Economic and environmental impacts of political non-cooperative strategies in water management : an analysis of prospective policies in the cauvery river basin of India

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AmjathBabuTharayil_2008_11_06_.pdf (3.33 MB)

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2008

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DOI:
http://dx.doi.org/10.22029/jlupub-16992

Abstract

The current study examines the historical, political, economic and legal aspects of the Cauvery River water conflict in the Indian subcontinent and develops an economic solution for the water sharing issue. In the historical perspective, the study describes the evolution of the current scenario of existing demands for water exceeding the available water supply in the River. In this background, the current study examines the reasons for the lack of political interest in cooperating in the formation of a water allocation treaty, reviews various legal, economic and geographical instruments in water sharing and finally develops a water market solution for the water sharing issue so that the focus will be on the economic value that can be realised from water rather than its physical allocation. In addition, the study quantifies the externalities of using ground water as an alternate source of water instead of creating an efficient surface water reallocation system. The study also revealed that the farmers will not vote to any political party that is willing to compromise on surface water quantity allocation to the respective states. The insight from this result is that there is a need to decouple the quantity of water allocation and the economic benefit that the water represents. In order to decouple water rights from the net benefits that the water represents, a water right market can be introduced. In order to reduce the establishment and transaction costs of a water rights market, downsizing of number of players in the market by allocating rights to water user associations instead of individual farmers is proposed. The challenge is how to coordinate the use of water saving techniques in individual farms so that aggregate water surplus can be traded. The revenue sharing for water saving contract between water user association and the farmer offers a solution for this problem. The revenue sharing for water saving contract designed using a principal-agent model offers three instruments to coordinate action of farmers: The fixed amount paid to farmer in advance for joining the contract, a variable revenue share and the profit share from the water trade. It is to be reminded that water trade in the Cauvery basin can lead to Pareto optimal increase in benefits compared to the status quo allocation in the river basin, only when the cost of purchasing the additional water rights is lower than cost of the using the alternative source of water by the WUAs of the demand side i.e. groundwater. So to estimate the price below which water rights become a viable alternative, cost of ground water extraction has to be calculated. The three components in ground water extraction costs are investment costs on bore well and pumping equipments, pumping costs i.e. electricity charges and the externality costs of falling ground water levels. The externality cost is estimated through a spatial hedonic regression of water table levels on land prices. Hence it can be seen that the average cost of using ground water per hectare by the WUAs at the demand side is approximately 6000 INR to 7000 INR per hectare per year. For an average farmer who meets 50 percent water shortage by ground water pumping for two season paddy crop (10000 cubic meters/ ha), this account to 0.6 INR to 0.7 INR per cubic meter. In the numerical exercise of the principal-agent model, simulations at the water prices of 0.2, 0.3 and 0.4 Indian rupees per cubic meter are conducted. All of these prices are below the demand price of 0.6 Indian rupees. The study proves that a water price of INR 0.3 induce all farmers to switch over to water saving cultivation in response to the principal s instrument. The principal also can realise a decent remuneration for its effort. The numerical simulation proved that a considerable price differential exists between supply and demand prices of water in this context. It is to be noted that the operating cost of pumps is not considered as electricity is heavily subsidised in these regions for political gains. If we add the real operating costs also to the cost of using ground water, considerable gains of water trading becomes apparent. This proves the potential of surface water reallocation by the water rights market to Pareto optimally increase the benefits for all stakeholders in Cauvery Basin.

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