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Turnaround in Financial Recovery in Maharashtra's Irrigation Sector

Despite a number of policy measures in almost all the states, the financial performance of the irrigation sector has been deteriorating over the years because of rising operation and maintenance expenditure as well as low and revised water rates. Meanwhile, Maharashtra has achieved an over 100 per cent recovery rate in the irrigation sector since the beginning of 2002-03. This study analyses the factors behind this impressive turnaround in the financial recovery rate. It specifically studies the water rates, working expenditures as well as financial recovery in Maharashtra vis-à-vis other states since the 1970s. The study suggests clearly that the financial recovery rate of the irrigation sector can be increased if economic and institutional reforms are packaged and sequenced appropriately along with an upward revision of water rates.

Turnaround in Financial Recovery in Maharashtra’s Irrigation Sector

Despite a number of policy measures in almost all the states, the financial performance of the irrigation sector has been deteriorating over the years because of rising operation and maintenance expenditure as well as low and revised water rates. Meanwhile, Maharashtra has achieved an over 100 per cent recovery rate in the irrigation sector since the beginning of 2002-03. This study analyses the factors behind this impressive turnaround in the financial recovery rate. It specifically studies the water rates, working expenditures as well as financial recovery in Maharashtra vis-à-vis other states since the 1970s. The study suggests clearly that the financial recovery rate of the irrigation sector can be increased if economic and institutional reforms are packaged and sequenced appropriately along with an upward revision of water rates.

A NARAYANAMOORTHY

I
rrigation plays a paramount role in improving the performance of agriculture as well as the rural economy [Hasnip et al 2001]. In India, a major thrust has been given to increase the coverage of irrigation since the independence. Up to the end of the 10th Plan, the government sector alone had invested over Rs 1,556 billion (in current prices) for irrigation development. This not only increased the area under irrigation from 22.56 million hectares (mha) in 1950-51 to over 78 mha in 2002-03 but also increased the production of foodgrains and other agricultural commodities manifold. While the contribution of irrigation to the overall development of agriculture has been well recognised and documented, the financial performance of the sector has been deteriorating over the years partly because of increased operation and maintenance (O&M) expenditures and low and revised water rates [Gulati et al 1994; GoI 1992]. The financial rate of recovery1 was close to 100 per cent in 1975-76, but declined sharply to 7.90 per cent in 2002-03 [CWC 2004]. In fact, the irrigation sector has made a net positive contribution to the government finance up to the early 1950s. The revenues from irrigation water charges at that time exceeded the government expenditures for O&M plus imputed interest on investment. But, by 1967-68, the capital costs were no longer being recovered and a net annual loss of Rs 580 million was reported. The poor performance of the sector worsened during the 1980s and current expenditures on O&M on major and medium irrigation projects by 1988-89 exceeded revenues from water charges by Rs 23.5 billion [World Bank 1991].

Considering the importance of an improved recovery rate, the planners and policymakers in India over the last three decades have been suggesting various policy measures to improve the financial performance of the irrigation sector. However, not many states have taken up this issue seriously mainly because of sociopolitical reasons. Surprisingly, Maharashtra, which has the largest irrigation sector in India, is said to have achieved over 100 per cent recovery rate from the irrigation sector since the beginnings of 2002-03. While the economists and policymakers are perplexed about this unthinkable achievement, not many studies have analysed the factors behind this impressive turnaround in financial recovery rate. How could this happen when other states are still reporting a single digit recovery rate? Is this due to a substantial increase in water rates or due to a reduction in the working expenditure in the irrigation sector? Could this be due to rapid progress made in the formation of water users’ associations (WUAs)? What are the specific reforms introduced recently to increase the financial performance of the irrigation sector? A detailed empirical investigation is needed to answer these questions as well as to understand the dynamics of this remarkable financial recovery rate. In this study, therefore, an attempt is made to study these issues covering the period from mid-1970s to 2005-06, using the available secondary information. The specific objectives are: (a) to study the water rates, working expenditures as well as financial recovery of Maharashtra’s irrigation sector vis-à-vis other states since the mid-1970s, and (b) to find out the policy factors responsible for achieving a better financial recovery rate in the irrigation sector.

This paper has been organised into four sections. Section I presents an overview about the studies available on the issue of financial recovery in the irrigation sector. Section II analyses the financial performance of the irrigation sector for the country as a whole and for selected states. The turnaround in the financial performance of Maharashtra’s irrigation sector and the factors that are responsible for the same are discussed in Section III. Conclusions and policy recommendations are presented in the last section of the paper.

IIIII
Studies on Financial RecoveryStudies on Financial RecoveryStudies on Financial RecoveryStudies on Financial RecoveryStudies on Financial Recovery

Since financial recovery is important for sustaining and managing the irrigation sector of the country, a great deal of works have been carried out focusing on this issue [Wade 1981; Sampath 1992; Gulati et al 1994; Saleth 1996; Mahendra Dev 1996; Perry 2001; Ray 2005; Narayanamoorthy and Deshpande 2005; Vaidyanathan 1999; World Bank 1991; 1999; 2002 and 2005]. Most of the studies seem to confirm the fact that the recovery rate of the irrigation sector has been poor and deteriorating over the years. Meanwhile, these studies mostly point to two reasons for the poor recovery rate, namely, increase in O&M expenditures as well as poor and unrevised water rates [Gulati et al 1994; Vaidyanathan 1999]. A classic study by Gulati et al (1994) analysed the issue of the cost recovery of the irrigation sector covering data of over four decades from the 1950s to 1990s and concluded that the unrevised and low water rates were the prime reasons for the poor financial performance of the irrigation sector.

Despite the fact that a huge increase in O&M cost is one of the prime reasons for this debacle, the literature on the financial aspects of irrigation sector, particularly from India, has been heavily loaded in favour of increasing the water rates for improving the recovery rate of the sector [Svendsen and Gulati 1994]. Unlike many existing studies, the Vaidyanathan Committee report on pricing of irrigation water [GoI 1992], after carefully analysing the water pricing and working expenditures of the irrigation sector, underlined that the recovery percentage declined drastically not only because of low and unrevised water rates, but mostly because of huge increases in the O&M expenditure. It surmises,

The staff component has been increasing over the years leaving progressively less funds for physical maintenance. The proliferation of personnel has occurred on account of various causes (such as liberal norms of staffing, obligation to provide permanent employment to workers from the construction stage, political influence and intervention from courts). Further, increases in staff costs also result from the rapid rise in wages and emoluments. The combined effect is that in the country as a whole, the staff component has risen from 34 per cent in 1974-75 to 43 per cent in 1986-87; it is mounting from year to year. This cannot be afforded. Deliberate efforts are called for to bring down the staff costs substantially” (ibid, pp 104-05).

A detailed study of Maharashtra’s irrigation sector by Deshpande and Narayanamoorthy (2000) also found that despite having higher water rates in the country, the recovery rate of the states worked out to be only 3.66 per cent during 1991-92 because the per hectare working expenses in Maharashtra were more than fivefold of the average per hectare working expenses at the national level. The study underlines that instead of working only on the water-rate side (revenue side) vigorously, it is essential to consider with equal keenness the expenditure side (expenditure of irrigation department) to understand the increasing trends in expenditure and find ways and means to cut down avoidable expenditure. While reviewing the overall performance of the irrigation sector of Maharashtra along with a few other sectors recently, the World Bank (2002) underlined that “while spending on O&M of existing facilities is already inadequate due to financial constraints, salaries account for 70 per cent of total O&M costs” [World Bank 2002, p 53].

Adequate revenue generation is essential for managing and sustaining the irrigation sector, and therefore the poor recovery often considered to be a stumbling block for improving the service quality and other rehabilitation work needed for the sector. Much of the irrigation infrastructure has been crumbling owing to the paucity of funds for O&M. A recent World Bank (2005) study surmises that “user charges are negligible, resulting in lack of accountability and insufficient generation of revenue even for operation and maintenance. The gap between tariff and value of irrigation and water supply services has fuelled endemic corruption. Staffing levels are 10 times international norms, and most public funds are now spent feeding the administrative machinery, not maintaining the stock of infrastructure or providing services. There is an enormous backlog of deferred maintenance” (p x).2

Our review suggests that the poor financial performance of the Indian irrigation sector occurs mainly because of increased O&M expenditures as well as low and unrevised water rates by different states. Though improved service quality, accountability on expenditures, improved assessment of irrigation charges and users’ participation through formation of WUAs are very important for increasing the recovery rates of the irrigation sector, not many studies have dealt with these issues. Therefore, the present study tries to deal with some of them while addressing the turnaround in financial recovery of Maharashtra’s irrigation sector.

IIIIIIIIII
Financial Performance of IrrigationFinancial Performance of IrrigationFinancial Performance of IrrigationFinancial Performance of IrrigationFinancial Performance of Irrigation
Sector – All IndiaSector – All IndiaSector – All IndiaSector – All IndiaSector – All India

Though the main objective of the study is to analyse the reasons behind the remarkable achievement in financial recovery of Maharashtra’s irrigation sector, it is also necessary to ask the following pertinent questions so as to understand the overall performance. Is it true that the financial performance of the sector has been deteriorating over the years all over India? Is this true across all time periods? What is the level of performance of rich states? Where does Maharashtra stand vis-à-vis other states in terms of financial recovery?

Table 1 presents the gross receipts (GRI), working expenses WEI and per cent of recovery rate (RRI) from the irrigation and multipurpose river valley projects both at current and constant (1993-94) prices for the whole of India. It shows that the financial condition of the sector has deteriorated over the years and more so after the early 1990s. At current prices, both the gross receipts and working expenses have been rising since 1976-77, but the rate of increase in the case of former is relatively slower compared to the latter. For instance, while the annual gross receipts increased from Rs 105 crore in 1976-77 to Rs 457 crore in 1999-2000, the working expenses increased from Rs 113 crore to Rs 7,980 crore during the same period, i e, the working expenses rose more sharply. This has resulted in a huge gap between the two.

The performance further worsens while converting the figures into constant prices. The gross receipts of the sector declined from Rs 562 crore in 1976-77 to Rs 301 crore in 1989-90 and further to Rs 251 crore in 1999-2000, for which we have the latest information for the whole of India. During the same period,

Table 1: Financial Status of Irrigation and Multipurpose RiverTable 1: Financial Status of Irrigation and Multipurpose RiverTable 1: Financial Status of Irrigation and Multipurpose RiverTable 1: Financial Status of Irrigation and Multipurpose RiverTable 1: Financial Status of Irrigation and Multipurpose River
Valley Projects, IndiaValley Projects, IndiaValley Projects, IndiaValley Projects, IndiaValley Projects, India

(Rs crore)

Year At 1993-94 Prices At Current Prices
Gross Working Gross Working Recovery
Receipts Expenses Receipts Expenses Rate (Per Cent)
1976-77 562.0 605.2 104.7 112.8 92.86
1980-81 409.5 894.4 103.4 225.7 45.78
1984-85 311.4 801.8 129.7 334.0 38.84
1990-91 305.7 3307.1 228.9 2476.3 9.24
1994-95 405.0 3960.7 445.1 4352.4 10.23
1999-2000 250.7 4378.3 457.0 7980.2 5.73

Note: Working expenses from the year 1987-88 onwards are inclusive of interest on the capital at the end of the year. Source: CWC (2004).

Economic and Political Weekly June 30, 2007

Figure 1: Financial Results of Irrigation and Multipurpose RiverFigure 1: Financial Results of Irrigation and Multipurpose RiverFigure 1: Financial Results of Irrigation and Multipurpose RiverFigure 1: Financial Results of Irrigation and Multipurpose RiverFigure 1: Financial Results of Irrigation and Multipurpose River
be increased mainly because of the rapid increase in the working

Valley Projects, All-India, 1993-94 PricesValley Projects, All-India, 1993-94 PricesValley Projects, All-India, 1993-94 PricesValley Projects, All-India, 1993-94 PricesValley Projects, All-India, 1993-94 Prices

expenses of irrigation sector since the late 1980s. This seems to suggest that an upward revision of water rates alone would not help improve the financial health of the sector, unless the required institutional and organisational reforms are taken up

simultaneously to reduce the working expenses.

5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 Rs crore

What are the factors responsible for the sharp decline of the

recovery rate? A large body of literature on recovery rates in irrigation boldly projects that the poor performance is mainly because of low as well as unrevised water rates in different states. But, this seems to be far from true. Studies pertaining to some

1976-771978-791980-811982-831984-851986-871988-891990-911992-931994-951996-971998-99

Gross receipts

states suggest that it is not mainly because of low water rates,

Table 2: Growth Rate in Gross Receipts, Working ExpensesTable 2: Growth Rate in Gross Receipts, Working ExpensesTable 2: Growth Rate in Gross Receipts, Working ExpensesTable 2: Growth Rate in Gross Receipts, Working ExpensesTable 2: Growth Rate in Gross Receipts, Working Expenses
and Recovery Rate of Irrigation and Multipurpose River Valleyand Recovery Rate of Irrigation and Multipurpose River Valleyand Recovery Rate of Irrigation and Multipurpose River Valleyand Recovery Rate of Irrigation and Multipurpose River Valleyand Recovery Rate of Irrigation and Multipurpose River Valley
Projects, All India at 1993-94 PricesProjects, All India at 1993-94 PricesProjects, All India at 1993-94 PricesProjects, All India at 1993-94 PricesProjects, All India at 1993-94 Prices

Working expenses

the working expenses of the sector has skyrocketed from Rs 605 crore to Rs 3,227 crore and further to Rs 4,378 crore (Figure 1). As a result, the recovery rate of the sector has plunged to single digits within a span of about 24 years. During the mid-1970s, the recovery rate was touching almost 100 per cent, but it declined to just about 5 per cent in 1999-2000.

Are the trends in gross receipts, working expenses as well as in recovery rate the same or not across the last 24 years? We have divided the whole period of the analysis into two as Period I (from 1976-77 to 1989-90) and Period II (1990-91 to 1999-2000) and compared the growth rates. The computed growth rate suggests that though the financial performance has been poor over the last 24 years, the performance seems to be relatively better during Period II (see Table 2). For instance, during Period I, the gross receipts of the irrigation sector declined at a rate of 5.41 per cent per annum and working expenses grew at a rate of 11.72 per cent per annum, but this improved during Period II, when gross receipts declined only at a rate of 3.09 per cent and the growth in working expenses also slowed down to 3.11 per cent. Because of the relatively slow growth in the working expenses, the recovery rate has declined at a rate of 6.19 per cent during Period

II. This appears to suggest some positive changes on the financial front of the irrigation sector, after the release of Vaidyanathan Committee report [GoI 1992].

Since water is a state subject, each state follows its own pricing policies, which are mostly guided by socio-political factors rather than economic factors. Pricing and other economic instruments used in the irrigation sector are generally varied across the states. Is the financial condition of the irrigation sector the same across different states? We have studied some of the selected states, both rich and poor, so as to understand the status of Maharashtra in terms of gross receipts, working expenses and recovery rate at two time points, namely the late 1980s and late 1990s. Data presented in Table 3 clearly shows that the financial condition has deteriorated in all the states we considered for analysis, between the late 1980s and late 1990s. It appears that this is again mainly because of the substantial increase in the working expenses. However, the recovery rate in the poor states like Madhya Pradesh and Orissa appears to be far better than relatively rich states like Punjab, Haryana and Tamil Nadu. Interestingly, the recovery rate has not at all improved in Maharashtra, where not only water rates are very high, but have also been revised upward periodically since the 1990s. As in the case of other states, the recovery rate of the irrigation sector in Maharashtra could not

Year/Period Capital Outlay Gross Working Per Cent of Cumulative Receipts Expenses Recovery (GR/WEx100)

1976-77 to 1989-90 8.57a -5.41a 11.72a -17.12a 1990-91 to 1999-2000 3.95a -3.09ns 3.11a -6.19a 1976-77 to 1999-2000 6.09a -2.40a 10.44a -12.83a

Notes: a refers to significant at 1 per cent level. ns: not significant. Source: CWC (2004).

Table 3: Financial Results of Irrigation and Multipurpose RiverTable 3: Financial Results of Irrigation and Multipurpose RiverTable 3: Financial Results of Irrigation and Multipurpose RiverTable 3: Financial Results of Irrigation and Multipurpose RiverTable 3: Financial Results of Irrigation and Multipurpose River
Valley Projects, Selected StatesValley Projects, Selected StatesValley Projects, Selected StatesValley Projects, Selected StatesValley Projects, Selected States

(Rs Crore in Current Prices)

States Year Capital Gross Working Recovery
Outlay Receipts Expenses Percentage
Andhra Pradesh Late 1980s 281.45 20.30 403.25 5.03
Late 1990s 770.70 4.60 1082.55 0.42
Bihar
Late 1980s 279.40 6.30 58.25 10.50
Late 1990s 418.35 41.75 185.25 22.77
Haryana
Late 1980s 38.00 14.55 105.00 13.86
Late 1990s 269.40 49.70 269.35 18.60
Karnataka
Late 1980s 187.25 15.20 146.00 10.41
Late 1990s 953.85 17.15 541.30 3.22
Madhya Pradesh
Late 1980s 240.75 16.00 57.00 28.07
Late 1990s 295.65 43.50 269.00 16.12
Maharashtra
Late 1980s 449.10 23.15 399.35 5.80
Late 1990s 1104.95 47.65 1541.15 3.07
Orissa
Late 1980s 141.80 5.10 14.75 35.00
Late 1990s 513.35 9.50 62.75 15.40
Punjab
Late 1980s 86.70 17.00 71.75 23.69
Late 1990s 374.40 17.00 188.10 9.03
Tamil Nadu
Late 1980s 37.30 1.45 72.45 2.00
Late 1990s 259.75 9.05 299.05 3.02
Uttar Pradesh
Late 1980s 282.30 33.50 327.50 10.23
Late 1990s 481.85 44.65 823.60 5.62
West Bengal
Late 1980s 40.40 1.55 43.50 3.56
Late 1990s 94.80 2.95 156.35 1.90
All India
Late 1980s 2486.00 187.00 2175.90 8.59
Late 1990s 7480.10 456.40 7597.75 6.00

Notes: Late 1980s – average of 1988-89 and 1989-90; Late 1990s – average of 1997-98 and 1998-99. Source: CWC (2004).

Per Cent

Figure 2: Turnaround in Financial RecoveryFigure 2: Turnaround in Financial RecoveryFigure 2: Turnaround in Financial RecoveryFigure 2: Turnaround in Financial RecoveryFigure 2: Turnaround in Financial Recovery
in Maharashtra’s Irrigation Sectorin Maharashtra’s Irrigation Sectorin Maharashtra’s Irrigation Sectorin Maharashtra’s Irrigation Sectorin Maharashtra’s Irrigation Sector

180 160 140 120 100 80 60 40 20 0

Even after independence, the policy towards water rates has been the major point of discussion right from the time of the First Irrigation Commission of Maharashtra, which had given a broad outline for water rates [GoM 1962].

Though the productivity of most of the crops is relatively lower in Maharashtra, the recommendations of the Second Irrigation Commission are broadly followed and the water rates are revised with the required frequency. Though the water rates for irrigation have not been revised between 1962 and 1980, it has been revised five times4 since 1980 (1988, 1994, 1998, 2001 and 2006), which

has not been done in a majority of the states. In fact, in order to cover O&M cost of irrigation, water rates have been increased since September 2001. These charges will automatically be increased by 15 per cent every year for a five-year period, 2001-05 [World Bank 2002]. It is worth mentioning here that no other state in India has taken this kind of bold decision in

1974-751976-771978-791980-811982-831984-851986-871988-891990-911992-931994-951996-971998-992000-012002-032004-05

Year

but due to an ever-increasing working expenses and other reasons recent times. At present, the state has the highest range of water[for details see, Narayanamoorthy and Deshpande 2005]. The rates prevailing in the country.working expenses of the irrigation sector have been increasing The water rates were very high in the state, but the percentageat very fast rate since the early 1980s, not because of the increase of cost-recovery was not appreciably higher when compared toin O&M expenditures but due to an increase in the wage and other comparable states up to 1999-2000. As per the data of thesalary component of the personnel administrating the sector. This CWC (2002), the percentage of recovery of irrigation andpoint was also reiterated by the Vaidyanathan Committee [GoI multipurpose river valley projects has declined from 166.02 per1992], which mentions that “The staff component has been

increasing over the years and leaving progressively less funds for physical maintenance. Deliberate efforts are called to bring down the staff costs substantially.” In fact, the share of the salary component in many states accounted for all the expenses allotted under the heading of operation and maintenance charges [Saleth 1996; CWC 1994].3

Low water rates fixed for irrigation is also one of the reasons for the poor financial recovery rate. Along with many suggestions, the second irrigation commission [GoI 1972] has suggested that the states are required to revise the water rates after every five years, and water rates should be fixed between 6 and 12 per cent of gross income of the crop (depending upon the crop). But, this is not followed in any of the states. As per the estimate of the Vaidyanathan Committee, the gross receipts per hectare as against the gross productivity per hectare vary from 0.1 per cent to 2.9 per cent in different states, which is much lower than what the Second Irrigation Commission had suggested. Most of the states did not revise water rates till 1999-2000 (Table 4). In fact, the water rate has not been revised since 1962 in states like Tamil Nadu. Because of low and unrevised water rates as well as a rapid increase in working expenses, the gap between the two has been widening over the years.

IIIIIIIIIIIIIII
Turnaround in MaharashtraTurnaround in MaharashtraTurnaround in MaharashtraTurnaround in MaharashtraTurnaround in Maharashtra

Water rates have been historically very high in Maharashtra. This is clearly evident from the dissent note by G K Chitale in the report of the Deccan Canals Financial Improvement Committee of 1932. It was stated that

The information that we have obtained from Hyderabad, Mysore and Bikaner states, confirms our views that the present pitch of the water rates on the Deccan canals is too high as compared with those in force in these states. Even after making allowances for the cost of construction, it is still apparent that in Mysore and in Hyderabad where the canals run through soils similar to ours, there is no reason, especially in these days of competition, as to why we should insist upon a water rate which does not bear a fair proportion to the net profits [GoB 1932, p 40].

cent in 1974-75 to 3.87 per cent in 1999-2000 in

Maharashtra,5 while the same has declined from 64.2 per cent to 5.70 per cent at the national level during the same period. In fact, during 1999-2000, the recovery rate has been over 12 to 20 per cent in states like Madhya Pradesh, Orissa and Bihar where the water rates are much lower than Maharashtra. Though an important reason for the poor recovery rate is that the per hectare working expenses in Maharashtra are about five times the average per hectare working expenses at the country level, faulty policies followed in the state cannot be ignored. The policymakers in the state all along seem to have believed that the recovery rate can be increased only by an upward revision of water rates, without introducing institutional reforms required for achieving higher recovery rate.

Table 4: Statewise Working Expenses, Gross Receipts andTable 4: Statewise Working Expenses, Gross Receipts andTable 4: Statewise Working Expenses, Gross Receipts andTable 4: Statewise Working Expenses, Gross Receipts andTable 4: Statewise Working Expenses, Gross Receipts and
Range of Water Rates of Irrigation Multipurpose River ValleyRange of Water Rates of Irrigation Multipurpose River ValleyRange of Water Rates of Irrigation Multipurpose River ValleyRange of Water Rates of Irrigation Multipurpose River ValleyRange of Water Rates of Irrigation Multipurpose River Valley
Projects in India, 1991-92 and 2003-04Projects in India, 1991-92 and 2003-04Projects in India, 1991-92 and 2003-04Projects in India, 1991-92 and 2003-04Projects in India, 1991-92 and 2003-04

As of 1991-92 As of 2003-04 States Working Gross Range of Year Working Gross Range of Year Expenses Receipts Water of Last Expenses Receipts Water of Last (Rs/ha) (Rs/ha) Rates Revision(Rs/ha) (Rs/ha) Rates Revision

Andhra

Pradesh 1377 48 99-222 1986 1556 6 148-1235 2003 Bihar na na 30-158 1983 375 76 74-371 2001 Gujarat 3605 231 25-830 1981 4768 346 70-2750* 2001 Haryana 792 88 17-99 1975 683 94 86-198 2000 Jammu and

Kashmir 529 15 6-289 na 319 6 20-49 2001 Karnataka 1639 252 37-556 1985 2014 53 37-988 2000 Kerala 596 46 37-99 na 442 33 37-99 1974 Madhya

Pradesh 748 182 15-297 1990 516 87 124-741 1999 Maharashtra 5627 206 65-1000 1989 3050 130 180-4763** 2001 Orissa 189 40 6-185 1981 256 30 28-930 1998 Punjab 412 65 14-81 1974 217 20 Abolished 1997 Rajasthan 852 99 20-143 1982 888 65 30-608 1999 Tamil Nadu 579 15 Jun-65 1962 846 27 Mar-62 1962 Uttar Pradesh 808 64 7-237 1983 484 21 30-474 2002 West Bengal 514 16 74-593 1977 470 8 37-124 1977

Notes: * Subject to increase 15 per cent per annum; ** Subject to increase 15-25 per cent per annum.

Source: CWC (1994 and 2005).

Economic and Political Weekly June 30, 2007

Area in lakh ha

Figure 3: Trends in Area Operated by WUAsFigure 3: Trends in Area Operated by WUAsFigure 3: Trends in Area Operated by WUAsFigure 3: Trends in Area Operated by WUAsFigure 3: Trends in Area Operated by WUAs

3.5 3

2.5 2

1.5 1

0.5

0 1996-97 2000-01 2000-02 2002-03 2003-04 2004-05 2005-06

Year

However, this position has completely changed since 1998-99, as the recovery rate has started increasing substantially (Table 5). As per the data of the water resources department of the government of Maharashtra, the cost recovery has increased from 30 per cent in 1998-99 to over 119 per cent in 2004-05 (Figure 2). How did this phenomenal achievement happen in the state? Though many earlier studies have suggested that the recovery rate can be achieved primarily by increasing/revising the water rates regularly, the state was not able to improve the recovery rate whenever it made an upward revision of water rates. Learning from past experience that the upward revision of water rates alone would not help increase the recovery rate, the state government has introduced a series of policy measures along with the upward revision of water rates since 2000. First, the state has revised the water rates effective from September 2001 for both irrigation and non-irrigation purposes so as to achieve the objective of covering 100 per cent of O&M costs. These charges have been increased by 15 per cent every year for a five-year period up to 2005 to cover part of the capital cost and also to neutralise the effects of inflation [World Bank 2002]. Secondly, various measures have been initiated to improve the overall supervision of the irrigation system to increase the recovery rate since 2001. Targets for every irrigation circle are fixed at the start of the financial year and review of recovery is taken in every bimonthly meeting of superintending engineers with the secretary (CAD). A special drive is also made to recover the arrears of non-irrigation use every year [GoM 2006]. Thirdly, since reduction in O&M expenditures is essential for increasing the recovery rate, various efforts are being taken up to minimise O&M costs. As a result, the total O&M costs of the irrigation sector have declined by Rs 0.566 billion between 1999-2000 and 2004-05 (from Rs 4.326 billion to Rs 3.760 billion), despite considerable increase in the area under surface irrigation in the state.6

Another important reason for the significant turnaround in cost recovery could be the rapid progress made in the formation of WUAs in the state. The state government made a policy decision to hand over the whole irrigation system management to WUAs during July 2001 itself.7 This policy says that water will be supplied only to WUAs on volumetric basis and no individual farmers would get water in future. In order to provide a legal recognition to the WUAs, the state has also enacted the Maharashtra Management of Irrigation System by Farmers Act, 2005. Because of this important policy decision, there has been significant progress in the number of WUAs functioning/registered/ proposed since September 1996. While the number of WUAs currently fully functioning increased from 100 in September 1996 to 921 in 2005-06, the area operated by these WUAs increased from about 43.68 thousand hectares to 2.87 lakh hectares during this period (Figure 3). That is, the area covered by the fully functioning WUAs has increased nearly by seven times during this period. Besides using water more efficiently, the WUAs also help reduce the O&M expenditures of the system because of better participation by farmers [Raby 1991]. Importantly, since the WUAs are required to pay the water charges at the stipulated time to get water regularly for the next season, the farmers must have paid the required water charges in time, which may have also increased the recovery rate of irrigation sector in recent years.

Along with the upward revision of water rates and other reform measures, water auditing has also been introduced in the state. The main objective of water auditing is to have a proper account of water and its uses in various sectors as well as to increase the revenue of the government [Rao et al 2003]. Water auditing for all irrigation projects in the state has been made mandatory as underlined in the state’s water policy (2003). Water auditing gives a comparison of planned water use efficiency (ha/mcum) versus actual water use efficiency as well as loss of water in each system. Since water use has to be accounted in each system under water auditing, there is tremendous pressure on the system managers to report the figures of area under irrigation precisely. In fact, the initiation of water auditing in the state has substantially increased the water use efficiency (ha/ mcum) in canal irrigation, from 96 ha in 2000-01 to 119 ha in 2004-05 [GoM 2006a]. The increase in area under irrigation must have also increased the gross receipts of the irrigation sector.

IVIVIVIVIV
Conclusion and Policy SuggestionsConclusion and Policy SuggestionsConclusion and Policy SuggestionsConclusion and Policy SuggestionsConclusion and Policy Suggestions

Though the contribution of irrigation to the overall rural economy has been well-documented, the financial performance of the sector has been deteriorating since the mid-1970s. As a result, the state agency is not able to carry out the O&M as well as other rehabilitation works needed to improve the quality of water supply to the farmers. Much of the irrigation infrastructure has been crumbling owing to a paucity of funds for O&M. Various committees, commissions, policymakers and researchers have suggested different policy measures at different time points for improving the financial performance of the sector at least over the last two decades, but not much improvement has taken place in terms of recovery rate at the all-India level. However, it has been reported that Maharashtra’s irrigation sector has made a tremendous turnaround in the financial recovery rate since 1999-2000.

This study shows that despite having the highest water rates in the country, the recovery percentage of Maharashtra’s irrigation

Table 5: Present Trends in Irrigation Assessment, OM CostTable 5: Present Trends in Irrigation Assessment, OM CostTable 5: Present Trends in Irrigation Assessment, OM CostTable 5: Present Trends in Irrigation Assessment, OM CostTable 5: Present Trends in Irrigation Assessment, OM Cost
and Recovery in Maharashtraand Recovery in Maharashtraand Recovery in Maharashtraand Recovery in Maharashtraand Recovery in Maharashtra

(Rs in billion)

Year Assessment OM Cost Recovery Per Cent of Recovery
1998-99 1.951 3.790 1.135 30
1999-00 2.762 4.326 1.729 40
2000-01 4.375 4.900 1.953 40
2001-02 4.535 4.500 2.516 56
2002-03 4.4385 3.700 3.770 102
2003-04 4.5329 3.330 3.780 114
2004-05 NA 3.760 4.480 119

Note: O M cost includes establishment plus maintenance and repairs. Source: GoM (2006).

sector was very poor until 1999-2000. The recovery rate was 166 per cent in 1974-75, but it declined to 3.87 per cent in 19992000. Since the policymakers in the state were pursuing a faulty policy of upward revision of water rates, without initiating other required reforms (cost-cutting measures, formation of WUAs, overall accountability, etc), the state could not make any financial improvement. This situation has changed completely since 1999-2000 because of the initiation of both economic and institutional reforms simultaneously. The recovery rate increased from 40 per cent in 1999-2000 to 119 per cent in 2004-05. The study finds a few specific reasons for this achievement in the financial recovery rate. First, the state has made an upward revision of water rates effective from September 2001 and the charges have been increased by 15 per cent every year for a fiveyear period up to 2005 to cover part of the capital cost and to neutralise the effects of inflation. Second, the overall supervision for increasing the recovery rate has also increased since 2001. Targets for every irrigation circle are fixed at the start of the financial year and review of recovery is carried out periodically. Third, efforts have been made to minimise the OM costs, which are considered to be the main reason for the poor recovery rates. Another important reason for this significant improvement in cost recovery is the rapid progress in the formation of WUAs in the state. This happened because the government of Maharashtra has made a policy decision to hand over the irrigation management to WUAs during July 2001 itself. The rapid progress in WUAs might have also increased the irrigation revenue of the state, while reducing the OM costs.

The study clearly suggests that the financial recovery rate of the irrigation sector can be increased, if economic and institutional reforms are packaged and sequenced appropriately along with an upward revision of water rates. The reforms that are followed in the state seem to match with the suggestionsmade by the Vaidyanathan Committee [GoI 1992], which underlined that the revision of water rates should go hand in hand with measures to improve the quality of service and to keep a check on costs. Though this paper clearly demonstrates how the state can achieve a better recovery rate by initiating various reform measures, we are unable to study certain pertinent governance issues because the paper is based on state level aggregate data. Is the recovery rate same across all the systems (small, medium and large)? Are there any differences between the systems which are managed by WUAs and the state agency? What is the share of irrigation revenue and non-irrigation revenue in the gross receipts of the sector in various irrigation systems? Is there any cross subsidisation of drinking water needs of the poor? How does the financial recovery compare with the total economic cost of irrigation? Did reduction in OM costs result in a further neglect of maintenance and related functions? While the answers to these questions would help to understand the various dimensions of the financial performance of the sector, there is no doubt that the experience of Maharashtra would be a great lesson for those states that have been continuing to show a single digit recovery rate over many years. Further research is also needed to identify the factors and institutional process

Economic and Political Weekly June 30, 2007

that may help create similar structures to learn from Maharashtra’s experience.

[l'

Email: na_narayana@hotmail.com

NotesNotesNotesNotesNotes

[This is a revised version of the paper presented at the IWMI-TATA workshop on Water and People: Reflections in a Turbulent Pool, held at IRMA, Anand, Gujarat during March 8-10, 2007. The author is thankful to V M Rao, S Mahendra Dev, Munir A Hanjra, Sanjiv Phansalkar, K J Joy and participants of the workshop for their comments on the paper. However, the author takes the full responsibility for any errors remaining in the paper.]

1 The financial recovery rate of irrigation sector in India has been calculated by dividing the gross receipts of the irrigation sector with the expenditures on OM works. Though ideally one should include the capital cost of the sector for estimating the recovery rate, it is generally not considered due to socio-political reasons. However, some interest on the capital cost has been included under the head of working expenditures for estimating the financial recovery rate of the irrigation sector since 1987-88 [CWC 2004].

2 In fact, because of deferred maintenance works, the cost required for sustaining the sector has considerably increased over the years. The World Bank (2005) estimated that the cost of replacement and maintenance of India’s stock of water resource and irrigation infrastructure would be about $ 4 billion a year, which is about twice the annual capital budget in the five-year plan.

3 In most of the states, the actual expenditures on repair and maintenance works account for relatively less share in the total working expenses. In Maharashtra, the expenditure on repairs and maintenance as a per cent to total working expenses was 43 in 1974-75, but it further went down to 37 in 1986-87. Though the recent data on this is not available to quote here, we believe that the trend would not have reversed in recent years.

4 Personal communication with S V Sodal (the former secretary, water resources department, government of Maharashtra), who is considered to be the main person responsible for initiating the reforms in the state’s irrigation sector.

5 We could find lot of discrepancies between the data (on financial recovery) published by CWC and water resources department, government of Maharashtra, especially during late 1990s.

6 Given the increase in canal irrigated area, one would normally expect an increase in OM expenditures. But, this has not happened in Maharashtra. Could this be due to poor allocation of funds for OM activities? While the exact reasons for reduction in OM expenditures may be useful for policy decision in different states, we could not elaborately study this issue because of data constraints.

7 Though the policy decision to hand over the irrigation system management was made only during 2001, the state agencies along with some NGOs have been making an effort to popularise the concept of participatory irrigation management since late 1980s. As a result, some progress has been made in the area operated by WUAs, much before the formal announcement of handing over the system to WUAs.

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