China’s water shortage is severe and has become one of the factors hindering economic growth. It is widely accepted that changes in water technology play a profound role in sustainable development. However, because water technology is embedded in water resources, it is difficult to clarify the effects of water technologies as a means of alleviating water scarcity to achieve sustainable development. The level of water technology can be measured by total-factor water efficiency. This study analyzes panel data from 2002–2018 using the stochastic frontier model and addresses water inputs and water technology by introducing the concept of water productivity into economic growth framework. We found that, with the introduction of water technology, the importance of water resources for economic growth increases; water inputs increase by 1%, and GDP increases by 0.349%. The progress of 1% water technology can drive 0.142% of GDP growth and have great potential as a water scarcity remedy for the economy. Due to lower prices, the substitution rate of water technology to water is six times that of water-to-water technology, which is very detrimental to water technology progress. In the short term, water technology can be policy-driven in water-scarce developing economies, and price-induced in the long term.