India Can No Longer Treat Water as a Free Input to its Economy
Without reforming pricing, incentives, and fiscal preparedness, water scarcity will increasingly burden India’s economy and stability
A background note can be accessed here: IMF Report on Water Scarcity
Dr. Vivek: Independent Researcher
SDG 6: Clean Water and Sanitation | SDG 8: Decent Work and Economic Growth
Ministry of Jal Shakti | Ministry of Agriculture & Farmers’ Welfare
The IMF warns that a 5 percent drop in water availability can shave up to 3.1 percentage points off GDP, while existing subsidies for water-intensive crops accelerate depletion. What reforms in water pricing or agricultural support, such as scarcity-linked tariffs or redesigned input subsidies, are essential to internalise environmental costs while protecting agrarian livelihoods?
Reforming water pricing and agricultural support is politically sensitive, which makes policy design as important as intent. Relying solely on price-based instruments risks sharp income shocks and weak compliance, making behavioural and institutional tools essential, particularly when tailored to local contexts. Non-price interventions, such as community-led planning and crop suitability mapping, can gradually reduce the cultivation of water-inappropriate crops without abrupt income shocks. These measures are most effective when anchored in integrated water resources management, which links hydrological data, climate forecasts, and local agronomic decisions rather than treating these domains in isolation.
More broadly, macroeconomic stability under water stress requires a continuous feedback loop between economic policy and climate science, supported by regular stakeholder dialogue and adaptive management frameworks. However, complexity in policy design must be matched with simplicity in implementation. Behavioural change – driven by shifts in attitudes, social norms, and locally credible leadership – becomes critical to sustain reforms over time. Well-designed reforms can thus internalise environmental costs while protecting agrarian livelihoods by sequencing incentives, information, and institutional trust rather than relying on prices alone.
India exports vast quantities of “virtual water” embedded in crops and manufactured goods, placing stress on already-depleting aquifers. What trade, procurement, or certification mechanisms could curb unsustainable virtual water exports without undermining export competitiveness, and how might they reshape cropping patterns, farm incomes, and long-term water security?
The IMF’s evidence shows that virtual water exports reflect a broader global pattern, suggesting scope for coordinated international responses alongside domestic reforms. Managing exports at multiple sub-national scales can improve water outcomes while strengthening broader environmental sustainability. Therefore, the issue of India’s virtual water exports should be addressed through a layered strategy that combines national, sub-national, and global mechanisms.
A first step is visibility of virtual water in products and services–through labelling or disclosure of embedded water use and intensity–can provide a basis for decision-making by producers and consumers, alongside regulatory action by policymakers.
At the same time, domestic distortions must be addressed. Free or underpriced electricity has been a major driver of groundwater over-extraction, and India has precedent in gradually reforming both electricity and water pricing where they were once free.
Treating water explicitly as an economic good – priced at meaningful levels – creates space for market-compatible instruments. Cap-and-trade mechanisms for blue water use, combined with legal recognition of groundwater as a common-pool resource requiring metering and permits, can align farm incomes with long-term water security.
The IMF notes that repeated droughts and water shocks can cause persistent macroeconomic scarring, especially where fiscal buffers and governance capacity are weak. What mix of fiscal tools, social-protection measures, and public-investment priorities should India adopt to build resilience against recurrent water-climate shocks across agriculture, industry, and urban systems?
Repeated droughts and water shocks create lasting macroeconomic scarring when governance and fiscal preparedness are weak. Integrated Water Resources Management (IWRM) captures the interdependence of water, agriculture, industry, and urban systems, yet this integration remains uneven in practice. Recent flood devastation following prolonged drought in Iran underscores how neglect of IWRM can amplify fiscal stress and humanitarian costs.
Reducing vulnerability requires rebuilding water prudence at village and local levels, drawing on traditional wisdom and extending it through appropriate community-scale technologies. Such preventive investments can substantially lower the need for large, reactive fiscal interventions. Nonetheless, crisis response remains essential. Governments should earmark contingency funds with clear triggers and transparent rules for deployment.
Proactive capacity-building must complement this. India can leverage the Anusandhaan National Research Foundation to consolidate and operationalise existing knowledge through applied research. Crucially, resilience-building cannot be centralised alone. A decentralised, participatory approach – engaging states, local governments, and communities, as reflected in the Jal Jeevan Mission guidelines – ensures that fiscal tools, social protection, and public investment reinforce each other across scales.
Author:
Dr. Vivek acknowledges with gratitude a constructive discussion with Dr. Amol Agarwal that contributed to the development of this commentary. Views are personal.