Water Pricing Should Reflect Its True Value

More than 40% of India consists of arid or semi-arid regions, characterised by erratic and scanty rainfall. The situation is further aggravated by climate change, which has disrupted rainfall patterns and intensified water shortages nationwide. There is also variation in rainfall, both spatial and temporal. According to a 2019 NITI Aayog study, by 2050, India’s water supply is expected to decline to half of the anticipated demand, making effective demand-side water management an urgent priority. This results in severe water stress and scarcity, impacting millions of lives and livelihoods across these areas.    

Water as an Economic Good

• Evolution of Water Perception: Historically, water was considered a free, non-economic resource, much like air. However, rapid population growth, increased demand for food (which requires more water for production), lifestyle changes (such as more cars being used and water required to wash them), and economic growth have shifted this perception.  As it became clear that water is a finite resource, the idea that it could be provided for free became unsustainable, as people would exploit it carelessly.  If managed improperly, this could lead to water stress and depletion.  Consequently, water is now recognized as an economic good. 
• Dublin Principle of the UN: The concept of water as an economic good, similar to other resources like laptops, cars etc. should be implemented universally. This idea was emphasised by the UN’s Dublin Principle (1992). Water should not be provided for free; only when it has a value will people use it wisely. Otherwise, its importance will be undermined.   

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Water Pricing in National Policies

• National Water Policy (NWP), 1987: The National Water Policy (NWP) of 1987 introduced the concept that water should be priced to reflect its scarcity and to encourage water-efficient practices. The intention was for the pricing to cover operation and maintenance (O&M) costs as well as contribute to fixed costs, such as the salaries of workers and irrigation infrastructure.
• NWP of 2002: The NWP of 2002 suggested that water rates should initially cover O&M costs and later contribute to a portion of capital costs, such as infrastructure development (e.g., reservoirs, dams). The pricing structure was recommended to be linked to service quality, meaning that if water quality, pressure, and delivery levels are high, the rates should be higher, and vice versa. Additionally, subsidies should be well-targeted and transparent (available in the public domain).  
• NWP of 2012: By 2012, the NWP recommended that water pricing be based on volumetric usage. For example, using 1 unit of water could cost Rs. 10, while using 1,000 units could cost Rs. 10,000. The responsibility for setting pricing should be under a regulatory authority dedicated to this purpose.

Current Challenges

• Ad-Hoc Water Pricing Mechanisms: Despite the recommendations of the NWP 2012, many states still lack independent Water Regulatory Authorities (WRAs), leading to ad-hoc and non-transparent water pricing systems. For example,  Kerala did not revise its water rates for 47 years.
  • In contrast, Karnataka has specific water rates for different crops, with more water-intensive crops incurring higher rates. Water rates also vary based on irrigation types used.  For instance, the rate for sugarcane under lift irrigation is ₹2,965.16 per hectare, whereas for flow irrigation it is ₹988.39 per hectare.
• Non-Coherence in Guidelines: In groundwater regulation, 20 states/UTs (such as Maharashtra and Rajasthan) follow Central Ground Water Authority (CGWA) guidelines, while 16 states/UTs have their own regulations. However, there is a lack of alignment between state and central guidelines. 
• Unregulated and Unpriced Groundwater: Currently, groundwater is largely unregulated and unpriced for most rural, urban domestic purposes, agricultural activities, and small enterprises, leading to unchecked exploitation. Although there are charges for large enterprises and areas classified as safe, semi-critical, critical, or over-exploited, groundwater pricing is linked to withdrawal rates and aquifer criticality. 
  • For example, in safe areas, charges are ₹1 per m³, while in over-exploited areas, the charge is ₹8 per m³. However, agriculture, the largest groundwater user, is not subject to these regulations.  

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International Best Practices in Water Pricing

• Volumetric Pricing: In many OECD countries, water pricing is based on a volumetric model, which promotes economic efficiency by aligning prices with marginal water costs. 
• Two-part tariff system: A common approach is the two-part tariff system, which includes a fixed cost component and a volumetric component. This system is used in countries such as the US, Jordan, the UK, Australia, and France, particularly for irrigation water.
• Volumetric Pricing: Countries like China, South Africa, Australia, Israel, and Chile employ volumetric groundwater pricing. This model charges users based on the amount of groundwater extracted, encouraging efficient use.
• Seasonal Pricing: South Africa implements seasonal pricing based on groundwater availability. For example, during periods of high availability in summer, the water rate is lower, whereas, in drier winter months, the rate increases to incentivize water conservation.
• Demand and Supply: Australia uses a market-based approach where water rates are influenced by demand and supply dynamics. The trading system allows users to buy and sell water entitlements, promoting flexibility and efficient water use.

Way Forward

• Adopting Water as an Economic Good: Water should be universally recognized as an economic good, including in the agricultural sector. In irrigation, cost recovery should cover operation and maintenance (O&M) costs and at least 1% interest on capital employed, as recommended by the former Planning Commission.
• Implementing Volumetric Pricing for Irrigation: A volumetric pricing system should be introduced in the irrigation sector. Incentives should be provided for adopting water-efficient technologies, such as drip and sprinkler irrigation.
• Including Groundwater Users Under Pricing Models: Groundwater users should be included in water pricing regulations. Volumetric pricing should apply to all uses, including irrigation, to ensure comprehensive water management.
• Establishing Metering Infrastructure: Incentives should be provided for installing metres and promoting water conservation. Additionally, water audit-based credits can encourage efficient water use.

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Conclusion

Effective water pricing, particularly through the adoption of volumetric systems, will promote sustainable water use and encourage the adoption of efficient technologies. Recognizing water as an economic good must be universally implemented to address India’s growing water scarcity, ensure equitable distribution, and foster a more responsible approach to water management.