India’s water resources are under tremendous pressure. There are wide temporal and spatial variations in the distribution of water. For example, India receives more than 80 per cent of the rainfall during four months of the year. As regards unequal spatial distribution, the Barak and Brahmaputra basins have a per capita water availability that is more than that of the Ganga basin. India’s per capita water availability has touched the water-stressed benchmark, and is likely to reach the water-scarce scenario by 2050.

Water credits deal with the transaction between water deficit and water surplus entities within a basin. It represents a fixed quantum of water that is conserved or generated. It is almost a mirror image of the concept of carbon credits. However, unlike carbon credits, the spatial limits for transactions are confined to hydrological boundaries — that is, river basin or watershed.

Take the water credit system between municipalities and industries. Industries can buy water credits from water-rich municipalities that are fund crunched to finance large-scale floodwater harvesting or wastewater treatment projects, which aid in conserving water. Thus, the multiplayer approach is essential for the water credit system.

Global successes

India should learn from global water trading successes, like that of Australia (for example, the Murray-Darling basin), to lay a roadmap for water trading and also ensure water regulation by setting up related authorities. Another notable success story comes from Chicago Mercantile Exchange, where participation is seen from actual users such as farmers and municipalities and financial investors.

Recent reports suggest that NITI Aayog is contemplating draft recommendations on future trading of water and tradable water licences. However, experts have raised some concerns about the awareness among water users and water suppliers on water trading. It is anticipated that India could face opposition if water is made a tradable commodity.

With the effective implementation and stringent regulatory standards, water trading also paves way for water quality standards. This makes water “quality” a tradable commodity. Under such as system, a source pollutant (industry) having controlled pollutant levels “sells credits” to another source pollutant (industry), which can use these credits to enhance their level of treatment in order to comply with the regulatory requirements.

This further promotes growth in the recycle and reuse markets through the utilisation of heavy metals/trace organics released in the water from both the industrial and agricultural sectors.

An innate flaw of this water credit system is that the market is dominated by a small number of rich institutions or sellers. Due to this market domination, rich sellers can control the market by buying credits from the poor, and continue to misuse the shared water resources. The market competition among sellers is further reduced due to the lack of awareness about the water credit concept. In such a case, a regulatory body must be in place to facilitate and successfully maintain free market conditions.

However, the credit system can be used to highlight the water quality merits and strengthen economic relations both at a global as well as regional level. Also, such a system can substantially reduce the burden of the government that releases funds towards mitigation as well as post-disaster events such as floods and droughts. Another benefit of such a system is that the markets can even ‘insure’ irrigated and rain-dependent agriculture against droughts by locking in water prices.

There has been no strong dialogue on the implementation of a water credit system, so far. India needs to aggressively alter and adopt practices to expand finance opportunities within the water sector.

Sarkar is a Distinguished Fellow, and Tigala is Associate Fellow, TERI

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