In this article we will discuss about the economics of irrigation projects.
According to the constitution, irrigation projects are planned, executed, owned and operated by State Governments, except all types of wells owned by individuals.
In 1679, the following criteria were adopted by the British Parliament to test financial results of irrigation projects in India (Irrigation Commission 1972):
(I) By considering capital cost of work as simply the sum actually spent on its construction.
(II) By debiting the revenue account yearly with.
(a) The simple interest on the capital cost of the work at the commencement of the year
(b) The working expenses of the year.
(III) By crediting the revenue account yearly with
(a) Direct receipts.
(b) Indirect receipts.
The difference between (II) and (III) for one year would show the profit or loss for that year. Schemes were to be sanctioned only if they satisfied the test of financial productivity, arrived at in terms of rate of returns calculated as suggested in (I), (II) and (III) above.
The test of financial productivity was that the project should be able to show a certain percentage return on the ‘sum- at-charge’ in the tenth year after its opening. The ‘sum-at-charge’ was the capital cost plus the arrears of interest up to that year.
This principle was followed since then and the rate of return required before a project could be considered as financially productive was fixed variously from time to time. It was fixed at 4 per cent for works sanctioned before April 1, 1919. Progressively, it increased to 6.5 per cent by April 1, 1969.
After independence, criteria for financial soundness of a productive irrigation are:
a. Cost per hectare criterion.
b. Benefit-Cost Ratio criterion.
c. Internal rate of returns method.
a. Cost per Hectare Criterion:
The economic feasibility of a new irrigation project is judged with reference to norms of capital outlay ha-1 of irrigation. The major limitation of this criterion is that it is based purely on the income derived from water rate levied and does not consider the role of project in improving socio-economic conditions in the command area.
b. Benefit-Cost Ratio Criterion:
It is widely used for assessing the economic feasibility of irrigation projects. Benefit-Cost Ratio means that the benefits, which may accrue from the project, are in excess of the estimated cost of construction. The irrigation Commission 1972 adopted it as a standard for the evaluation and ranking of irrigation projects.
The following criterion was laid down for irrigation projects:
Project Location: Benefit-Cost Ratio:
Normal rainfall area: 1.5
Drought-prone area: 1.0
c. Internal Rate of Return Method:
This method envisages the basic technique of discounting costs and benefits accruing in different periods and expressing them all in common value at any one point of time. If the net present value of project works out negative (if the discounted value of the benefits is less than the discounted value of the cost) then the project is not fit for sanction.
To take note of inflation and increase due to economic change over long construction period, an appropriate indicator of price rise (an adjustment factor) is constructed and the increase so obtained is added to the estimate as a supplementary provision for adjusting cost estimates of project.