MPG vrs HP
It increases peak output power, but this is not the same as efficiency. If it increased efficiency (power out/power in), they would do it all the time.
I am not saying you are wrong, but I am not sure about this. Not using it all the time could have more to do with not wanting to carry the water needed to do so.
A smaller high compression engine that needed water injection all the time could be more efficient. However there would be no headroom for passing (car) or takeoff (airplane). It would be a good engine to have in a hybrid.
I have been thinking about what makes an engine both efficient and powerful.
Things that reduce friction qualify. Roller rockers, roller cams and crank scrapers are good examples of this.
Most things that get the charge in and out of the cylinder with less work/friction should provide higher effective compression which could result in higher mileage. There is some debate in my mind about this.
Cold dense air makes more HP but warm air help the gas atomize better and provides a higher MPG.
Other things like having both the exhaust and intake open at the same time produce a more powerful charge in the cylinder but reduces efficiency because some on the unburned intake charge goes out the exhaust.
Then there is the turbo. We know it makes more power, but does it make more MPG? It depends on how the engine is tuned. EDIT: Maybe also the turbo size relative to the engine and the engine turbo combo size to the application.
Which brings me back to water injection. You can only run an engine so lean or it will burn the valves. With water injection you can run in leaner. That should mean better MPG.
Except for frictional gains/losses any of this could be wrong. But there may be a few things worth talking about.