The water table in north-western India is falling at an alarming rate. The reason is politics. Bad politics. And the bad pricing that follows from it.
Am I sure it isn't because of global warming, or climate change? Well, I can't say I'm sure, because I'm not a climatologist, but here are the words of Matt Rodell, a hydrologist at NASA, the US space agency that mapped Indian water tables: "We looked at the rainfall record and during this decade, it's relatively steady -- there have been some up and down years but generally there's no drought situation, there's no major trend in rainfall. [...] We would expect the groundwater level to stay where it is unless there is an excessive stress due to people pumping too much water."
And why were people pumping too much water? As an economist, I would suspect it had to do with the fact that the electricity for pumping was either free, as in Punjab, or hugely subsidised, as in most states of the country. And, with electricity being supplied by government entities, the pricing decision was fundamentally a political one. Groundwater, in any case, has no price attached to it - which is a fundamental disaster from an economist's point of view.
When a good (or service) is under-priced, supply will overwhelm demand. There are only two ways of dealing with this - one is to ration the good; in other words, construct a political framework as to how to allocate the resource. The other is to allow the price to rise. This does two things:
* For the supplier, it creates an incentive to create more of the good; granted that in the case of ground-water, nature may not be persuaded by gold to replenish our reserves.
* For the consumer, in this case the farmer, a higher cost for water will create an incentive for him to find more efficient ways of irrigating his crop, or to switch to crops that demand less water, like, say, sorghum.
It is true that this, in turn, requires there to be a market for sorghum, which responds to the additional supply. In India, the market for agricultural goods is far from responsive or flexible. At its heart is the MSP (Minimum Support Price) mechanism, which buys crops at prices set by central planning. At last count, the mechanism covered 26 agricultural products. Sorghum is not one of them.
An economic system based on central pricing is going to be a rigid one, slow to respond to shifts in supply, demand, or technology. It deals with over-supply by waste - think of the 'butter mountains' and 'wine-lakes' created in the European Union by their agricultural support mechanisms. Unmet demand is dealt with by rationing, which strangely ends up favoring the political elite - think telephone connections in India before 1995, or nylon stockings in Soviet Russia. If your pricing systems don't make room for sorghum, or American cigarettes, you end up with tiny, inefficient markets for them.
In a strange way, the service road outside my Delhi home is exactly like the water table in Haryana and Punjab. Perpetually over-crowded with parked vehicles, it (along with me) is a victim of zero-pricing. The land situation in South Delhi is such that the area within the boundary wall of my home is priced at Rs. 425,000 per square yard. Cross that 6-inch wall, and it is free for any jerk who decides he needs to draw cash from the bank next door, parks his car askew, and creates a traffic jam for the next ten minutes.
An average parked car - and I am not talking of the SUVs that the most noxious offenders drive - takes up 120 square feet of road space. Which means that the guy who pulled up to draw cash, and then decided to have a smoke while he was about it, is occupying Rs. 57 lakhs worth of road space - for free! No wonder he abuses it.
Interestingly, the government of Delhi is now planning to implement a scheme of parking charges which is graded according to the cost of land in the relevant area. More power to their elbow - nothing would give me more joy than to see a row of parking meters outside my home. Provided, of course, that the cops actually ticket those who park without paying up.
Our water reserves might not be so lucky, yet. The Planning Commission has advised the Haryana Government to impose a cess on electricity used for agriculture. The state doesn't want to act because Punjab and Uttar Pradesh have not been asked to do the same. More politics, of the inter-state kind.
What the Haryana state government is willing to enforce is a ban on new tubewells in areas of severe water depletion. I see a whole new market opening up - for permits to install new tube wells, for new tubewells passed off as repaired old machines, for chunks of land declared to have had their water tables restored by divine intervention.
When bureaucratic imagination can open up such a rich diversity of markets, why settle for the boring old mechanism of pricing?
Mohit Satyanand is an entrepreneur and portfolio investor.
More from Mohit Satyanand:
The Problem with Indian Railways
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Jai Arjun Singh -- The Distorting Mirror
Amit Varma -- Football and a Comic Marriage
Deepak Shenoy -- ULIP Exits and the Sunk Cost Fallacy
Ashok Malik -- The Bones of the Buddha
Girish Shahane -- Museums, Mansions and Money
Aadisht Khanna -- When Working Out isn't Working Out
Sanjay Sipahimalani -- Beating the Reader's Block
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