The Flawed Economics of Free Water

Over the past few months, ever since the heady fragrance of the Delhi elections starting wafting in the winter air, the buzz was that the Aam Aadmi Party (AAP) would sweep back to power. For many, the positive opinions seemed to converge into two tangible gains – free water, and free electricity. Now, freebie politics has always been popular among the masses, but with the free water and free electricity, the appeal seemed to transcend multiple socio-economic and more stunningly, educational backgrounds. One might have reasonably expected the educated populace to see the economic reality through the myopic haze of the politics behind the freebies; but alas, I realised that was not the case when a senior professor at a premier technology institute in the capital assured everyone around that their vote was going to the AAP as a reward for the free water.

Looking at the electoral results, the professor was surely not alone in such thinking. Delhiites across the spectrum did, in fact, reward the incumbent government, completely glossing over that pithy bit of truth that Peter Dos Utt called TANSTAAFL (There ain’t no such thing as a free lunch) in his 1949 monograph about a new economic world order.

Now that the dust has settled on the electoral campaigns, perhaps the hot air balloons of empty promises have cooled and descended into the grimy realms of reality. This might also be a good time to reflect on that wisdom – TANSTAAFL that many economists have since quoted to reflect something that is technically called an opportunity cost.

Indeed if water is being offered for free, there would be corners cut somewhere and someday, all of us would have to pay for it. The question is, who is taking the hit today? The Delhi Jal Board is the obvious fall guy. According to the response to an RTI query in September 2018, the Delhi Jal Board surplus had fallen from a peak of Rs. 227.88 crores in 2009-10, to a (tentative) deficit of Rs. 663.59 crores in 2018-19.

The supporters of the free water scheme might argue that even though the Delhi Jal Board is in the red, the scheme itself is beneficial. The commonest argument to bolster the claim of the scheme being an intelligently-designed and an economically sound one is the one that says that the scheme allows for free water only to the extent of 20 kilolitres per household per month and if the household were to exceed even a single kilolitre over that, they would have to pay for the entire consumption and not just for the marginal consumption. The underlying assumption is that households would stringently strive to conserve water in order to maintain their monthly consumption within the 20 kilolitre mark.

Prima facie, that logic is sound. The only little problem is that the claim is neither borne by data, nor by the realities of human behaviour. There are no easy ways to arrive at an estimate of just how many households make an effort to conserve water in order to continue to benefit from the government largesse.

According to the Economic Survey of Delhi 2018-19, the total water consumption (including households and industrial units) per capita per day has hovered around 48 gallons to 50 gallons between 2004-05 to 2016-17 (the data for 2018-19 was unavailable in the report). This means, while the absolute water requirements have gone up due to the growth in population, water usage per capita has remained constant. Therefore, a report published by Abdul Shaban and R. N. Sharma in 2007 titled “Water Consumption Patterns in Domestic Households in Major cities” may still offer us relevant insights.

As per the report, in Delhi, middle income households, low income households, and slums consumed 396.4, 393.5, and 398.7 litres of water per day. Of course, there is wide variation between the consumption of individual households as evidenced by the high standard deviations of 248.6, 176.4, and 216.8 litres per household per day, respectively. Disregarding that variance for a moment, let us assume that the average household consumption (excluding high income households) was around 396 litres per day. Juxtapose that with the water consumption that is fully subsidised by the Delhi government – 20000 litres per household per month, or, 667 litres per household per day.

Clearly, even if we assume a steep rise in average water consumption per household since 2007, the subsidised levels still allow a very large headroom. Therefore, the policy is perhaps not effective at instilling a sense of responsibility towards water conservation among the households; instead, it may be doing just the opposite – given the liberal consumption limit before the tariffs kick in, households are probably disincentivised to conserve water.

Further, if we consider an average household as comprising of five members, the per person availability of free water works out to 133.4 litres per day. That is very close to the average water consumption per capita per day in major Indian cities – 135 litres. Had the goal been to inculcate water saving practices, the free limit should have been set much lower, closer to global benchmarks of 92 litres or less in European cities such as Leipzig in Germany and Malaga in Spain.

Delhi Jal Board has in the past been estimated to have transmission losses to the tune of 35%-40% which is double the average loss for developing countries at about 20%. With such huge quantity of leakages, to provide 133 litres per person per day, the Jal Board has to purify and pump over 180 litres per person per day. Given the poor financial health that the Board is in, the amount of money available for maintenance and repair of pipelines would be only expected to nosedive further making the problem worse. The Jal Board is truly caught in a vicious circle. 

Multi-part pricing models with a large price bump after crossing an arbitrary threshold –  as in the case of water tariffs in Delhi – do less to incentivise individuals to modify their behaviour as the policy states an intent to do, and achieves more of the negative outcome – tampering and theft. Not just that, there is enough room for other forms of malpractice as evidenced by the findings of a monitoring committee that reported to the National Green Tribunal (NGT) regarding the misuse of the scheme by several housing societies in Delhi that use pumped groundwater after exhausting the free water to avoid water bills. Such practices fly in the face of the usual principle in the case of all finite natural resources – the user pays.

Such malpractices also highlight another problem that should have been more central to the narrative – that of ecological water availability. According to the Central Ground Water Board, the water table across Delhi has been depleting by 0.5 metres to 2 metres per year. The districts of New Delhi, South Delhi, South East Delhi, as well as the districts in the eastern part of the city are classified as “over-exploited” with ground water withdrawal being higher than the recharge. The North, North-West, and South-West districts fare only marginally better, being classified as “semi-critical”.

In the 1974 mystery drama directed by Roman Polanski – Chinatown – the character of Jack Nicholson got his nose almost cut off in a fight over water. While it may have been dystopian then, with the climate considerably warming up across the world, water stresses are no longer a hypothetical possibility of the future. We now live in a world where “Day Zero” in the context of water availability is a reality – Chennai declared Day Zero in 2019, and Cape Town came very close in 2018. If sufficient measures are not taken urgently, Delhi’s own Day Zero may not be too far in the future. According to the global water stress atlas published by the World Resources Institute in 2019, most of northern India is subject to “extremely high” baseline water stress.

Given all of the above realities, it is amply clear that water should be priced. A commodity that is given free is not valued by the end consumer and the free pricing removes any incentive to conserve it. It also stresses the financial health of the public utility system leading to further deterioration in their operational efficiency. Like any other exhaustible resource, free is the wrong price for water.