'Get the Price Right'

Economists are right when they point out that irrigation water prices are absurdly low compared with their scarcity value, and that at such low prices there is no incentive to conserve. However, it does not follow that raising water prices is the natural next step for developing countries such as India. There are two broad reasons for this conclusion: first, in the near to medium term, canal water prices probably cannot be raised to the point where they significantly affect water demand. The negative impact on farm revenues would be too drastic and the policy would not find broad public support. Second, low water prices are often not the main reason behind the farmers' water-inefficient crop choices. Moreover, farm-level inefficiencies appear not to be the most significant ones on existing canals, nor are water prices the most significant prices driving irrigation demand. A better first step would be to enforce simple allocation rules - such as per-hectare rations - that would make the scarcity value of water immediately obvious. The analysis in this article is based on a study of one canal system in Maharashtra.