Depends. Those water soluble packing peanuts are way better than plastic. But probably not great to be adding those corn-based chemicals to the water in high concentrations. Not to mention this might not be useful to water constrained areas, especially with the UN saying water scarcity is expected to dramatically increase in the next decade or two.
I don't see that working for packaging. Half of the food is filled with or submerged in water, and for the rest, as well as non-food items, the packaging would start decomposing in the ambient air because of the water vapor.