Abstract: This paper argues that scarcity value is an economic instrument embedded in the framework of IWRM (Integrated Water Resources Management). Scarcity value emerges as the value which can be obtained if the constraint on resource availability is reduced by a unit. It is argued in this paper that traditional supply augmentation plans may not be the correct approach to manage water. Supply augmentation plans are used to address scarcity only, and they have led to further conflicts between co-riparians, as shown in various other cases. With a paradigm shift occurring in the ways to manage water, there is a clear need to define an objective instrument for decision-making, and scarcity value renders that instrument. In the process, the shift in paradigm from the old traditional ‘arithmetical hydrology’ to the new emerging IWRM that emphasizes on ‘eco-hydrology’ should be interpreted as the movement from ‘scarcity’ to ‘scarcity value’.