[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...

MORE MARKETS, LESS GOVERNMENT
Map-1: Ground Water Categorisation
Source: NWR and WSD, Government of Gujarat
ble,influence-free” administrative bodies
that are able to design and implement the
‘correct’ prices. In practice, this may often
not be the case: these bodies could be captured
by interest groups or they may be
short-sighted and unable to estimate future
demand, or they may be unable to set
and collect appropriate water charges.
Advocates of administrative approaches,
however, often ignore these problems focusing
at the same time on imperfections
of markets that supposedly reduce the efficacy
of market-based solutions! In effect,
if two second best states are being compared
it may be difficult to order them.
The numerous informal water markets
existing in North Gujarat (tubewell companies)
and South Gujarat (illegal water
lifting from canal) suggest that water users
will buy and sell water even if it is illegal or
discouraged by the government.
Even though water markets are believed
to change incentives for water user and
improve water allocation, there are number
of constraints that may prevent introduction
of water markets. For formal water
markets to work, one key component is for
users to have some type of water right or
use right they can buy or sell. This may
create a serious problem not only because
water rights may be difficult to establish,
but also because public water agencies feel
they will lose a great deal of power if they
allocate water rights to users. If water users
have rights, this means that system operators
have the responsibility to deliver
water to the users more or less when the
users want it. In contrast, if a government
agency holds the water rights, they can dictate
farmers the conditions under which
they will receive water including in some
cases, necessary side payments from farmers.
If water rights are made tradable, this
creates an even greater dilemma for government
agencies. To prevent losing control
over tradable water rights, Comision
Nacional del Agua in Mexico and some of
the water districts of western United States
limit trading among water districts. A water
user must obtain special government
approval to sell water outside the jurisdiction
and any profits from the sale must accrue
to district and not the seller. This, of
course, discourages interdistrict trading,
but reduces the chance that trades will
have third party effect. Such instances of
formal water markets in India are non-existent.
Experience of Mexico, Chile, United
States, France, where water markets
exist in one form or the other, assists in
understanding organisational problems of
water trading through market. First is the
resistance to water trading between or
among district or jurisdiction. Second is
the problem of establishing water rights
and giving the users more control over water.
Other problems which raise the transaction
cost of water trading include legal
challenges by third parties who feel they
In the formal water markets water rights may be very diffi
cult to establish. What's more, public water agencies feel
that they will lose a great deal of power if they allocate
water rights/user rights to users
might be damaged by a transfer, the lack
of sufficient infrastructure to transfer water
among potential buyers, and lack of an
effective means for verifying and enforcing
water rights.
Establishing Water Markets
Before we determine whether there is a
need of reducing transaction cost and
methods to do so, there is a need to understand
the past experience of markets for
allocating water resource. This is done
with the assumption that if a country has
experience with water markets, then it is
THE INDIA ECONOMY REVIEW
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