The time is ripe for greater private sector investment in water, till now considered a ‘public good’.
Water supply to and disposal from residential and commercial segments are expected to grow significantly, even as massive government spending on irrigation continues. We estimate $30 billion (Rs 1.39 lakh crore) is up for grabs every year in India’s water business.
Understanding the broad numbers
Globally, agriculture consumes the most amount of water (69%). Industry and residential segments split the rest of water consumption at 18% and 13%, respectively. Industry’s consumption of water is expected to grow disproportionately (3.2% per annum) to overall demand growth (2.2% pa).
In India, the skew towards agriculture is more pronounced (85%). This is both due to a low-yield per drop of water and also the free or (low) fixed cost electricity offered to farmers, which promotes unchecked usage. As India urbanises, the needs of its energy and industrial sectors (currently 9% of demand) will significantly outpace growth in residential (6%) and agricultural demand.
According to the ministry of statistics and programme implementation (Mospi), India currently uses around 813 billion cubic metres (bcm) of water (a cubic metre of water is 1,000 litres), and this is expected to rise to 1,093 bcm by 2025. For reference, the four-month long monsoon delivers ~4,000 bcm of water and our rivers carry 1,869 bcm of water annually. Hence, while there is no physical scarcity of water, the issue is of space-time mismatch. Water is not available at the right place at the right time, which creates scarcity and hence, value.
Supply side: Everyone loves big projects
Big ticket solutions on the supply side include the creation of more inventory and delivery infrastructure (dams, canals, etc) and supply sources (desalination plants). India’s storage capacity of water is 212 bcm, which is a quarter of the country’s annual requirement (whereas globally, countries look at storing at least a year’s worth of water).
We hence expect the government to continue its focus on creating this infrastructure. However, such utilities face high capital expenditure and costs of supply and can be feasible only with practical revenue models, focused on either the user or the government as payee. Unfortunately, given the large population dependent on agriculture, it has been found politically expedient to rely on the latter.
We expect the government to sharpen its focus on urban infrastructure creation. Segments like sanitation and waste-water treatment will open new opportunities. Note that India generates ~38 billion litres of sewage daily, of which it treats only 30%: the rest is flowing untreated underground or into rivers and other water bodies.
Chennai has taken the lead in creating desalination plants for its citizens. The project (requiring an investment upwards of Rs 500 crore) will supply water to Chennai at Rs 48 per 1,000 litres. While other cities, notably Mumbai, are toying with the idea of desalinated water, unless the pricing of water from the final consumer increases, these projects may further strain water utilities.
Demand drivers: Agriculture, industry and home consumption
Agriculture will continue to provide growth opportunities to the irrigation industry (87.2 million hectares of the ~140 million hectares of arable area is irrigated), pump companies (India has an installed base of ~30 million pumps) and irrigation equipment industry (only 3.5 million of 87.2 million hectares of irrigated area has micro/ sprinkler irrigation).
Note that the high installed pump base means that the ratio of India’s groundwater consumption to its surface water is highly skewed at ~50%, causing groundwater depletion worries in many areas.
Home-delivery of water (tanker services), bottled water and purifiers are expected to see increased demand. We expect tentative steps towards the creation of water utilities in areas of city-water distribution, especially in the area of waste water treatment.
Pricing: What is free is not valued
Water in India gets ‘priced’ according to political expediency or demand exploitation. Indians with access to water infrastructure pay a small fraction (Rs 5 per 1,000 litres, compared to global urban prices upwards of Rs 75 per 1,000 litres) of the price charged globally by water utilities.
Ironically, those without access to water pay a higher price (tanker water in Mumbai costs upwards of Rs 80 per 1,000 litres). Stable and enforced pricing mechanisms can help water users make rational and economically beneficial choices of their water use entitlement.
However, the urban local body-controlled water utilities in our cities are caught in a vicious cycle of low prices and limited collection leading to under-investment in infrastructure (causing leakages that can amount to as much as 32% in urban India, according to Asian Development Bank), resulting in further disinclination of the public to pay. We estimate the total annual collection of the urban water utilities in India to be $646 million, while Indians will spend over $650 million on purifiers annually.
Privatising water utilities, a contentious idea globally and being tried cautiously in India, could increase the cost of water for users from the very low levels currently.
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