Conceptual framework of South Asian water futures exchange - Commodity Vision

In this article published in Commodity Vision, the author presents the concept of the establishment of a 'futures market in water availability' in the context of the risk of water availability that Indian agriculture has been facing in the recent years.

With South Asian agriculture being dependent on the timely occurrence of the monsoons, any deviation from the scheduled arrival of the monsoon causes problems not only for the farmers, but also produces a threat to the food security of the region. However, the author argues that, there is no market in South Asia where users and investors exposed to water availability risk can effectively hedge against such a risk.

There can be numerous advantages of the futures market for water:

  • Water futures market will help discover price (through the scarcity value of the resource), thereby leading to an efficient use of the resource.
  • Water futures contracts will provide a price indicator for future stored water. This will assist investment decisions and also forward risk management.
  • The price realised at the futures market will be an objective instrument of decisionmaking for project prioritisation
  • Pricing of natural resources can raise public and political awareness of the importance and availability of the resource. A high value of a natural resource might imply its high importance to the community
  • Irrigated as well as rain dependent agriculture, dependent on the availability of water will be able to use the market (or products derived from the market) to insure themselves against droughts by locking in prices in the water futures market
  • Water futures market will provide the financial tools required by investors and banks to confidently invest in the rural sector. This would result in long-term planning and investment that will actually deliver water to areas that need it rather than simply insure against its absence.
  • A water futures market will help in promoting the best water-efficient technology. This will further stimulate research on water resources and will eventually help in the crisis management for the future.

However, the author argues that a lot needs to be done for such an institution to be effective. The most crucial one is creating adequate infrastructure to bring about real-time flow data in the public forum. A knowledge base that is transdisciplinary as well as trans national for water resource economics, institutions, and hydrological engineering has to be created.

A regulatory authority should be created and consist of specialists in various aspects of water resource management, rather than merely having bureaucrats, and should have their regional offices in various capital cities of south Asia.

 It is important to place sufficient information on all water-related aspects in the public domain, and also develop adequate analytical methods and instruments for better prediction. With knowledge based on adequate information, an efficient futures market for water can help in discovering the price of water, which will reflect upon the scarcity value of the resource, concludes the article.

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