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Is water the next oil?

Water is a sensitive item to tax. Many users form vote banks that leaders dare not antagonise.

Dipen Sheth | Print Edition: August 6, 2009

Dipen Sheth
Dipen Sheth

On the face of it, water seems to be a common enough resource, present in the form of large water bodies (remember, threefourths of the earth’s surface is covered with water). Till the beginning of the new millennium, even in an apparently arid region such as the Gulf, most countries used around a fifth of the water they received naturally.

So, why is there a water shortage now? Is this a problem that can drive the course of investing, economics and politics? In the past 50 years, the world’s population has doubled to 6.5 billion and, as yet, this is not entirely under control. Moreover, much of this increased population is only beginning to taste the fruits of a higher per capita income (across large swathes of Asia, for example) that drives the consumption of water-intensive foods like meat. The amount of water needed to produce 1 kg of meat is about 15 times the quantity required to produce 1 kg of wheat! Meanwhile, population hotspots are emerging in areas that are not naturally self-sufficient in water.

In terms of consumption, threefourths of all water intake is for agriculture. This does not mean that water consumption is more rural. Actually, this rising water requirement is being driven by the grain and meat hunger of rapidly growing urban centres. The industry, which is usually not a responsible user of resources, has learnt to recycle and conserve water to the extent that it now utilises less than 10% of humanity’s water withdrawals from nature. Meanwhile, municipal water, which constitutes 15% of the usage mix, continues to grow unabated as urbanisation picks up across the world. Many mega-cities, from Los Angeles to Delhi, depend on water supplies from reserves that are located at large distances, far enough to make the delivered/piped cost of water a significant subsidy guzzler.

This is where politics comes in. Water is a sensitive item to tax. Cities in India don’t recover even a fraction of what it takes to deliver water. Most citizens are, therefore, wasteful users. Many end-users in India are, anyway, too poor to pay a fair price, and form large vote banks that politically sensitive leaders dare not antagonise. But things are rapidly reaching a point of no return. Consumption is running ahead of sourcing and distribution, and inevitably, the people in the cities are at the short end of the receiving cycle.

Also, the weather patterns have become increasingly volatile, with alternate spells of heavy precipitation and drought. Right now, we are in the midst of one such period of apparent shortfall, which seems to have afflicted the market sentiment and economic outlook. In a year when the rest of the world is grappling with economic recession, it will hardly help India’s case if large parts of the country report significantly lower-than-normal rainfall. This could have a cascading effect on rural production, incomes and consumption, thereby puncturing a big part of the ‘resilient consumption’ theory that has driven up FMCG and other consumer-related sectors in the post-budget fall.

As of now, little has been done to tackle this problem. If some smart thinking is put in place, there are ways to balance social needs with commercial or business opportunities in the water supply space. This could attract large investments in water infrastructure.

Dipen Sheth is Vice-President, Institutional Equities, BRICS Securities Ltd.

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