Executive Summary

Water is a critical resource for social and economic growth. In the coming years, to realise greater economic growth, India will require a multitude of resources, of which water is vital. Yet, India’s economy, and the country’s agriculture sector in particular, is highly waterintensive, and substantial water resources are locked up in less productive growth. India uses two to three times more water to produce a unit of a major food crop in comparison to China, Brazil, and the US. In parallel, the demand for water in other sectors is rapidly escalating, leading to increasing conflicts across regions in India. Growing industrial production requires a reliable and sustained water supply, without which growth will be constrained. Given increased water demand and growing shortages, India will need to reallocate water away from water-intensive sectors to those with higher water productivity to support future economic growth.

Globally, countries are using water reallocation as a response to water shortages. While there are many possible demand- and supply-side responses to the impending water crisis, enhancing irrigation water-use productivity is key and should be prioritised for two reasons. First, if irrigation water productivity is not improved, non-agriculture sectors will face water shortages in most parts of India, except for the water-abundant eastern states. Second, enhancing irrigation water productivity is a more cost-effective strategy for managing water as compared to many other interventions, particularly the provision of large surface water reservoirs and water distribution structures. To better understand the potential for water reallocation to support India’s rapidly growing economy and meet future demands for water (including the provision of piped water connections for all rural households under the Har Ghar Jal programme and the additional water required to boost manufacturing through the Make in India programme), our study focusses on the following research objectives: (i) to quantify the magnitude of water that could be potentially reallocated from irrigation to other sectors in India without compromising on agricultural output; and (ii) to recommend a pathway for a reallocation strategy for India. We also attempt to provide high level preliminary estimate of the economic costs of inaction if the current pattern of water allocation across sectors continues.

The overarching paradigm used in this study is that of allocative efficiency. To understand and achieve a higher allocative efficiency of water use in the Indian economy, we used the stochastic frontier analysis (SFA) model to examine water productivity in irrigation (including surface water, groundwater, and rainfall) for eight crop categories for India. The SFA model of estimating inefficiency is an economic model rather than a biophysical one. In this approach, we benchmark the irrigation water-use productivities of different farmers against the best farmer for each crop and region based on actual irrigation water-use data from a field survey. We chose three representative states to cover different agro-ecological zones as well as to ensure that we have a good representation of key crops. Based on our analysis of crops across three states, we derive crop-specific minimum and maximum values for water savings to estimate the range of possible water productivity improvement for the given crop. We use this range to estimate a low water-saving and a high water-saving scenario for the Indian agricultural sector, which allows us to estimate how much water can potentially be reallocated. We then provide high level estimates of the cost of inaction, which captures the extent to which inefficient irrigation water use will become a constraint to the growth of other sectors, namely the manufacturing and domestic use sectors. We estimate the total value addition from water use assuming the successful implementation of the Make in India and Har Ghar Jal policies for 2030 and 2050 and estimate the cost of inaction if these targets are not met due to the inadequate availability of water.

We find that total water withdrawal in the business-as-usual (BAU) scenario is expected to increase from 949 billion cubic metres (BCM) in 2010 to 1,058 BCM in 2050. Water withdrawal for agriculture is estimated to grow slowly, while for manufacturing and domestic use, it is expected to grow rapidly. Still, agriculture is expected to constitute a lion’s share of India’s total water withdrawal across the next 30 years, its share increasing from 77 per cent in 2010 to 81 per cent in 2050. Water withdrawal related to thermal power cooling is expected to decrease significantly between 2010 and 2030 due to a Government of India regulation limiting water use in inland thermal power plants. On the other hand, water supply is quite evidently strained. Though India has 1,123 BCM of utilisable water, its surface water has not been beneficially developed. Of the 690 BCM of surface water available, India’s reservoir capacity is only 258 BCM. Given its ease of access and decentralised nature, groundwater continues to be the sought-after option for all sectors. However, indiscriminate irrigation withdrawals are resulting in rapidly declining levels of groundwater.

We find that there is significant potential to enhance water productivity across crops without compromising on output, although there may be significant differences across states for a given crop. For example, for paddy, there is potential to reduce water consumption per hectare by 25 per cent in Maharashtra, but the potential is even higher – 73 per cent – in Andhra Pradesh. This implies that in the latter state, the average representative farmer is using significantly more water than the most water-efficient (benchmark) paddy farmer in the state. Interestingly, we find that there is no significant difference in the potential for enhancing water productivity in drought- and non-drought-prone areas for the crops for which adequate data were available. For most crops, except for cotton in Maharashtra, average water consumed per hectare in drought-prone areas is lesser, but not significantly, as compared to the water used for the same crop in non-drought-prone areas.

We find that in 2030, compared with the BAU irrigation net water withdrawals, 160 BCM can be saved and reallocated according to conservative estimates, while the higher end of the saving potential could be 389 BCM. Similarly, in 2050, India can potentially save and reallocate between 166 BCM and as much as 403 BCM. This implies a potential saving of 20 to 47 per cent in India’s agricultural water withdrawals in 2030 as well as 2050. We find our high-level estimate of the cost of inaction, explained as the economic impact of failing to enhance irrigation water productivity and reallocate water to other sectors, to be almost ii There is significant potential to enhance water productivity across crops without compromising on output INR 48 trillion (USD 869 billion1 ) in 2030 and INR 138 trillion (USD 2,520 billion) in 2050. A large part of this cost could be attributed to the value-add that would have potentially been lost due to the non-achievement of an aggressive increase in manufacturing due to water constraints. The value-added per unit of water is very high for manufacturing compared to other sectors. Our cost of inaction estimates do not account for the general equilibrium economic impacts of interventions in one sector on the other economic sectors. Given the magnitude of our preliminary estimates, we suggest that a detailed and sophisticated analysis of the economic impacts of water reallocation across sectors be undertaken.

We discuss three key alternative institutional mechanisms for reallocating water based on past experiences – administrative allocation, formal and informal market-based allocation, and collective negotiation. In addition, we highlight the enabling factors for a successful reallocation regime across the governance, technical, equity, environmental, and economic dimensions.

Overall, we derive the following insights from our analysis:

• There is significant potential to enhance irrigation water productivity, even if an average representative farmer adopts the practices undertaken by the most water-efficient farmer in the area;
• The pressure on India’s groundwater resources can be reduced significantly by enhancing irrigation water productivity;
• Ultimate irrigation potential can be achieved by enhancing irrigation water productivity;
• Sectoral water reallocation is imperative to achieve the goals of Make in India and Har Ghar Jal;
• Introducing institutional mechanisms for enhancing irrigation water productivity and water reallocation needs to be made a priority to address potential water constraints in non-agricultural sectors;
• The implications of water pricing policies, water markets, input price subsidies, and minimum support prices need to be analysed to devise effective policies for facilitating irrigation water productivity and sectoral water reallocation.

Our study recommends the following as the next set of actions that should be undertaken for achieving the larger goals of reallocation:

• Choose a state where the competition for water resources poses a significant challenge and that is ready to experiment with an alternative reallocation regime.
• Undertake behavioural experiments and economic analyses to better understand what policies and interventions can impact irrigation water productivity in the chosen state.
• Devise a state-specific reallocation strategy based on existing institutions, enabling environments, and participatory stakeholder engagement.
• Implement the strategy on a pilot basis in a sub-basin and create a monitoring and evaluation plan to learn from the implementation process.