Why India should be wary of trading in ‘water futures’

One solution being suggested is to create a formal water market for its trade. In an unprecedented move, the Chicago Mercantile Exchange launched water trading for oil, gold, etc. in 2020. Water-commodities contracts, known as ‘water futures’, are linked to California’s $1.1 billion spot water market. Another example is the Murray-Darling Basin in Australia; It allows water trade at the regional level using tradable permits. On similar lines, the Maharashtra Water Resources Regulatory Authority Act, 2005, is experimenting with bulk-water rights as a precursor to introducing individual water rights and eventually trading in water. India is planning to start water trading in commodity exchanges. NITI Aayog is in the process of drafting recommendations for public consultation, covering various options including futures and spot trading of water and tradable licences.

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The aim is to establish water as an economic asset, as its scarcity would rapidly increase its value. Moreover, once the market is created, voluntary trade between rational buyers and sellers will help in efficient price discovery. An efficient price will guide water resources to their highest valuable use and help establish relative values, which is essential for understanding the value of competing use cases. It also helps in achieving allocation and productive efficiency.

In addition, rain-fed agriculture can be insured against drought by locking prices in the water futures market, which will significantly reduce government spending on drought relief. It will also attract investment, leading to adoption of better technologies and less wastage of water.

In reality, however, given the high transaction costs, information asymmetry, power dynamics and weak institutions, the profits from trade may not be as high as economic theory suggests. Also, it is not always clear that creating a market will solve the problem. Before taking the initial steps towards the market, we must recognize that the current trading systems in the US, Australia, China and Chile are more the exception than the norm. Against this background, this policy intervention requires careful analysis. Here we are presenting some challenges keeping in mind the Indian realities.

The first step towards creating any market is to define the property rights of the assets that are to be traded. Currently, rights over water resources in India are tied to land—the owner of a piece of land effectively owns groundwater. This limits the supply of water to the economically weaker sections. Water futures can help solve this problem, but much depends on how our legislation is framed. For example, how to calculate available water for futures contracts? It is important that the baseline is determined only after the basic household needs of water are met. Such water markets are known as rights-based; China and Australia follow this model. Furthermore, if such a market is not regulated well, it will lead to corporates and high-value users dominating the sector. Cartels are also likely to arise, which can hinder most people’s access to water. There is also a strong risk of violation of fundamental rights to equality and life. Note that about 80% of groundwater is used in agriculture, which employs about half of our workforce. Commercial objectification may have implications for food, employment and water rights that must be assessed. Finally, India faces massive water conflicts between states, making it vital to the political economy.

The country has a thriving informal water market, as we see an increase in the supply of the neighborhood via water tankers during the summer months. This unregulated market ensures that the right to water is fully protected without any liability on the state. But it comes at a cost, both in terms of its price and the quality of the water supplied. Here, there is a significant trade-off between water as a basic human right and an economic asset. The key is to regulate it in such a way that rights are protected and speculators/cartels do not get the upper hand. Perhaps the bigger challenge is to administer water rights: granting licenses, permits or other legal titles, that is, one that allows tradable rights and extraction from water bodies.

Roopa Madhav and Ashirwad Dwivedi are, respectively, Professors of Law and Assistant Professors of Economics at the National Law University, Delhi.

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