Water Policy 18 (2016) 565–585

Irrigation water demand and implications for groundwater

pricing in Pakistan
Muhammad Arif Wattoa,b, * and Amin William Mugeraa,c
a
School of Agricultural & Resource Economics, The University of Western Australia M089, 35 Stirling Highway,
Crawley 6009, Western Australia, Australia
b
US-Pakistan Centre for Advanced Studies in Agriculture and Food Security (USPCAS-AFS), University of Agriculture,
Faisalabad, Pakistan
*Corresponding author. E-mail: arifwattoo@ymail.com; arif.watto@research.uwa.edu.au
c
The Institute of Agriculture, The University of Western Australia M089, 35 Stirling Highway, Crawley 6009,
Western Australia, Australia

Abstract

This study employs the positive mathematical programming (PMP) approach to estimate groundwater derived
demand for irrigation using a cross-sectional dataset of 200 predominantly groundwater irrigated farms from the
Punjab province of Pakistan. First, we find that the PMP optimal solution uses less water than what is available
(being extracted) in order to make farmers allocate all the available land to different crops. Second, when water
supplies are constrained farmers allocate land to different crops based on their total returns, not on the irrigation
water requirements. The study results suggest that the limiting/constraining groundwater extractions would induce
farmers to reconsider their irrigation water demand. The study findings suggest an introduction of Rs. 0.04/m3 of
groundwater would not decrease farm income rather it would make farmers aware of the economic value of water.
We suggest that although water pricing can induce an efficient use of groundwater extractions, additional policies
are also required that improve irrigation water use efficiency.

Keywords: Groundwater irrigation; Irrigation water demand; Pakistan; Positive mathematical programming
(PMP); Water pricing

1. Introduction

Globally, the agriculture sector is the largest consumer of water withdrawals. The agriculture sector
accounts for approximately 70% of the global water withdrawals (Döll, 2009; Siebert et al., 2010). The
irrigated area comprises less than 20% of the global cropland, but it contributes more than 40% of the
global food production (Döll & Siebert, 2002). Although surface water is the major supplier of irrigation
doi: 10.2166/wp.2015.160

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water, irrigated agriculture also heavily relies on groundwater resources in many regions of the world.
Currently, groundwater contributes about 42% of the global irrigation water supplies (Rodell et al.,
2009; Siebert et al., 2010; Döll et al., 2012). The huge increase in groundwater use over the past
half-century has been a result of development of large-capacity wells and wide water distribution tech-
nologies (Schwartz & Ibaraki, 2011; Scanlon et al., 2012). A recent study reports an approximate
1,500 km3 y
1 use of tapped water at global scale (Döll et al., 2012) and the area equipped for ground-
water irrigation is about 113 million hectares which is about 38% of the global irrigated cropland
(Siebert et al., 2010). Due to increasing dependence and consequently higher extraction rates, ground-
water resources are rapidly declining in many parts of the world (Giordano, 2009; Schwartz & Ibaraki,
2011; Werner & Tom, 2012). Despite the global groundwater abstractions (1,500 km3 y
1) being far
lower than the global recharge (12,600 km3 y
1) groundwater resources measured locally in different
regions are in gradual decline (Döll & Fiedler, 2008; Wada et al., 2010; Konikow, 2011; Döll et al.,
2012; Scanlon et al., 2012). Aeschbach-Hertig & Gleeson (2012), based on the recent estimates,
have remapped global groundwater depletion rates which show the highest depletion rates in the
USA, Mexico, Saudi Arabia, China, India and Pakistan.
It is widely recognized that Pakistan is amongst the countries where groundwater is under rapid
depletion (Khan et al., 2008; Rodell et al., 2009; Wada et al., 2010). Being the third largest groundwater
consumer, Pakistan accounts for about 9% of the global groundwater withdrawals (Giordano, 2009). In
terms of the cropped area, Pakistan irrigates 5.2 million hectares which constitutes 4.6% of the global
groundwater-fed cropland (Siebert et al., 2010). The utilization of groundwater resources has been play-
ing a key role in agricultural development for a long time in the region. However, the spectacular increase
in groundwater use started after the 1960s’ Green Revolution. The adoption of high yielding and water
intensive crops during the Green Revolution increased irrigation water requirements by many times
(Shiva, 1991; Ahmad et al., 2004). Consequently, efforts were made to increase irrigation water supplies.
Although, the completion of two major reservoirs Mangla1 and Tarbela (1967–1976) made a significant
addition, the canal water supplies could not meet the escalating crop water requirements due to vast
expansion of the irrigated area and the adoption of modern water intensive crops varieties. Concomitant
with higher irrigation water demands, massive groundwater extraction was started by thousands of farm-
ers in pursuit of reliable irrigation water supplies through large scale tube-well development.
During the early 1960s, the adoption of tube-well technology was facilitated by government support
policies such as rural electrification, subsidization of electricity, diesel and drilling services, free pump
sets and low interest long-term loans (Falcon & Gotsch, 1968; Papanek, 1968; Johnson, 1989; van
Steenbergen & Oliemans, 2002). Later, higher yields and greater economic returns (Meinzen-Dick,
1996) encouraged farmers to adopt tube-well technology and the transition into growing water intensive
crops, such as sugarcane and rice (Muhammad, 1964, 1965; Falcon & Gotsch, 1968; Nulty, 1972).
The groundwater share of total irrigation water supplies which was observed at nearly 8% during the
1960s has now gone up to more than 50% in many parts of the country (Strosser & Rieu, 1997; Qureshi
et al., 2010). However, the renewable groundwater resources of Pakistan are not sufficient enough to
meet the outpacing irrigation water demands. Consequently, groundwater resources are under immense
pressure from over-drafting. Currently, the groundwater extraction rates have increased to 60 km3 y
1

1
The Mangla Reservoir is located on the Jehlum River. It was completed in 1967. The Tarbela Dam is situated on the Indus
River and is the largest earth-filled dam in the world. It was completed in 1976.

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 M. A. Watto and A. W. Mugera / Water Policy 18 (2016) 565–585 567

which have exceeded the recharge rate of 55 km3 y
1 (Giordano, 2009). Rapidly declining groundwater
tables have made groundwater extractions economically unviable (Banerji et al., 2006), and are creating
environmental concerns with serious repercussions for the sustainability of irrigated agriculture in the
region (Kelleners & Chaudhry, 1998; Kijne, 1999; Kahlown & Azam, 2002; Khan et al., 2008; Qureshi
et al., 2009).
Given the well-documented various spatial and temporal externalities of groundwater over-drafting,
some sort of regulatory mechanism is necessary to ensure its sustainability. Many policy mechanisms
propose water pricing, transferable rights, and reallocation mechanisms (e.g., markets) to regulate agri-
cultural water demands (Tsur & Dinar, 1997; Tsur et al., 2004a). It is considered that ‘getting the right
price’ is important to improve water allocation and conservation ( Johansson et al., 2002). It is argued
that an effective water pricing policy must consider the elasticity of demand for irrigation water and any
collateral effects which may come in the form of reduced agricultural production as a result of con-
strained water supplies (Huang et al., 2010). Many studies have demonstrated that the demand for
irrigation water is inelastic and hence water pricing would not make users change existing water allo-
cations (Moore et al., 1994; Varela-Ortega et al., 1998; Berbel & Gómez-Limón, 2000; Schoengold
et al., 2006). Similarly, farmers are reported to be unresponsive to low water pricing2 in Pakistan
and do not make on-farm investments in water conservation technologies or to make efficient use of
water resources (Chaudhry & Young, 1989). So, if groundwater irrigators in Pakistan are not responsive
to existing water pricing (cost of extraction for sellers and cost of buying for buyers)3, introducing some
groundwater pricing will not significantly reduce groundwater demand. In the past, the government tried
various indirect groundwater management strategies, such as creating a nexus between electricity tariffs
and groundwater withdrawal decisions, but limited success was reported. The successful implementation
of an effective water management policy requires assessing the levels at which farmers’ demand for irri-
gation water becomes elastic and remains socio-economically acceptable.
The goal of this paper is to estimate groundwater derived demand for irrigation in the Indus basin of
Pakistan. We use positive mathematical programming (PMP) to estimate the irrigator’s demand for
groundwater using a farm level survey consisting of two different types of irrigators, i.e., water sellers
and water buyers. There exist few studies on the economics of irrigation water that discuss water pricing

2
In Pakistan, some water charges are levied as a user charge (Abiana) for canal water distribution by the respective provincial
irrigation departments while groundwater is a free resource. Over the last half-decade the Abiana charges have been enforced on
a flat rate basis. These flat rates are different for different crops and vary among different provinces. The study by Chaudhry and
Young (1989) was conducted more than two decades ago and at that time Pakistan was not facing water crises.
3
Markets for groundwater have been in operation for informal trading of groundwater between tube-well owners and water
buyers without involving the exchange of permanent water rights (Meinzen-Dick, 1996; Khair et al., 2012). Basically, these
markets offer a win-win situation to tube-well owners by offering economic benefits and to non-owners by offering
opportunities to increase agricultural productivity (Meinzen-Dick, 1996; Manjunatha et al., 2011; Shiferaw et al., 2008).
Due to open access to groundwater resources for farmers who have the means to invest in tube-well technology, they can
extract and sell groundwater without any interference (van Steenbergen & Oliemans, 2002; Meinzen-Dick, 1996). Private
tube-well owners bear only energy and machinery costs that are incurred for groundwater extraction. Nonetheless, water
buyers have to pay extra charges in terms of wear and tear charges (more directly profit) besides paying pumping costs.
Traditionally, the price for groundwater is determined through social consensus at the beginning of a new cropping season
or with increasing energy prices as an hourly flat rate basis or fixed share in crop production per unit of land. However, in
many instances tube-well owners set the price first and then inform the water buyers. The price usually varies with the type
of tube-well i.e., electric or diesel operated tube-well, and based on the horse power of the engine etc.

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policies in Pakistan (Chaudhry et al., 1993; Sahibzada, 2002; Sufi, 2011; Farooqi et al., 2012). Never-
theless, those studies explicitly focus on surface water with an objective to address the gaps between
water supply, and operation and maintenance costs. This article is, to the best of our knowledge, the
first quantitative study to estimate the derived demand for groundwater for irrigation in Pakistan.
The rest of the paper is organized as follows. The next section provides a literature review within the
context of irrigation water demand and pricing. Section 3, describes the methodological framework to
estimate irrigation water demand. The results are presented in Section 4. The final section draws con-
clusions and provides some policy implications.

2. Irrigation water pricing and demand

The neoclassical economic literature argues that irrigation water pricing is necessary to induce farm-
ers to rationalize their irrigation water demands and to adopt water saving technologies (Berbel &
Gómez-Limón, 2000; Frija et al., 2011). Moreover, due to heavy investments in irrigation infrastructure
and the resulting temporal and spatial unintended consequences, some sort of regulation is required to
create an equilibrium between the supply and demand (Tsur et al., 2004a) and make farmers aware of
the economic value of water (Perry, 2001; Easter & Yang, 2007). Consequently, a lot of policy mech-
anisms to allocate water and rationalize irrigation water demands have emerged both at the managerial
and institutional level. Amongst these, many policy instruments suggest some sort of water pricing to
regulate water allocations (Tsur & Dinar, 1997; Dinar, 1998; Tsur, 2004). However, there is no consen-
sus on what is the right pricing mechanism and how pricing should be implemented (Tsur, 2004). Many
experts propose that for the successful implementation of water pricing policy, it should be accompanied
by a set of complimentary policies that simultaneously would help to improve water productivity and
efficiency (Gómez-Limón & Berbel, 2000; Gómez-Limón & Riesgo, 2004; Liao et al., 2007; Molle
et al., 2008).
Empirical studies from several developed countries have shown that demand for irrigation water is
inelastic (Moore et al., 1994; Berbel & Gómez-Limón, 2000; Salman & Al-Karablieh, 2004). These
studies indicate that water pricing would not reduce agricultural water consumption until prices nega-
tively affect farm income. This implies that raising the price of water will not significantly reduce
demand and will not be effective because water users are not responsive to water pricing (Huang
et al., 2010). Berbel & Gómez-Limón (2000), in a study in Spain, demonstrated that if water pricing
is selected as a tool, farm incomes will decrease by 25 to 40% before water demand starts to decrease
significantly. Likewise, Salman & Al-Karablieh (2004) conducted a study in Jordan and demonstrated
that pricing water at 0.35 $/m3 would not significantly reduce irrigation water demand. Moore et al.
(1994) investigating multi-cropping production decisions in the Western United States concluded that
a farmer’s irrigation water demand is inelastic for short-run water use decisions and is elastic for
long term crop-choice and land allocation decisions. In contrast, a few other studies indicate more elastic
demand and show that the price of water is a strong determinant of water demand and is an important
incentive for farmers to adjust their irrigation water requirements (Scheierling et al., 2006)4.

4
Scheierling et al. (2006) provide a detailed description of irrigation water demand using meta-analysis.

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Numerous methods to price and allocate irrigation water have been proposed in theory and practice,
some are more efficient and some are easier to implement than others. These methods include: volu-
metric pricing, non-volumetric pricing, quotas and market-based mechanisms (Dinar, 1998;
Johansson et al., 2002). Amongst these pricing methods, volumetric pricing is considered important
to induce efficient use of water. Yet volumetric pricing is an exception worldwide due to its high
implementation costs (Tsur & Dinar, 1997; Tsur, 2004). On financial grounds, water pricing is a
means to recover the cost of supplying water and on economic grounds, it is a tool to signal water scar-
city (Dinar & Saleth, 2005). Nevertheless, the most commonly used marginal-cost pricing method,
which equates water price to marginal-cost of supply, does not cover the economic dimensions of
water pricing, i.e., capital depreciation and other fixed costs (Tsur et al., 2004a; Huang et al., 2010).
In the case of groundwater, the marginal opportunity cost is associated with the unavailability of a
unit of groundwater that is over-extracted today (Koundouri, 2004). Hence, it is necessary to estimate
the social cost of groundwater over-exploitation (Huang et al., 2010). The social cost of groundwater
extraction arises as a result of over-exploitation of the resource by some users that increases the cost
of extraction for other users (Harou & Lund, 2008). Because of its non-excludable nature, there is
little incentive for a groundwater user to forego his current water needs over future requirements, result-
ing in an increased rate of extraction and more rapid resource depletion (Reddy, 2005; Pfeiffer & Lin,
2012). Generally, groundwater is not regulated by well-defined property rights or by competitive water
markets. Hence, both the opportunity cost and social cost largely remain unrecognized (Lynne, 1989;
Koundouri, 2004; Huang et al., 2010).

3. Theoretical framework

3.1. Approaches to derive demand for irrigation water

Irrigation water demand can be estimated by either econometrics or mathematical programming tech-
niques. We explain the two techniques theoretically following Tsur et al. (2004b). Consider the case
of a
farmer who uses a single input, e.g., irrigation water, to produce m number of crops. Let yj ¼
fj qj
represent a yield-water response function for crop j, where yj is yield, qj is water input and fj qj is
an increasing and strictly concave production function and j ¼ 1, 2, . . . . . P
. , m. With
pj representing
m  
price of crop j and w for water price, a farmer’s operating profit is
p ¼  j¼1 pj fj qj
wqj and
the necessary conditions for profit maximization are @ p=@qj ¼ fj 0 qj ð
wÞ
w= pj ¼ 0, which give
0
1
rise to the individual crop’s derived demand for water, qj ðwÞ ¼ fj w= pj , j ¼ 1, 2, . . . . . . , m:
Thus the water demand can be represented as:
Xm Xm 0

qj ðwÞ ¼ q ðw Þ ¼
j¼1 j j¼1
fj
1 w= pj (1)

Equation (1) can easily be extended to the general case of n farmer as:

X
n n X
X m
0

qðwÞ ¼ qi ðwÞ ¼ fij
1 w= pj (2)
i¼1 i¼1 j¼1

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Alternatively, the derived demand for irrigation water can be obtained as follows. Let us consider that
water is not priced but is constrained at the level x. Here we are interested in how much farmers are
willing to pay to relax the water constraint by xD units (i.e., x þ Dx). Suppose that a farmer uses
water up to constraint x, the revenue generated is pf (x) and the additional water ðDxÞ will generate
additional revenue p½ f ðx þ DxÞ
f ð xÞ. For the additional quantity of water demanded, farmers are
p½ f ðx þ DxÞ
f ð xÞ
willing to pay at most . For a small enough change in water constraint Dx, the mar-
Dx
ginal revenue is p f 0 ð xÞ. This represents the (maximal) price the farmer is willing to pay to relax the
water constraint by one unit; it is also called the shadow price of water. The shadow price varies at
different levels of water constraint and will only be positive when the constraint is binding. This
approach of computing the shadow price of irrigation water can be extended to situations involving mul-
tiple inputs and additional constraints are easy to impose. Suppose crop j’s production involves inputs
qj , zj and bj , where qj is water input, zj represents inputs like seed, fertilizer, pesticide and machinery that
can be purchased at unlimited quantity at the going market price r and bj denotes primary inputs (e.g.,
land and family labour)

that
 are available at limited quantities s. Let the production function for crop j be
denoted by fj ¼ qj , zj , bj . The input decisions of profit maximizing and price-taking farmers at input
allocations qj , zj and bj can be solved as:
( )
X
m
 X
k
pðx, s, p, r Þ ¼ Max pj fj qj , zj , bj
rk z jk (3)
j¼1 k¼1

Subject to:

X
m
qj  x,
j¼1

X
m
b jl  sl ,
j¼1

where qj ¼ 1, 2, . . . :, m, zj ¼ z j1 , z j2 , . . . . . . , z jk , bj ¼ b j1 , b j2 , . . . . . . , b jL , r ¼ r1 , r2 , . . . . . . , rk ,
s ¼ s1 , s2 , . . . . . . , sk , and l ¼ 1, 2, . . . :, L the non-negativity constraints of some variables. This pro-
blem can be solved by forming the Lagrangian:
( ) ( )
X
m
 X
k X
m
z¼ pj fj qj , zj , bj
rk z jk þl x
qj
j¼1 k¼1 j¼1
( )
X
L X
m
þ m l sl
b jl þðother constraints times their multipliersÞ:
l¼1 j¼1

The multiplier l of the water constraint evaluated at the optimum is the shadow price of water, which
when calculated for all feasible water levels x, constitutes the inverse derived demand for water.

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3.2. Method of analysis – PMP

PMP emerged in the late 1980s as a means to analyse agricultural, environmental and land-use policy
decisions in accordance with economic behaviour. In this work, we apply the PMP approach formalized
by Howitt (1995) as a method to model economic behaviour where a concave profit maximization func-
tion is solved using the non-linear marginal cost parameters of the variable cost function. The term
‘positive’ implies that the parameters of the non-linear objective function are derived from an economic
behaviour and they are considered to be rational given the observed and non-observed conditions that
generate the observed activity level. Later, Tsur et al. (2004b) advanced this model to estimate the
derived demand for irrigation water. The PMP calibration approach consists of three stages. Let n rep-
resent the number of crops j ¼ 1, 2, . . . . . . , n, in the base year, pj price of crop j, yj yield/ha of crop j, xj
water requirement/ha for crop j, Lj land allocation to crop j in the base year and cj production cost/ha
excluding water cost for crop j. In the first step, a linear programming model is set to solve a constrained
profit maximization problem with calibration constraints on the total amount of water available to the
system and the total land available to cultivate j crops. We chose crop area allocation so as to maximize
net farm return subject to land and water constraint. The optimization model is represented as:

( )
X
n

max ¼ pj yj
cj Lj (4)
Lj
j¼1

Subject to:

X
n
xj Lj  W, ðwater constraintÞ
j¼1

X
n
Lj  L þ 1 ðland constraintÞ:
j¼1

where 1 is a small positive perturbation and the usual non-negativity constraint holds.
By solving the constrained profit maximization problem, we generate shadow values l for different
crop allocations and optimal allocation of crop area that is devoted to the various crops. In the second
step, we use the estimated shadow values l (dual values) along with the data based average yield func-
tion to derive the calibration parameters that represent the crop yield function parameters. Letting lj
represent the

shadow
 price which is derived through step 1, we define the yield slope coefficient dj
as dj ¼ lj = pj Lj and the intercept coefficient bj as bj ¼ yj þ dj Lj .
The third step involves specifying the PMP using the yield parameters (d and b) along with the base-
year data on all crops. The specified PMP involves reformatting the constrained optimization as a quad-
ratic programming model using the crop yield function parameters and solving for the shadow value of
water based on the water availability constraint and the prices for crops. The specified PMP is solved

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 572 M. A. Watto and A. W. Mugera / Water Policy 18 (2016) 565–585

using the following optimization model:

( )
n h 
X  i
max ¼ pj bj
dj Lj
cj Lj (5)
Lj
j¼1

Subject to:

X
n
xj Lj  W, ðtotal water constraintÞ
j¼1

X
n
Lj  Lðtotal land constraintÞ:
j¼1

The dual multiplier of the water constraint is the shadow price l of water and constitutes the marginal
value of water which means that if an additional increment of water resource Δx (which is constrained at
certain level x) becomes available, output would increase by some amount Dy  l Dx; in other words
l is the marginal value of water (Silberberg & Suen, 2001). By changing the annual water constraint x
in step 3 only and recording the shadow price l that corresponds to each x level, we obtain the corre-
spondence between x and the shadow price of water l, which constitutes the (inverse) derived demand
for irrigation water.

4. Study areas and data description

This study is carried out in two districts viz. Jhang and Lodhran in the Punjab province of Pakistan
(Figure 1). Due to the arid and semi-arid geographic location, irrigation water requirements for different
crops are relatively higher in these districts. The irrigation water requirement for cotton crop in the south
Punjab is 27% higher than in the northern Punjab. Likewise, for rice and sugarcane the potential irriga-
tion requirements are 20% and 25% higher in the southern part compared to the northern side.
Therefore, agriculture heavily relies on irrigation water supplies from both surface and groundwater
in these regions. However, the study districts mainly depend on groundwater extractions for irrigation
purposes. A large part of south-western Jhang solely depends on groundwater extractions whereas in
Lodhran district partial canal water supplies are available. In Lodhran district, canals supply water
during the Kharif5 season only. The canal water contribution6 during the Kharif season of 2010–11
was observed to range between 20% and 44% of the total irrigation requirements of Kharif crops.

5
There are two cropping seasons in Pakistan, Kharif and Rabi. Kharif starts from June, July and goes to October, November,
while the Rabi season starts from September, October and continues to April, May. However, cropping time varies
geographically across the country. Cotton is a Kharif crop.
6
In Punjab canal water is distributed equitably proportional to the farm size as a fixed weekly rotation which is allocated
through a calibrated orifice from the watercourse. The water management department has computed a common conversion
factor of 102.98 to convert the discharge water into cubic metres.

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Fig. 1. Map showing study districts (Jhang and Lodhran) in red. Please refer to the online version of this paper to see this figure
in colour: http://dx.doi.org/10.2166/wp.2015.160.

Besides limited canal water supplies, both districts receive very low rainfall. On average, Jhang district
receives 180 mm annual rainfall and Lodhran district is even lower receiving 71 mm annually. Conse-
quently, the majority of the irrigation water comes from groundwater which is in many cases extracted
through hundreds of metres deeply drilled tube-wells.
Our data come from a field survey carried out in the two districts during the cropping season of 2010
and 2011. The sample data show large variation in the depths of drilled tube-wells in both districts. In
Lodhran district, the variation in tube-well depth was observed to be between 60 and 99 metres com-
pared to the Jhang district where it was between 33 and 57 metres. Low water tables do not only
contribute to high groundwater extraction costs but also to high tube-well drilling costs. Qureshi
et al. (2003) computed that the drilling cost to bore a 24 metre deep tube-well is seven times higher

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 574 M. A. Watto and A. W. Mugera / Water Policy 18 (2016) 565–585

compared to boring a tube-well at a depth of 6 metres. Due to deep underground water tables and the
high installation costs, the tube-well population is relatively less dense in the study areas. As a result,
farmers generally engage in informal groundwater trading under the locally established informal ground-
water markets. The informal groundwater trading increases access to irrigation water for the tenants and
smallholder farmers who do not own tube-wells. Since these markets are not formally regulated, some-
times tube-well owners prefer certain water buyers to sell groundwater to due to social ties with them
(Shah, 1993; Jacoby et al., 2004; Khanna, 2007). Moreover, as these markets involve selling surplus
pumped water (Meinzen-Dick, 1996; Qureshi et al., 2009), sometimes despite paying three to four
times more than the total cost of extracting groundwater, water buyers often cannot get water in time
(Shah, 1993; Jacoby et al., 2004; Khanna, 2007).
A multi-stage sampling technique was used in data collection. In the first stage, one tehsil7 was
selected purposively from both Lodhran and the Jhang district. In the next stage, 10 villages were
selected at random from each purposively selected tehsil. Then, from each village 10 groundwater
users (five tube-well owners and five water buyers) were selected randomly to obtain the differential
impact of tube-well ownership and to reveal the difference of irrigation water demand and production
gains for tube-well owners and water buyers. Finally, we collected farm level data from 200 ground-
water-fed agricultural farms, i.e., 100 farms from Lodhran and 100 farms from the Jhang district.
The selected farms reflect the typical situation of groundwater irrigated farms in the study districts in
particular and in the rural areas of the Punjab in general.
The dataset contains information on various inputs and output costs and quantities. The different farm
operations and inputs include: seed cost, fertilizer cost, and total (hired and family labour) labour cost,
farm operation (ploughing, threshing etc.) cost, and groundwater irrigation cost.
On the use of irrigation water, various studies have used different approaches to compute the volume
of irrigation water. For example, Gedara et al. (2012) measured the quantity of water used in rice pro-
duction in Sri Lanka, which was related to the proportion of total land owned by the farmer and the total
quantity of water released, assuming that this was distributed evenly across the irrigated area. Sharma
et al. (2001) measured water by the number of times water was released for the farm from the main
water course in the Tarai of Nepal. In contrast to the surface water volumes, groundwater use estimates
are more realistic and reliable. In Pakistan, information on groundwater utilization does not exist at the
district level due to the large number of non-registered small scale and fragmented groundwater users
(Qureshi et al., 2003). Further, at farm level groundwater extractions are not monitored as meters are
not installed on tube-wells. In this study, we computed groundwater volume by collecting information
about the number of irrigations applied to each crop, duration of water application per irrigation event,
borehole depth, diameter of the suction pipe, and power of the engine used to pump groundwater. Using
this information in an approximate estimation model, as used by Eyhorn et al. (2005) and Srivastavaa
et al. (2009), we measured groundwater extraction in litres using the following formula and then con-
verted into m3. This approximation formula for groundwater extractions is based on the assumptions that
the lifting head is equal to the depth of the tube-well. It does not consider pump efficiency differences
due to maintenance conditions and mode of operation, i.e., diesel operated or electricity operated.

7
Tehsil is an administrative unit. A district usually comprises of 5–6 tehsils (sub-districts). Lodhran district is comprised of
three tehsils, i.e., Dunyapur, Kahror Pakka and Lodhran, while Jhang district is comprised of four tehsils, i.e., Athara
Hazari, Shorkot, Ahmad Pur Sial and Jhang.

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 M. A. Watto and A. W. Mugera / Water Policy 18 (2016) 565–585 575

However, it does consider efficiency differences due to voltage variations in electrical power supply:

t  129574:1  BHP
Q¼ (6)
½d þ (255:5998  BHP2 )=d 2  D4 )

where Q represents the volume of water in litres, t is the total irrigation time, d is the depth of bore, D is
the diameter of the suction pipe, and BHP is the power of the engine.
Table 1 provides a descriptive breakdown of the major crops cultivated in both districts by water
sellers and water buyers. The cropping pattern of both districts is mainly dominated by wheat and
cotton crops. In Lodhran, cotton and wheat are the most commonly cultivated crops whereas in
Jhang farmers also cultivate rice and sugarcane. All the 100% surveyed farms reported wheat and
cotton cultivation in Lodhran during the cropping season of 2010–11. In Jhang district, a vast
majority of farms also reported rice and sugarcane cultivation along with wheat and cotton during
the same cropping year.
Table 2 shows the total area allocated to different crops, yield, irrigation water requirements and
different crop prices. The descriptive breakdown indicates that wheat crop (489 hectares) covers the
largest cropped area followed by cotton crop with 386 hectares. Sugarcane and rice cover only 97
and 75 hectares of cropped area, respectively. The irrigation water requirements for different crops
indicate that wheat is the least water consumptive while sugarcane is the most water consumptive
crop. By looking at unit (m3) irrigation water consumption and output production in terms of crop
revenue, wheat crop with, on average, Rs. 54 generates the highest revenue per m3 groundwater
consumption followed by cotton (Rs. 34/m3), sugarcane (Rs. 24/m3) and rice (Rs. 15/m3). However,
by looking at unit (m3) irrigation water consumption and output production in terms of crop yield,
sugarcane is the most water productive (2.36 kg/m3) crop followed by wheat with 0.98 kg/m3.
Table 3 provides details on the costs of different inputs and farm operations for both water sellers
and water buyers. We observe that there is a large variation in different input and farm operation
costs. Table 3 shows that for water sellers fertilizer cost is the highest input cost in wheat cultiva-
tion followed by the farm operation’s cost. Cotton cultivation involves labour cost as the highest
input cost followed by fertilizer cost. Similarly, sugarcane cultivation incurs labour cost as the

Table 1. Number of sample households that grew wheat and cotton in the Lodhran and Jhang districts during 2010–2011.
Number of households that grew different crops
Name of district and type of groundwater user Wheat Cotton Rice Sugarcane
Lodhran district total 100 100 0 0
• Tube-well owners 50 50 0 0
• Water buyers 50 50 0 0
Jhang district total 100 89 80 85
• Tube-well owners 50 45 45 40
• Water buyers 50 44 35 45

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Table 2. Area allocation to different crops, yield, irrigation water requirements and crop prices.





Area Lj Yield yj metric tons/ha Irrigation requirement xj m3/ha Crop price Pj
Crop enterprise ha year
1 year
1 Rs./kg
Groundwater sellers
Wheat 489 3.8 2,870 23
Cotton 386 2.1 7,770 88
Rice 75 3.8 6,640 55
Sugarcane 97 75 15,650 5
Groundwater buyers
Wheat 244 3.6 2,870 23
Cotton 202 2 7,770 86
Rice 22 3.5 6,640 54
Sugarcane 23 70 15,650 5

Table 3. Input cost for different farm operations in Rupees ha
1.

Crops Wheat Cotton Rice Sugarcane
Groundwater sellers
Seed costs 3,583 5,964 881 n.a
Labour costs 5,812 33,210 17,271 45,936
Fertilizer costs 17,419 13,506 13,998 16,689
Chemical costs 3,272 11,068 3,269 4,880
Farm operation costs 9,940 9,787 11,596 26,307
Groundwater irrigation costs 5,608 10,472 20,552 29,543
Total costs 45,634 84,007 67,567 123,355
Total cost, excluding groundwater cost 40,026 73,535 47,015 93,812
Groundwater buyers
Seed costs 3,361 5,485 795 n.a
Labour costs 6,358 33,823 24,599 38,946
Fertilizer costs 14,874 12,449 10,695 12,821
Chemical costs 3,271 10,423 4,470 4,863
Farm operation costs 10,805 10,005 10,916 24,233
Groundwater irrigation costs 10,469 18,536 36,239 51,047
Total costs 49,139 90,721 87,713 131,910
Total cost, excluding groundwater cost 38,670 72,185 51,474 80,863

highest input but followed by irrigation cost. In the case of rice cultivation, irrigation cost is the
highest input cost followed by labour cost. Unlike water sellers, irrigation cost is the highest
input cost for water buyers for all crops, except for irrigation cost being slightly lower than farm
operations cost in wheat cultivation.
Based on the computations including groundwater extraction cost, electricity and maintenance costs,
the cost of groundwater is found to be Rs. 0.2/m3 for water sellers and Rs. 0.38/m3 for water buyers
which is 90% higher than water sellers.

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5. Results and discussion

The PMP analysis consists of three steps. The first step PMP results for water sellers and water buyers
are presented in Tables 4 and 5, respectively. In the first step, the PMP model allocates crop area to
different crop enterprises to maximize net farm returns given the total amount of irrigation water and
land available for both water sellers and water buyers. The first step PMP profit maximization model
indicates that at the given annual irrigation water (the amount of groundwater that was extracted for
the observed cropping season) constraint the total land constraint is binding. It means that the total
area allocation to each crop is equal to the total land available to the sample farms of both water sellers
and water buyers. However, given this specification the water constraint is not binding, indicating that
the total amount of groundwater that is being extracted is not equal to the total irrigation water require-
ment of all crops. We computed the total groundwater extraction for water sellers and water buyers with
an average over-extraction of 123,228 m3 for water sellers and 50,510 m3 for water buyers. By assuming
the total groundwater availability (total extraction) as an annual water constraint, i.e., no additional water
is available to the observed cropping system, we calibrate the dual multipliers l (shadow price) for land
allocation to different crop enterprises.

Table 4. PMP step 1, water sellers.

Crop Wheat Cotton Rice Sugarcane Constraint level
Return per ha (excluding water cost) 47,374 111,265 161,985 281,188
Crops area ( )
489 386 75 97
Pn

The Objective maxLj ¼ pj yj
cj Lj 9.87  107
Constraints j¼1

Total land 1 1 1 1 1,047 ,¼ 1,047

Wheat 1 489 ,¼ 489
Cotton 1 386 ,¼ 386
Rice 1 75 ,¼ 75
Sugarcane 1 97 ,¼ 97
Groundwater 2,780 7,770 6,640 15,650 6.37  106 ,¼ 6.50  106

Table 5. PMP step 1, water buyers.

Crop Wheat Cotton Rice Sugarcane Constraint level
Return per ha (excluding water cost) 43,432 103,004 137,399 263,932
Crops area ( )
243 202 22 23
Pn

The Objective maxLj ¼ pj yj
cj Lj 4.05  107
Constraints j¼1

Total land 1 1 1 1 490 ,¼ 490

Wheat 1 243 ,¼ 243
Cotton 1 202 ,¼ 202
Rice 1 22 ,¼ 22
Sugarcane 1 23 ,¼ 23
Groundwater 2,780 7,770 6,640 15,650 2.75  106 ,¼ 2.80  106

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The dual multipliers (calibrated in step 1) are then used to compute the optimization function par-
ameters, i.e., yield slope coefficient and the intercept coefficient which are presented in Table 6.
Tables 7 and 8 report the third step PMP results when the total land and groundwater extractions are
constrained at the available level. We find that at this stage, the total land constraint is binding while the

Table 6. PMP step 2, dual multipliers, yield slope coefficient and the intercept coefficient.

  
Constraint/crop l Duals d dj ¼ lj = pj Lj b bj ¼ yj þ dj Lj
Groundwater sellers
Total land 0.00 0.00 0.00
Wheat 47,374 0.00 5.86
Cotton 111,265 0.00 3.36
Rice 161,985 0.04 6.75
Sugarcane 281,188 0.58 131.24
Groundwater buyers
Total land 0.00 0.00 0.00
Wheat 43,431.58 0.01 5.53
Cotton 103,004.11 0.01 3.22
Rice 137,398.92 0.12 6.06
Sugarcane 263,932.00 2.23 120.95

Table 7. PMP step 3, water sellers.

Constraint
Crop Wheat Cotton Rice Sugarcane level
Return per ha (excluding water 47,374 111,265 161,985 281,188
cost)
Cropped area No. of ha (PMP 489 386 75 97
chosen)
Price of crop ( pj ) 87,400 184,800 209,000 375,000
Production cost/ha excluding 40,026 73,535 47,015 93,812
water cost (cj )
dj 0.00 0.00 0.04 0.58
bj 5.86 3.36 6.75 131.24
Land allocation Lj 489 386 75 97
The h 
PObjective  i 3.04  109
n
j¼1 pj bj
dj Lj
cj Lj
dj Lj 2.06 1.26 2.95 56.24
bj 
dj Lj  3.80 2.10 3.80 75.00
pj bj
dj Lj  3.32  105 3.88  105 7.94  105 2.81  107
pj bj
dj Lj
cj 2.92  105 3.15  105 7.47  105 2.80  107
h 
Quasi-rent/  i 1.43  108 1.21  108 5.60  107 2.72  109
ha pj bj
dj Lj
cj Lj
Constraints
Total land 1 1 1 1 1,047 ,¼ 1,047
Groundwater 2,780 7,770 6,640 15,650 6.37  106 ,¼ 6.50  106

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Table 8. PMP step 3, water buyers.

Constraint
Crop Wheat Cotton Rice Sugarcane level
Return per ha (excluding water 43,432 103,004 137,399 263,932
cost)
Cropped area No. of ha (PMP 243 202 22 23
chosen)
Price of crop ( pj ) 82,102 175,189 188,873 357,744
Production cost/ha excluding 38,670 72,185 51,474 93,812
water cost (cj )
dj 0.01 0.01 0.12 2.23
bj 5.53 3.22 6.06 120.95
Land allocation Lj 243 202 22 23
The h 
PObjective  i 7.02  108
n
j¼1 pj bj
dj Lj
cj Lj
dj Lj 19.1 11.9 25.5 51.3
bj 
dj Lj  3.62 2.03 3.51 69.60
pj bj
dj Lj  2.97  105 3.56  105 6.63  105 2.49  107
pj bj
dj Lj
cj 2.59  105 2.83  105 6.11  105 2.48  107
h 
Quasi-rent/  i 6.28  107 5.73  176 1.35  107 5.71  108
ha pj bj
dj Lj
cj Lj
Constraints
Total land 1 1 1 1 490.00 ,¼ 490.00
Groundwater 2,780 7,770 6,640 15,650 2.75  106 ,¼ 2.80  106

water constraint is not binding for both the water sellers and water buyers. This is because the cultivated
land by all farmers cannot exceed the total agricultural land that is available in the region. Moreover,
farmers may re-allocate land differently to various crops compared to the observed season. However,
in contrast to the total land, the groundwater is not a limited resource at least for short-term extractions.
Particularly, when there is no volumetric restriction on groundwater extractions, it can be an expensive
resource rather than a limited resource. In this situation, some farmers may extract more groundwater
than others even to irrigate the same size of land under the same type of crop cultivation. Because
groundwater extraction is not limited either at regional or farm level, the water constraint may or
may not be binding. We observe that non-binding groundwater constraint is due to the fact that the opti-
mal solution requires less water than what is being extracted or available. Alternatively, it suggests that
farmers extract more groundwater than what is required by the cultivated crops. As we adjust the water
constraint level (limit groundwater extractions), farmers start re-allocating land to the crops that generate
the highest revenue given the available water resources. As we make groundwater constrained, we com-
pute the shadow price of groundwater at each constraint level to assess farmers’ responsiveness (derived
demand) at all constraint levels.
The results of the groundwater derived demand for irrigation are presented in Figures 2 and 3.
We find a high marginal value of groundwater for both sellers and buyers at low water constraint;
which is possibly due to high profitability from cotton and sugarcane crops. Given the land constraint
(land allocation to all crops cannot exceed the actual land devoted to different crops), making

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Fig. 2. Derived demand for groundwater for irrigation for water sellers.

Fig. 3. Derived demand for groundwater for irrigation for water buyers.

additional groundwater supplies (increasing allowable extractions) available does not make farmers
responsive to irrigation water demand. However, when we make water constrained (limiting allowable
extractions), initially farmers start re-allocating land to different crops based on their farm revenue. We
observe that as the water constraint increases both water sellers and water buyers keep allocating their
land to sugarcane crop and reduce area allocation to other crops. Sugarcane cultivation requires high
irrigation water applications but, higher land allocations to sugarcane are due to the higher net returns
compared to the other crops. The derived demand for water sellers is almost inelastic when water is
constrained between 4.98  106 and 1.20  105 m3; for water buyers it is inelastic at constraint level
between 2.45  106 and 5.05  104 m3. Similarly, the derived demand for water sellers is responsive
to price changes when water is constrained between 1.20  105 and 8.00  104 m3. For water buyers,
the demand is responsive to price changes when water is restricted between 5.05  104 and 3.03 
104 m3.
Table 9 shows the percent changes in water demand corresponding to percent change in shadow price.
For water sellers, the groundwater availability of between 6.37  106 and 3.30  106 corresponds to a
shadow price of Rs. 40–105/1,000 m3, indicating that the percent change in water demand is lower than
the percent change in shadow price. Similarly, for water buyers at groundwater availability between
2.75  106 and 1.16  106, the shadow price of water for water buyers corresponds to a shadow
price range of Rs. 36–92/1,000 m3, again with percent change in water demand lower than percent

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Table 9. Percent change in water demand at the given percent change in shadow price.
Water demand (1,000 m3) Shadow price (Rs./1,000 m3) % change in water consumption % change in shadow price
Water sellers
6.37  106–3.30  106 40.48–105.06 48% 160%
3.30  106–2.00  106 105.06–112.52 40% 7%
2.00  106–1.52  106 112.52–1,791.13 24% 1,499%
Water buyers
2.75  106–1.16  106 36.47–92.088 58% 115%
1.16  106–9.51  106 92.088–93 18% 1%
9.51  106–3.51  106 93–1,585 67% 1,604%

change in shadow price. The derived demands for both water sellers and water buyers are inelastic when
the percent change in water demand is higher than the percent change in the corresponding shadow
price. However, the derived demand is elastic for both water sellers and water buyers when the percent
change in the shadow price is higher than the percent change in water demand.
Based on the percent change in water demand and percent change in shadow price for groundwater,
we conjecture that a 2% reduction in the current groundwater volumes would require introducing
groundwater pricing at Rs. 41/1,000 m3 for water sellers and Rs. 36/1,000 m3 for water buyers. At a
2% reduction level, farm income does not change significantly for both water sellers and water
buyers. However, a 20% reduction in irrigation water demand would decrease farm income by 18%
and 16% for water sellers and water buyers, respectively. It is believed that imposing a price on ground-
water is a complicated issue and the difficulties of implementing water pricing are well documented in
the literature. Similarly, pricing groundwater is a complicated issue in Pakistan. In the past, the govern-
ment tried several indirect pricing mechanisms (creating an energy-groundwater nexus) but limited
success was reported. Kumar et al. (2011) worked out various indirect options to manage groundwater
resources in neighbouring parts of India. They proposed a co-management strategy by creating a nexus
between groundwater extractions and energy supplies. The best proposed option is pro rata pricing of
electricity coupled with rationing of energy supply to address the issues of equity, efficiency and sus-
tainability of groundwater use. However, such indirect strategies, such as energy taxation, are difficult
because most of the tube-wells are operated by diesel and the use of diesel for agricultural and non-agri-
cultural purposes are not clearly distinguished. Direct pricing (e.g., volumetric pricing) is complicated
because: (1) groundwater extractions are not measured; and (2) a farmer’s demand for groundwater is
not responsive to price changes, suggesting that they do not assign any economic value to water.

6. Conclusions

In Pakistan, rapid depletion of groundwater has raised concerns about the sustainability of ground-
water resources. Within this context, sustainable extraction of groundwater aquifers requires policy
interventions to ensure the longevity of groundwater resources. Amongst the many policy options to
encourage the sustainable extraction of groundwater resources is the ongoing debate on controlling
large-scale groundwater over-drafting through irrigation water pricing policies.

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Within this policy context, this study employs the PMP approach to estimate the derived demand for
groundwater for irrigation. The study uses a cross-sectional dataset of 200 households who predomi-
nately use groundwater for irrigation in the Punjab province of Pakistan. PMP estimates the shadow
price of groundwater to represent farmers’ willingness to pay when the available groundwater resources
are constrained (limited extractions are allowed).
By taking the current groundwater extractions as total annual available water, farmers’ land allocation
to different crops remains equal to the total land available for both irrigators, i.e., water sellers and water
buyers. Nevertheless, given the current groundwater extractions the non-binding water constraint suggests
that the optimal solution uses less water than what is available in order to make farmers allocate all the
available land to different crops. Alternatively, the optimal solution indicates that farmers extract more
groundwater than the requirement of the cultivated crops which obviously can be rationalized. Mean-
while, we make the groundwater availability constrained and farmers start re-allocating land to various
crops differently. Although farmers take water constraint into consideration, they allocate land to different
crops based on their profitability not based on their water requirements. We observe that after constraining
water availabilities, farmers would give top priority to sugarcane cultivation under the revised cropping
plan. This is possibly because sugarcane cultivation generates the highest revenue compared to the
other crops. At the same time, irrigation water requirements of sugarcane are the highest among all the
crops and it generates less revenue compared to wheat and cotton when we compute the revenue per
unit (m3) of groundwater consumption. After imposing water constraints, farmers’ allocation of more
land to sugarcane indicates that they do not allocate land based on crop water requirement but purely
based on the total revenue. It also indicates that farmers are not responsive to the existing groundwater
pricing/extraction costs. Based on the study findings we suggest an introduction of Rs. 0.04/m3 of ground-
water would not decrease farm income rather it would make farmers aware of the economic value of water.
The study findings support that water pricing can help to rationalize irrigation water demand and
induce irrigators to improve irrigation water use efficiency. However, we suggest that besides water pri-
cing, additional complimentary policies are required to improve irrigation water use efficiency. In this
regard, a multi-dimensional policy intervention is required to assess the merits of policies that encourage
groundwater extraction either in terms of giving incentives for tube-well adoption or encouraging the
adoption and cultivation of water intensive crop varieties. A larger cost-benefit framework is also
required to assess groundwater resource management both in terms of short-term gains (i.e., farm rev-
enues or profits) and long-term future social benefits from water resource management.

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Received 9 March 2015; accepted in revised form 16 November 2015. Available online 22 December 2015

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