Urban water pricing: Setting the stage for reforms – A study by National Institute of Public Finance Policy

This study on “Urban Water Pricing” by the National Institute of Public Finance Policy grew out of the need to continue and deepen the process of urban sector reforms.

It underlines, in this regard, the importance of a responsible municipal fiscal and financial system, simplification of existing water pricing and tariff structures, and regulatory mechanisms which are able to balance the interests of the producers and consumers of urban services.

Setting appropriate prices is indispensable to providing adequate water to India’s growing urban population. Water in most Indian cities and towns is underpriced, with damaging long-run consequences for households who have limited and poor quality water services and for water supplying entities which are unable to invest and expand water coverage.

Most water supply entities – be these the Public Health Engineering Departments (PHED), state or city-level water boards, or municipal governments, run at a loss, and cover the loss – defined as the gap between revenues from the sale of water and cost of water provision – from government subsidies and accelerated depreciation of capital. The result is a low-level equilibrium: low tariff, poor services, and constraints on access, especially of poor households.

While the need for appropriate pricing of urban water has been long stressed and is widely recognized as central to broader urban sector reforms, what constitutes water price reform remains an elusive and emotive issue. Moreover, the goals and objectives of water pricing are often conflicting.

Using city-level experiences of water pricing, particularly in respect of the size of the consumer base, multiple instruments of charging, price discrimination between different water user groups, and price-cost linkages, this study provides a framework that spells out key areas of reform, objectives that may govern water pricing, and parameters of tariff rationalization.

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