RESEARCH CONDUCTED IN EASTERN DRY ZONE

TITLE OF THE STUDY: An Economic analysis of groundwater markets in Eastern Dry Zone of Karnataka

This study aimed at analysing the relative economics efficiency of Groundwater use in farming by the farmers involved in groundwater markets, to study the institutional arrangements and the price formation in the groundwater markets and also to estimate the externality in groundwater extraction on the farms in Siddlaghatta taluk of Kolar district in Eastern Dry Zone of Karnataka.

The primary data was collected from 120 respondents for the cropping year 2003-04. Tabular analysis was carried out. Quadratic function was employed to support the concept of John Nash's bilateral bargaining model of price formation of water in the groundwater market. When compared, the Net returns/ acre inch of water used, it was Rs.1217 for FSWFNA, Rs. 762 for FSWFA, for 658 for FNSW and Rs.470 for FBWFA, so, FSWFNA were economically more efficient in using ground water for farming fallowed by FBWFA, FSWFA, and FNSW. The net price realized by FSWFA was Rs.624 where as FSWFNA received Rs.6910 per acre-inch of water sold. The crop share contract was the only mode of payment that existed in the groundwater markets in the study area. Majority of the FSWFA (84%) indicated that surplus water they have is the main reason for entering the groundwater markets. On the demand side, 77% of the FBWFA indicated that high probability of well failure and high initial investment on borewell was the main reason for entering groundwater markets. The crop share fixed in the groundwater markets was 1/3 of the value of the crop in case of mulberry and ¼ in case of all other crops. About 54% of the groundwater buyers for non-agricultural purposes are silk filatures. other buyers were hotels and households. The main mode transportation was through power tiller drawn tankers (of volume 1400 ltr) and bullock drawn tankers (of volume 250 to 375 ltr). The externality in rupee per rupee of amortized cost of functioning well was the highest, 0.30 for FBWFA and 0.12 each for FNSW and FSWFA. Since FBWFA experienced the highest negative externality, they started buying groundwater.

Analytical framework
In order to quantify the objectives of the study, the data collected was subjected to descriptive and statistical analysis. To estimate the cost of irrigation well owners, investment on borewell at current prices was considered and amortized considering the respective life span of the well at 2 per cent interest rate. The actual groundwater rent paid was the irrigation cost in case of groundwater buyers.

The summarised empirical findings are as follows:

1. Socio-economic features
The literacy rate was higher in case of FNSW, FSWFA and FSWFNA compared to FBWFA where in 30 % of the farmers were illiterates. The total holding size of the FNSW and FSWF was higher than that of FBWFA. The land under irrigated condition was as low as 0.37 acres in case of FBWFA where as it was more than 1.5 acres in case of other categories of the farmers. The proportion of small and marginal farmers was the highest in case of FBWFA. Most of the well owners selling water constituted large farmers (67 percent).

2. Salient feature of irrigation wells
The WEM mainly used by the farmers was bore wells and dug wells. All the dug wells have dried up and borewells were the only means of water extraction. The proportion of functional wells was around 83 % for FNSW, FSWFA and FSWFNA. It was only 62 % for FBWFA, The average number of functional wells per farm was the least, 0.17 (1 well for 6 farmers) for FBWFA, where as it was more than 1 in case of all other categories. The average yield of borewells was 1550 gallons/hour for FBWFA but it was more than 2500 gallons/hour for all other categories. There were 25 farmers of FBWFA, not owing any type of well.

3. Cropping pattern
The major part of the gross irrigated area was occupied by the Mulberry crop, a perennial grown as annual that supports the Sericulture activity in the area. It occupied relatively lesser (55 %) proportion in case of FNSW compared to other categories, FBWFA being the highest with 87 %. This pattern indicates the water use pattern also, since mulberry is a hardy crop, requires less water and can withstand water scarcity. Contrary to this, FNSW had considerable proportion of their GIA for vegetable crops like Tomato, Potato, and Carrot etc. Which requires more amount of water.

4. Productivity of crops cost of cultivation of Mulberry crop.
It was found that the productivity of crops was higher for FNSW and FSWFNA compared to other categories. When compared to the productivity of FBWFA, FSWFA had the higher productivity.

Mulberry was the main crop grown in the area. The cost of cultivation is given for both moriculture and also silkworm rearing. The cost and returns for FNSW and FSWFA was more or less same. The irrigation cost was the main cost component for FBWFA when compared to other categories. The net returns from selling of leaves was highest (Rs.6315/acre/crop) for FNSW and the least (Rs.3517/ acre / crop) for FBWFA, due to higher irrigation cost and lower yields.
When the farmers use the leaf yield from the field for silk worm rearing instead of selling the net returns per acre per crop are around Rs.11169 for FNSW and Rs. 11924 for FSWFNA and it was the least, Rs.7917 for FBWFA.

5. Income from different sources
The major source of income for FNSW was, farming; they obtained 42 % of their total income from farming fallowed by Sericulture (30 %). FSWFA obtained more or less equal proportions (30 % & 29 %) of income from Farming and Sericulture respectively. The income from sale of Groundwater was Rs.29069 per farm for FSWFA where as it was Rs. 85000 per farm for FSWFNA accounting for 17 % and 41 % of the their total income. So the main source of income for FSWFNA was selling of groundwater.

6. Economics of irrigation
The cropping intensity was the least, 163, for FBWFA, it was due to higher proportion of rain fed land in the total land holding. FBWFA used 592.25 acre-inches of water from their own wells and purchased 1396 acre-inches of water from FSWFA. Groundwater used per acre of GIA was 26,21,15,16 acre-inches by FNSW, FSWFA, and FSWFNA respectively. Net returns per acre-inch groundwater used was highest of Rs.1217 for FSWFNA. It was Rs.658 and Rs, 762 and Rs. 470 for FNSW, FSWFA and FBWFA respectively. This speaks about the economic efficiency of water use by different categories of farmers. The amortized cost per well was Rs.14058, Rs.15547, Rs.13483, and Rs.15427 for FNSW, FSWFA, FBWFA and FSWFNA respectively. The net returns per are of GIA was the highest Rs.18345 for FSWFNA fallowed by FNSW with Rs.17009. It was the least for FBWFA with Rs. 13942.

7. Income from Sale of groundwater
The net returns per farm from sale of ground water was Rs. 29069 and Rs. 85000 for FSWFA & FSWFNA respectively, by selling 1396 and 368 acre-inches of water for agriculture and non agriculture purpose respectively. The net returns per acre-inch of groundwater, from farming and sale of groundwater was Rs. 726 and Rs. 1780 respectively for FSWFA & FSWFNA.

The national price realized per acre-inch of groundwater sold was Rs. 624 & Rs.6910 for agriculture and non-agriculture purpose respectively. The difference between the prices realized emphasized the role of end use pricing for natural resources such as Ground Water. Speaking about the FBWFA gross area irrigated with purchased groundwater (105 acres) was 4 times of Gross area irrigated (24.50 acres) with Groundwater from own wells.

On an average Rs. 34745 was paid as water bill, the net returns per acre of GIA after paying for purchased water was Rs.7208. The cost of Ground Water irrigation is nothing but amortized cost for FNSW, FSWFA and FSWFNA with Rs.131, Rs.122, and Rs.189 per acre-inch respectively. But for FBWFA, it also includes water bill paid for purchased water, which makes the higher irrigation cost of Rs.578 for them.

The national price realized per acre-inch of groundwater sold for non-agricultural purposes was 11.07 times that of national price realized per acre-inch of groundwater sold for agriculture purposes. This shows the importance of end use in pricing of Natural resource like ground water.

8. Groundwater institutions in water markets
The only mode of contract that exists in the groundwater market in Siddlaghatta was the crop share contract. There was no other mode of contracts such as cash payment, labour exchange etc. ninety percent of the groundwater market contracts were for one year and the rest were for one season. The main reason for opting crop share mode of contract by groundwater sellers and buyers were, easy payment /recovery of the water bill, easy monitoring of water supply and crop share system of groundwater pricing is in vogue of many years in that area. The groundwater buyers felt that, there is partial transfer of the risk due to well failure and in crop production are transferred to the groundwater sellers. In case of groundwater sellers, profit motive was only seen with 17 per cent of the sellers.

9. Factors promoting water markets
There are supply factors and demand factors, which promote water markets. Among supply factors, fragmented /small land holdings was the main factor responsible for the existence of groundwater market. Other factors include, inadequacy of family labour for management of farm, as source of additional income. On the demand side, high initial investment on bore wells coupled with high probability of initial well failure were the deterrents for the groundwater buyers to go for a new bore well, so they opted for entering into groundwater market. Other factors included fragmented land, inadequacy of groundwater from own wells and easy availability of groundwater for purchase.

The non-market relations between buyers and sellers also played important role in groundwater markets in Siddlaghatta. Eight pairs of the sellers and buyers were friends and seven pairs of the farmers were relatives. Other relationships like, the farmers belonging to the same caste were also important factors promoting groundwater markets.

10. Crop share of different crops and their market value
The crop share that was fixed in case of commercial crops like tomato, potato, and carrot was one fourth of the total out put, whereas it was one third of the output for mulberry crop. The market value of the share crop was the highest for tomato, Rs. 11460 and it was the least, Rs. 3276 for mulberry crop. But when we consider the excess amount per acre inch of water bought, paid by the buyer to the seller over the irrigation (amortized) cost incurred by the seller, it is the highest, Rs. 495 for carrot crop fallowed by mulberry crop (Rs.484). For tomato crop it was only Rs. 395.

11. Nash's bilateral bargaining model for factors forming price
The results of Nash Equilibrium model indicated that for one percent increase in GIA of the seller the margin ratio (surrogate for price of ground water) increased by 0.098 per cent, for one percent increase in Total water extracted by sellers margin ratio increased by 0.85 per cent and for one percent increase in GIA of buyers the margin increased by 0.3 per cent. This shows that the Total water extracted by sellers and GIA of buyers are econometrically the key explanatory variables in price determination in ground water market.

The Total water extracted by sellers gives greater bargaining power for the seller in price determination than the GIA of buyers and GIA of the seller. This also shows that the ground water seller by judiciously distributing the extracted water between his farm and neighbouring buyer farm is able to reap larger benefits to the tune of Rs 29069 per farm.

12. Groundwater purchased for non agricultural purposes
The main buyers of the groundwater for anon-agricultural purposes were, silk filature units (54 per cent), hotels (26 per cent) and households (20 per cent). The water purchased per day per buyer was the highest, 1400 litres for silk filatures and it was 1100 litres for hotels and 400 litres for households. Higher price per litre was paid by silk filatures and hotels (Re. 0.069 and Re. 0.064) compared to households which paid Re. 0.040.

13. Externality in irrigation
The externality in rupee per rupee of amortized cost of functioning well was the highest, 0.30 for FBWFA and 0.12 each for FNSW and FSWFA, whereas it was the least, 0.09 for FSWFNA.

This shows that since FBWFA experienced the highest negative externality, they started buying groundwater. The other three groups had almost similar levels of negative externality per irrigation well. Intelligently FSWFA and FSWFNA by selling groundwater not only diffused their negative externality but also realized higher net return to groundwater, while FNSW absorbed all of their negative externality by themselves and did not realize as much as those who sold groundwater. Thus, farmers who participated in groundwater market by selling, even though their negative externality was comparable with FNSW, they reduced the burden of negative externality by extracting and using a part if the volume of groundwater on their farm and also by selling a part of the extracted groundwater to FBWFA. The relatively higher negative externality for FSWFA is internalised by the FSWFA through reduction in extraction of groundwater. The FSWFNA had the least negative externality of Rs. 1458 per functioning well who in addition reduced the extraction of groundwater and realized higher net return per acre inch of extracted groundwater by selling for non agriculture purposes.

Considering the volume of groundwater used per acre of gross irrigated area, it was considerably lower for farmers involved in water markets viz. 21 acre inches for FSWFA, 15 acre inches for FBWFA and 16 acre inches for FSWFNA when compared to 26 acre inches for FNSW. At the same time, the net returns per acre-inch of groundwater used for irrigation, it was significantly higher for farmers involved in groundwater markets viz. Rs. 762 for FSWFA, Rs.908 for FBWFA and Rs. 1217 for FSWFNA when compared to Rs. 658 for FNSW.

These outcomes clearly indicate that the water markets have helped the farmers in using the groundwater more efficiently. In addition 25 farmer buyers not owning any irrigation bore wells could get the water for irrigation and realised higher net returns, than those owning irrigation wells and 70per cent of the buyer farmers was marginal and small farmers. This is an equity measure.

1. By selling water for agriculture and non-agriculture purpose farmer realized higher marginal productivity of water when compared with farmers who did not sell water. Even with this realization of higher marginal productivity of water farmers who sold water for agriculture or non-agriculture purposes realized 17 percent and 41 percent of their total net return from sale of water respectively. This is an additional income not at the sacrifice of their original returns from agriculture. Thus, groundwater market in groundwater scarce area has not only economic water use efficiency but also contributed additional net return per unit of water extracted. Therefore groundwater markets in rural areas can be facilitated by considering groundwater markets as legal with well defined property rights to water.
   
2. Further groundwater markets have the potential to promote further water use efficiency among sellers and buyers by installing drip / sprinkler systems. Since the seller is aware of higher marginal productivity of water and the buyer is aware that he has to pay for his water through his nose.
   
3. There had been increased exploitation of groundwater in this region. This has repercussions on sustainability of groundwater use. Hence, to promote sustainability of groundwater use and thus increasing the accessibility of water to farmers, the government. In addition to effective groundwater institution, should promote groundwater literacy emphasizing.
   i) The role of desiltation and tank rehabilitation process in augmenting groundwater recharge in hard rock areas,
   ii) The type of well to be constructed, the depth and volume of availability of groundwater, in relation to the existing and projected interference problems in aquifers where groundwater mining is apparent,
   iii) The quality, type and HP of the pump to be used
   iv) Cropping pattern to be fallowed in relation to water requirement of crops and the volume of availability of groundwater every year.