Enabling poor rural people
to overcome poverty
Centre for development economics, delhi school of economics, working paper 183, April, New Delhi, Banerji, A., Gauri Khanna and J.V. Meenakshi (2010)
Exploring the complex water market in an Indian village, the study locates the role of social contracts in efficient allocation of water across farm households and suggests institutional reforms to ease the constraint of water supply for agriculture.
Water markets usually play a crucial role in the nature of agricultural development. The structure of water markets depend on control over the natural resource, which in turn is linked to the land ownership pattern. Further, the pattern of investments in water extraction within a village determines whether the water market is skewed and inefficient or a well functioning one. It has been observed that normally monopoly over water resources by a few leads to inefficient allocation of water across farms, thereby affecting land productivity and keeping crop yields low for villages or regions as a whole. In that sense, water markets can pose challenges to agricultural growth and development.
Contrary to common perception regarding the existence of skewed water markets, this study by Banerji et.al. reaches a different conclusion regarding water allocation in agricultural after studying the water markets in a Western Uttar Pradesh village called Tabelagarhi. The water market in this village is typical of the North Indian agricultural belts where there is significant extent of land fragmentation. In such a situation of extensive land fragmentation, there is a major role played by social contracts regarding water sharing for agriculture. The study infers that the principle of profit maximization is not always the central rule that governs water markets in these typically land fragmented agricultural settings.
The study uses extensive primary farm level data, centered around tube-wells, on water-use, irrigation hours, prices, farm-size, labour-use and use of other inputs exploring the farm-household behavioral patterns. The primary data was collected through a random sample of 73 tube-wells chosen from the northern and eastern parts of the village. The plots serviced by these tube-wells were chosen to form a sample of 326 plots, all growing sugarcane) belonging to 105 farm-households. This sample design allows a complete accounting of the water-use of the sample tube-wells. The authors fit a Cobb-Douglas production function to estimate marginal value of water-use and investigate the principles governing the allocation of water across farms. A simulation exercise also throws light on what possible institutional reforms can be suitable with regard to pricing of water in the village.
The water prices were fixed at Rs. 15 per hour for a tube-well. Depending on whether the tube-well uses submersible pumps or not and their relative strengths, the price of water varied between Rs. 4.7 and Rs. 8 per bigha-inch1 (roughly 20.56 cubic meters) of water. The Marginal Value Product of Water (MVPW) is significantly higher than this price, implying that it is more profitable to water one’s own plots instead of selling the resource at the given price. The MVPW, which is estimated at Rs. 16.6 per additional bigha-inch, is nearly 2.5 times the mean water price for the sample (Rs. 6.53 per bigha-inch).
However, social contracts for sharing of water govern the allocation of water in the village. The water market here definitely functions on principles that are distinct from merely reaching the market clearing price. Reallocating water according to the market clearing principle based on profit-maximization, the authors find that the average sugarcane yield for the village does not show any significant improvement. This finding further endorses that the market functioning is influenced by a social contract for water sharing, which allocates water fairly efficiently for sugarcane cultivation. The economic reason behind this social water sharing principle are the significant extent of land fragmentation and the high cost of boring tube-wells, which makes it infeasible to have a tube-well on each and every plot. Most farmers in the sample are both water sellers and water buyers at the same time due to this fragmentation of their farms into several disjointed plots.
Apart from this central conclusion, the study also reveals that the lack of adequate and uninterrupted power supply acts as a constraints to optimum water use for irrigation and sugarcane yields. The power supply was erratic in the village ranging from 8-10 hours in June, 6-7 hours in May and 3-5 hours in July. These three pre-monsoon months are crucial as far as watering of sugarcane plants is concerned. This power supply shortage leads to some rationing of water.
The authors, through a simulation exercise, note that with a higher pricing of power that improves power supply, there is an increase of irrigation volume and yields. Presently, there is a lump sum annual charge for electricity but no price per unit of power is paid by farmers. When power is priced at Rs. 4.50 per kilowatt-hour, the industrial rate prevalent in the country, the yield and water-use increases to 61 quintals per bigha and 30.2 bigha-inches per bigha respectively. These figures for the sample were 58.2 and 30.0 respectively. However, the profit per bigha reduces to Rs. 2050.9 from Rs. 2490.5 (sample average profit) at this high power price. The simulation exercise shows that when price of power is brought down to the range of Rs. 1.80 to Rs. 2.50, the irrigation volume, yields and profits are all higher than the current sample values. While the authors conclude this as the optimum price range for power, they also note with concern, that in this scenario, there was a 6 to 12.5 percent more extraction of water for irrigation and this may have adverse implication for aquifer depletion in the future.
One concern that remains about the study and the estimates of the MVPW and the optimum power pricing and resultant yields and profits is regarding the homogeneous production function for the sugarcane farms used by the study. The sample figures for output, labour-hours and other inputs like tractors, fertilizers, etc. vary significantly more than the farm-size, implying that there is considerable differentiation of the peasantry. This makes it more probable that different sugarcane farmers are operating on different production functions rather than a single function. Nevertheless, the study gives some interesting insights about the structure of water markets in Northern India, which do not always follow the usual market principles for water allocation.
1/ The paper reports that a bigha is approximately 0.2 acres.