Irrigation especially major irrigation cries for large investments especially in maintenance and rehabilitation. The positive externalities of these investments are very large. Waste in water usage too is very high.  Crucial to realising the vast efficiency gains is the correct pricing of irrigation water. A large part of the water that is ill-used or wasted (which could be as high as 50%) could then be recovered to bring about a quantum leap in efficiency. If water businesses can partake in even a small part of the gain through appropriate pricing and contractual arrangements, maintenance too can be simultaneously incentivised.  The additional second order effects of such efficiency gain resulting from the shifts in the cropping pattern in the right direction, avoidance of environmentally destructive practices, use of water saving technologies and practices are even larger. The appropriable part of the total social gains so possible could easily exceed by many times the current recoveries of the irrigation departments at 5% on the average and could rival the total expenditure of the these departments! Thus, the key to reform of the irrigation department is tariff rationalisation to reflect long run marginal costs. But that cannot happen if the reform is presented as one of sudden or even gradual increase in the water tariffs, since that measure alone would be quite unacceptable politically.


The only way out is really to move away from underpricing as the method of subsidising, to water endowments. Economics is good only when it is good politics too. Let us presume that currently a farmer has access to 10 acre feet of water for which he pays says Rs. 500 when the long run marginal cost (LRMC) of the same water in the region (command area of a dam or river basin or a set of connected basins) is Rs. 10000. Then his subsidy is clearly Rs. 9500 and his benefit is much larger since the marginal product of irrigation water is very large. But if he is farmer who is using water wastefully, the last few units (say 2 acre feet) have low value to him, even though the value of the same to a farmer at the tail end could have been much higher.  In the system we propose the endowment of the farmer is once fixed at 9 acre feet of water, and he has rights to these endowments every year or season by buying water coupons from post offices /banks etc by showing his endowment identification at say Rs. 50 an acre feet of water. Then there would be no political resistance to water reform including tariff reform, since the farmer’s benefits have been protected and possibly even enhanced. Tariffs can now go up to the LRMC or even higher to build in an element of scarcity or even to allow a commercial rather than LRMC pricing of water. Now the farmer has to buy any additional unit of water over his endowment from either the water company at the new tariffs, or from other farmers at rates prevailing in water markets. Or if earlier he was an inefficient user of water he could now sell to advantage to other farmers for whom the marginal value of water is very high. With such tradability, the allocative price of water goes up from the near zero value that it was, to the LRMC or higher. That is crucial to efficiency in use and to making reform both a positive sum game, and politically possible since there are trajectories that are pareto-optimal. Prices now can play their true role of allocating resources.


If the ID or private water company taking over the assets of the ID on an MOT basis for example could have its contract so written that it is free to sell the water that it generates out of savings (avoidance of leakages, waste, removal of silt, proper timing of water releases) at LRMC or water market prices then it would have a strong incentive to carry out regular maintenance and keep the assets well honed.  Additional revenue topping through an ‘annuity’ linked to the total throughput of the water company may be required only when the recoverable losses are small. Thus with the clarity that subsidies would all have to be converted to endowments which are upfront negotiated with farmers’ groups and lobbies, the path of water reform can be both politically and economically rewarding. Indeed, the political capital that it would allow the entrepreneurial politician who can think beyond the current modes of subsidisation to direct subsidies and  endowments are immense. In other words long years of waste and distortion create the opportunity to correct them which can be rewarding in ways that need to be imagined and exploited. Unfortunately, policy advisers caught in their own assumptions that good economics would not brook good politics have been less imaginative than they should have been.