Edelweiss: Every drop counts

We have been in this settlement (Kothrud, western Pune) for more than 12 years, since we worked as labourers on the construction of the apartment blocks that you see all around here… now we face an acute shortage of water. We have public standposts in the settlement, but water is available for only two to three hours a day. In such a short period of time, it is not possible for all of us to fill water. There is always a long queue and frequent fights. Women come to blows because some try to fill many handaas (small water containers) or jump the queue. Those who do not get their turn before the water is turned off have to walk 20 to 30 minutes to fetch water. Some pay up to INR 5 for one handaa of water. Some collect the water that keeps percolating in a small ditch by the side of the path near the water taps. As you can see, the water is turbid. We cannot drink it, but we can use it for washing. For a few weeks before municipal elections, one of the candidates who lives on the other side of this hill used to supply water to us via long hosepipes from taps in his house. After the elections, the hosepipes disappeared and our water supply stopped. Now, if we go to him to ask for water he drives us away as if we are beggars. It is so humiliating!” from interviews with women in Laxminagar, Pune, India. Source: UN-HABITAT, 2004, as quoted in Millennium Project

Ancient cities taking root close to fresh water bodies was not a coincidence; water nurtures civilisations. While this base fact has remained unchanged since ancient times, it has been progressively obscured by developments of the modern age. Increase in population and urbanisation have been two significant developments which have intensified the pressure on world water resources. The world’s population, which was 2.5 bn in 1950, has increased 150% to over 6 bn in 2000. About half the world’s population lives in urban centres today, compared to less than 15% in 1900.

With a weak and inefficient institutional framework, India has been unable to rise to the challenge of managing water resources in the face of the above two factors. Over the past three decades, the per capita water availability in the country has declined two-fifths. The urban water supply system is in need of an overhaul, water treatment capacities have grown at an abysmally low pace, and the area under irrigation needs to grow to feed an ever increasing population. We believe, insufficient regulatory action and not enough emphasis on water management is responsible for the current situation. However, we are beginning to see the first signs of that changing. The Jawaharlal Nehru National Urban Renewal Mission (JNNURM), an initiative dealing with the infrastructure needs of a rapidly urbanising India, has ~38% projects that have been sanctioned till date for improving water supply infrastructure in India. The states of Andhra Pradesh and Karnataka are leading the expansion of irrigation capacities. Hence, while the water situation in India is grim, opportunities have begun to bud.

The water industry in the country can be divided into demand management, water supply augmentation & treatment, water infrastructure, and water utilities. Different verticals have varying dynamics. While the number of companies serving the water industry in India abounds, it is difficult to identify public companies that have a substantial chunk of revenues coming from the water market. In this report, we will look at Thermax (TMX), Larsen and Toubro (LNT), Patel Engineering (PEL), Hindustan Dorr-Oliver (HDO) and Ion Exchange (ION), which have a presence in the water sector in India, however small. We believe, the water story in the country is a long drawn one and only at a later stage in the cycle can water come to contribute a substantial portion of revenues for companies covered. Nevertheless, as the cliché goes, ‘catch them young’.

“How is it that water, which is so useful that life is impossible without it, has such a low price, while diamonds, which are quite unnecessary, have such a high price?” — Adam Smith

Water demand-supply dynamics: The progressive decline According to various sources, India’s exploitable renewable fresh water resources are estimated at ~1,100-1,200 bcm. Surface water accounts for a majority of fresh water resources in the country. However, there is an overlap between surface and ground water resources While the total water resource availability remains constant, the per capita availability of water has declined steadily due to population growth. A per capita availability of less than 1,700 m 3 /year is termed a water stressed condition, while if it falls below 1,000 m 3 /year, it is termed as water scarcity condition. Per capita water availability in India stands at ~1,150 m 3 /year. While on an average we may be nearing the water scarce condition, on an individual river basin-wise situation, ~45% of Indian river basins are facing water stressed conditions.

The demand on water resources is generally classified according to end users. While agriculture constitutes the largest share of water demand, it is pertinent to note that the share of agricultural water demand is declining in contrast to an increase in the share of domestic and industrial water demand. We believe, this is a consequence of high industrial growth, coupled with lower growth in agriculture in the past decade.

Steady growth in population over 1973-02 and changing lifestyles have also contributed to the steep growth in domestic water demand. It grew at a CAGR of 14.7% over 1973-02 compared to 6.7% and 4.3% in industrial and agricultural water demand, respectively, over the same period.

The future: Will it get worse before it gets better? According to Ministry of Water Resources and National Commission on Integrated Water Resources Development (NCIWRD) estimates, demand for water is likely to increase at a CAGR of ~1.5% and ~1.3%, respectively, from 2010 to 2050. We are more comfortable with estimate of the former as it does not assume substantial increase in irrigation efficiency unlike the latter. The peculiarity in the case of water is that supply driven by the hydrological cycle remains constant, while demand follows a linear path, driven by population growth, industrial growth, and change in lifestyle. Apart from the per capita availability of water, we look at the water dependency ratio to ascertain the stress on water resources in India Driven by the increase in agricultural, domestic, and industrial demand of 64% in 2010E, the water dependency ratio is likely to be at dangerous levels. The declining water demand- supply dynamics can be explained by the Environmental Kuznets curve. According to it, in the initial part of economic development, the environment deteriorates as pollution increases. However, after a threshold, when basic needs are met, environment gets priority, which facilitates investments in the same

While India may still be on the upward leg of the Kuznets curve, we believe, we are close to a threshold point from where investments in the water sector are likely to increase. We use the water dependency ratio as a guide to predict the threshold. The increasing water dependency ratio, according to us, implies that we are getting closer to the threshold point.