Groundwater irrigation has a critical role in the sustainability of arable farming in many developing countries including Pakistan. Groundwater irrigation is generally practiced to supplement surface water supplies in Pakistan. Nevertheless, uninterrupted and extensive use of groundwater irrigation has raised several concerns about its sustainability and resultant environmental implications. Due to the scarcity of groundwater and heterogeneity in farmers’ resources, informal groundwater markets have emerged in Pakistan, where farmers trade water using a contractual system. Yet, the effects of these markets on agricultural productivity and equity remain largely unknown. This paper aims to analyze the impact of participation in the groundwater market on farmland utilization, cropping patterns, water access, and income. We analyze these impacts using primary data collected from 360 farmers in three different zones of the country’s largest province. The farmers were categorized as buyers, sellers, and self-users of water. Results indicate that participation in water markets increased agricultural land utilization, evinced by a higher cropping intensity among participants. A horizontal and vertical equity analysis of water markets shows that although large farmers have better access to groundwater irrigation, water market participation improves equity to water access. Based on income inequality measures such as the Gini coefficient and the Lorenz curve, water market participation also improves farmer incomes regardless of farm size. Propensity score matching revealed that wheat yield and income among water-market participants went up by approximately 150 kg and PKR 4503 per acre compared with non-participants. Groundwater market participants’ higher crop productivity and income level suggest that water markets need a thorough revisit in terms of policy focus and institutional support to ensure sustainable rural development.

Pakistan is the world’s third-largest user of groundwater and the fourth-largest groundwater withdrawing country. The Indus Basin aquifer from where Pakistan withdraws its groundwater has become the world’s most “overstressed” groundwater aquifer. Given the growing shortages of surface and groundwater, the informal groundwater markets where farmers trade water have emerged in all provinces of Pakistan. Despite the considerable attention paid to the analysis of water markets in several countries, there is little evidence on the structure and implications of contractual agreements between the water users. This study includes buyers’ bargaining power in the contract choice model to estimate unbiased determinants of contract choice. The data was collected through a comprehensive survey of Punjab’s groundwater markets. Using several descriptive and econometric approaches, we find that the water markets in Pakistan are relatively competitive. A flat-rate water marketing contract is common in water-scarce regions, while a fuel-based contract is common in areas with large farmers. We find that buyers’ bargaining power is primarily determined by an agent’s ability to influence a joint decision between buyers and sellers. In addition, a seller’s landholding size also influences the choice of contract, as fuel-based contracts are more likely to be offered to large farmers. The relative bargaining power of buyers influences choice of fuel-based contracts, although this offers lower profits to sellers. We find evidence of price discrimination in which relatively well-off buyers with a long contractual history with sellers may receive discounts in the form of fuel-based contracts. As contract choice may also determine the extent of water use, these findings have implications for environmental sustainability. Policy intervention to standardize groundwater marketing contracts can help reduce overexploitation of groundwater and environmental externalities and promote sustainable development.

Informal groundwater markets, where farmers with wells sell surplus water to neighbors, are a widespread adaptive response to water scarcity, particularly in South Asia where they are most prevalent and well-documented. This review (1990–2025) examines the evolving patterns of these markets by synthesizing global literature and viewing them through the lens of three transformative trends: energy transition (especially solar pumps), digital innovations (e.g., blockchain and IoT), and new policy pathways. We synthesize literature to evaluate market structures, contract forms, efficiency and equity outcomes, environmental impacts, and the influence of energy policies and digital tools. The review assesses whether these informal trades fulfill their promise of enhancing water productivity and equity or if new challenges are creating pitfalls. Key objectives include documenting historical evolution, analyzing market performance, discussing externalities like aquifer depletion, examining policy interactions, reviewing digital pilots, exploring social inclusion, comparing governance frameworks, identifying research gaps linked to SDGs, and proposing a policy roadmap for harnessing benefits while ensuring sustainability.