mechanism is proposed for efficient management of India's water sector. The market agents' selection has been based on the historical data on the beneficiaries from the basin's major reservoirs. The marginal benefit derived from the maximisation of the participating agents' benefi t has been used to identify their willingness to pay or accept. Further different price discovery mechanisms have been evaluated for their effect on the surpluses of consumers and producers. A case study on the implementation of the water market in the upper Cauvery river basin is presented in the thesis. The result shows that agriculture agents are the predominant seller, and the domestic sector emerges as predominant buyers. The domestic agents were also able to satisfy the bare minimum water requirement of the population by trading the water in the market. The implementation of a water market has also resulted in an increase in social-welfare in the basin. The study also evaluated the impact of increasing the minimum support price (MSP) of the crops and a decrease in the total water availability in the river basin on different market performance characteristics. The study shows a decrease in intersectoral trade (agriculture to domestic) by 35% with a 50% increase in MSP and an increase by 17% with a 50% decrease in water availability. Also, it has been noted that the water traded in the market increases as the water scarcity increases in the basin. The analysis in this thesis shows that the proposed water market mechanism results in a reallocation of water and social surplus gain in the basin and can be used as a future management tool to mitigate water scarcity.