If water is not placed under the cash nexus when it is in short supply, people will go thirsty. There is no more ‘right’ to water than there is to copper or corn
India is one of the 17 countries facing extremely high water stress. Groundwater has been declining at an alarming rate and more than a third of the country’s population lives in water-stressed areas. This number is set to grow due to depleting groundwater and rising urbanisation. However, before we probe as to why this is occurring, let us first establish that this unfortunate situation is indeed true. According to the NITI Aayog, all of the largest cities in India are in the process of losing their groundwater reserves. The plight is so great that it is likely that by 2030 a whopping 40 per cent of the population of the country will lack drinking water.
Nor is this problem confined to the cities. It also threatens occupants in the periphery, specifically occupants of Ladakh, which has long depended upon melting snow from the Himalayan mountains for its supply.
What, then, is the cause of this crisis? It has been attributed to population growth, a tourist boom and Government mismanagement. All of these causes have the ring of truth to them. But this could hardly be all there is to the story, for the people of the subcontinent are not running out of other liquids, such as milk, orange juice, oil, petrol, diesel and so on. Nor for that matter are solids, such as cars, steel, bricks, air conditioners or bicycles in any short supply. If an increase in population and tourism can explain water shortages, it is difficult to see why these other items would not also be vulnerable to the same antecedents. In order to arrive at a better explanation of the problem, we ask what do all these other consumer and producer goods have in common that is lacking for water? Or, to put the matter inversely, what is true of water that does not apply to any of these others?
When put in this way, there is only one element that pops up: Water is free or priced very nominally across the country. People have to pay a lot of money for every other good on this list. Why is this divergence even of relevance? Cast your eyes back to economics 101 and the supply and demand model. When price was above equilibrium, supply was greater than demand, and there was a downward pressure on prices. That would cure the surplus. On the other hand, when prices were below this point, demand was greater than supply and the tendency was for a rise in prices. When this occurred, the shortage would tend to vanish. But suppose that the rate of exchange was not allowed to increase? Then, demand would continue to be greater than supply and the shortage would become permanent.
This is precisely what is going on with regard to the water crisis in India. Price is fixed at zero/nominal, a rate below that which would occur under free enterprise. How can this shortage be solved? Simple. Place water on the same economic plane as all these other goods and services. The shortage, all shortages, are caused by prices below equilibrium levels. Allow them to rise and voila, there is no more shortfall. But wait. Shouldn’t water be free? Well, yes, in places where there is plenty of it. But one of these places is not India. At least not right now, nor in the foreseeable future, if these prognostications are correct.
At present, air is a free good. But, when we get to the Moon, or Mars, it will not be. Not if we have any sense, that is. There is nothing “holy” about water. If it is not placed under the cash nexus when it is in short supply, people will go thirsty. There is no more “right” to water than there is any right to air, or copper, or corn. Thinking that there is will only lead to the problems being faced by India.
Has this solution ever worked before? Has allowing prices to rise ever called forth more supply? One of the most basic postulates in economics is that supply curves slope in an upward direction. Raise remuneration and more quantity is called forth. Want to encourage more people to work in Alaska? Pay them more. Want to have any sanitation workers at all? Their salaries must exceed equally skilled but cleaner occupations, to overcome the negative effects of a difficult and unhygienic job (this is called compensating differentials by economists). Want to encourage entrepreneurs to bring more food, toilet paper, baby diapers to Katrina-beleaguered New Orleans? Then the last thing you need are laws criminalising “price gouging.” Yes, higher prices wend their way through the warp and woof of the economy, boosting supplies. India is no exception to this general rule, and neither is water.
(The writer is a world-renowned economist, author and Professor of Economics, Loyola University, New Orleans)