Water Scarcity and Conflicts: Can Water Futures Exchange in South Asia Provide the Answer?

Introduction

Water futures exchange is not a new concept in today’s world. While it is already in vogue in Australia, it is increasingly being thought of as a mode of risk management in water availability in arid and semi-arid regions of the world. The idea has already hit the academic strands, with a few papers emphasizing the role of markets in the resolution of water allocation problems (Ghosh and Bandyopadhyay 2009a, Bandyopadhyay and Ghosh 2009b, Ghosh 2010). Holden and Thobani (1996) talked of tradable water rights as an approach to resolve water shortages and promote investment. They expressed that a system of tradable water rights combined with effective institutional arrangements can solve many of the problems related to allocation that administered solutions fail to deal with. In another instance, Chile’s National Water Code of 1981 established a system of water rights that were transferable and independent of land use and ownership. The most frequent transaction in Chile’s water markets is the “renting” of water between neighbouring farmers with different water requirements (Gazmuri 1992).

However, cases and analyses have widely been documented on physical market transactions of water all over the world or transactions of tradable water rights, rather than on futures markets. Rosegrant and Binswanger (1994) suggest that water markets provide a flexible and efficient way to allocate water while at the same time providing incentives that are beneficial for water users. When water savings can be traded, they provide extra income to farmers, while pricing leads to a reduction in income. They also suggest that markets lead to the highest value use of water. As shown by Holland and Moore (2003) in the context of the Central Arizona Project, a restrictive market mechanism on groundwater resources could result in inefficient solutions. According to Hearne and Easter (1995), markets should be recognized as providing a means of allocating water according to its real value, thereby leading to efficiency gains and conservation. Gardner and Fullerton (1968), Hartman and Seastone (1970), and Marino and Kemper (1999) suggest that markets can provide a means to allocate water according to its opportunity cost, resulting in efficiency gains.

Markets range from being formal to informal. Informal water markets are found in India (Saleth 1997), Pakistan (Bandaragoda 1998, Meinzen-Dick 1997), Chile (Hearne and Easter 1997), and Mexico (Thobani 1997). Transactions are typically small-scale and local, selling surplus water to neighbouring farmers or towns (Johansson 2000, Bosworth et al. 2002). Formal markets involve buyable and sellable water rights, permanent and seasonal transfers or transactions between sectors and jurisdictions. Examples exist for the western US (Colby 1998), California (Howitt 1998), Texas (Griffin 1998), and Spain (Garrido 1998). It is claimed that the most advanced form of tradable water rights exist in the Murray-Darling Basin in Australia, with seasonal and permanent states of diversion entitlements (Bosworth et al. 2002).