MARKET-BASED INSTRUMENTS FOR WATER ALLOCATION IN INDIA ISSUES.pdfVIP

MARKET-BASED INSTRUMENTS FOR WATER ALLOCATION IN INDIA: ISSUES AND THE WAY FORWARD. L. Venkatachalam1 Abstract Institutions do matter in managing water scarcity. Institutional reforms in water sector in recent years have tried to replace the existing ‘command-and-control approach’ with more innovative and comprehensive market- based approach. Based on a comprehensive literature review, this paper highlights various issues involved in market- based institutional reforms in the water sector in various countries. This paper finds that even though there are some problems, the market-based institutional reforms are capable of generating relatively higher benefits through efficient, equitable and sustainable water allocation mechanisms. This paper also provides policy suggestions on introducing market-based instruments formally in the water sector in the Indian context. 1. INTRODUCTION The existing literature dealing with water scarcity that causes negative externalities in agriculture sector mainly revolves around three major aspects namely, physical scarcity of water (Rosegrant, 1995), financial scarcity affecting water sector (Winpenny, 2003) and institutional scarcity of managing water resources (Saleth and Dinar, 2004). Conventionally, the literature has focused mainly on how physical scarcity of water arising from depletion and degradation of water resources causes adverse impact on production, productivity and profits in the agriculture sector. The major argument in this literature is that addressing water scarcity, especially in physical terms through various water augmenting mea