Economics of Water Resource Management in Agriculture and Farm Performance in India Under Market Distortions

As agriculture is the largest user of water resources in India, its efficient management is crucial for the food and water security of the country. However, prices of water and energy used in agriculture are distorted due to government interventions. It keeps the price of irrigation water artificially low and does not reflect its scarcity value. Such a situation largely affects the efficiency of water resource management and farm performance. In this context, the study examines the economics of water resource management in agriculture by estimating the degree and sources of technical inefficiency among farmers, evaluating the productivity effects of water-efficient technology adoption, and estimating the shadow price of irrigation water. The study applied a selectivity-bias-corrected directional distance function (DDF) approach to control for selection bias in estimating technical inefficiency and found substantial technical inefficiency in the production system. Adoption of water-efficient technology, here laser land leveling, appeared to significantly improve farm productivity. The study estimated shadow price (SP) of irrigation water using the duality relationship between DDF and the profit function. The estimated SP of irrigation water was low, indicating low incentives among farmers to optimize the use of irrigation water, largely caused by market distortions. The results indicate the possibility of improving water resource management in agriculture by upscaling water-efficient technologies and reducing factor market distortions. A mix of policy measures that combines the choice of realistic water and energy prices for agricultural use, scaling up of water-efficient agricultural technologies, and interlinking economic incentives to the scaling up of water-efficient technologies seem crucial towards sustainable and efficient water resource management in agriculture.