Economics of Groundwater Depletion: Need for Demand Management V. Ratna Reddy CESS, Hyderabad.

Water Related Issues & Concerns Declining Surface water sources like canal and tank irrigation Increased groundwater exploitation Increased Depletion of groundwater Replenishment becomes problem if non-renewable groundwater is used. Resource preservation would not be in the best interest of the region

Source Wise Area Under Irrigation (India)

Economics of Groundwater Groundwater is a public good Groundwater use and depletion has externalities Costs of depletion related externalities could be high and disproportionately distributed Rationale for mitigating (replenishment) measures in terms of private / social costs and benefits. Internalising the externalities could result in net social welfare

Groundwater Externalities Add heterogeneity in spatial distribution Add heterogeneity in technology. And heterogeneity in access to technology or capital. Assignment problems Add private property rights to a complimentary resource Legislative ExternalitiesTechnological Externalities APPROPRIATION EXTERNALITIES

Types of Externalities Negative Externalities: Stock (over exploitation), technological (higher pumping costs) and strategic (over extraction by few). Positive externalities of resource investments (percolation tanks/replenishment mechanisms): - Recharge: normal Percolation Tank: 7.87 mm/day De-silted Percolation Tank: mm/day - Impact radius: miliolite limestone: 1100 mt. gaj limestone: 780 mt. weathered basalt: 720 mt.

Externality context  rt #  pt --- Short run due to technological or strategic externalities as (Drt-1) > (Dpt-1). Resource rich farmers tend to appropriate more resources using their resource position  rt  pt --- long run due to stock externalities. Over exploitation resulting in use of non-renewable resource and tragedy of commons in the absence of cooperative strategy.

Externalities of GW Depletion: Open wells Drying up of open wells range from 45% in good to 85% in scarcity conditions (decline in no. of open wells) Drying up of open wells is more prominent among marginal & small farmers, especially in the moderate and scarcity conditions. S&M farmers are the first victims of externalities due to location disadvantages and poor quality soils.

Externalities of GW Depletion: Bore wells Many fold increase in no. of Bore wells- rate of increase directly linked to resource status. Significant increase in the depth of bore wells – directly linked to resource status S&M farmers are also investing in bore wells, especially in the moderate & scarcity conditions.

Externalities: Area irrigated Decline in NIA & GIA in all situations, but the decline progresses as we move from good to scarce resource condition. Decline is more in the case rabi (where dependence on GW is more). Decline in kharif is noticed in moderate and scarcity conditions. Decline is more among marginal farmers, especially in moderate and scarcity conditions.

Externalities: Crop shifts Decline in area under paddy (kharif & rabi), which is a water intesive crop. Cotton (ID), gingelly, etc., crops have replaced paddy though they are not remunerative. Decline in the rabi paddy area is the highest among the S&M farmers, especially in moderate and scarcity conditions.

Externalities: Yields Decline in yield rates of paddy (khaif & rabi) in all the situations. Declines as high as 17 percent. Decline is more for S&M farmers. ID crops also have recorded a decline.

Nature of Costs Direct Costs: -Loss due to drying of open wells (sunk) -Investment in borewells / well deepening (replacement) Indirect Costs: -Loss due to decline in productivity -crop shifts (high remunerative to low remunerative)

Costs of Depletion Total Costs of degradation range from Rs (US$85) per acre (good availability) to Rs (US$425) (scarcity conditions). These costs compare favourably with the costs of renovating the tanks. Both direct (sunk) and indirect (cropping pattern changes) costs are disproportionately borne by small and marginal farmers.

Costs of Degradation (Good Availability) Average cost /acre 3349 (US$85) Large farmers: Rs (US$60) / acre Medium farmers: Rs (US$115) / acre Small farmers: Rs (US$160) / acre Marginal Farmers: Rs (US$35) / acre

Costs of Degradation (Moderate Availability) Average cost /acre 5539 (US$140) Large farmers: Rs (US$ 105) / acre Medium farmers: Rs (US$170) / acre Small farmers: Rs (US$350) / acre Marginal Farmers: Rs (US$60) / acre

Costs of Degradation (Scarcity conditions) Average cost /acre (US$425) Large farmers: Rs (US$205) / acre Medium farmers: Rs (US$335) / acre Small farmers: Rs (US$480) / acre Marginal Farmers: Rs (US$1110 / acre

Costs: Degradation vs Abatement Lower costs of degradation in resource condition is due to the availability of replenishing mechanisms (percolation tank). Differential losses range from above Rs (US$50) to above Rs (US$275) per acre per year. Abatement costs range between Rs – Rs (US$ ) per acre depending on the size of the tank (with out de-silting) with a life of years. Investments in mitigation makes economic as well as ecological sense.

GW: A Mismanaged Resource Clear case of market failure due the absence of clearly defined property rights, as access to water is based on riparian laws resulting in over exploitation by some. Absence of Institutions in GW management has aggravated the problem (institutional failure) Absence of any policies for GW management (policy failure)

Demand management of Groundwater Managing Demand: Low priority for -Water demand functions -Water productivity -Water use efficiency Instruments: -Market Based -Technological -Institutional

Market based Instruments Pricing of water –economic as well as scarcity value Pricing increases use efficiency and cuts wastage - Pricing is inversely related to demand but inelastic - Income positively related and inelastic - Reasonably high willingness and ability to pay as farmers spend as much as 50% of their GVP when they buy groundwater for irrigation as against 2% in the case of public irrigation

Market based Instruments-II Pricing of complementary goods (power) -In the event of high transaction costs, adding the scarcity price of water to the electricity would be efficient for raising resources. This would not only internalise the externalities at the regional level but also minimise the adverse impacts. Other related pricing policies Incentive / dis-incentive strategies

Technological Instruments Technology is the key for expanding the supplies Technology can help in reducing wastage and increase use efficiency Micro irrigation systems can save up to 67% of water, energy and up to 60% of labour. Micro irrigation systems are economically viable for a number of crops Technology promotion through policy support

Institutional Options Property rights institutions-clearly defined and equitable rights in water Collective action institutions-bringing groundwater under the management regime viz., WUAs Institutional arrangements are required to make groundwater a common pool resource in the true sense of the term. In this regard de-linking of water rights from land rights would help addressing the equity issues effectively (vertical externalities).

Need for an Integrated Approach Integration at the resource front: Groundwater & surface water bodies should be treated as complements rather than substitutes. Integration at the policy level: Supply side and demand side management approaches need to be integrated. The experience of APFAMGS and similar initiatives would go a long way in helping designing better policies