I can't answer for
@DialecticSkeptic but I say that it cannot be referring to physical baptism because contextually it is incongruous, as it would imply that Baptism is necessary in order to see the Kingdom of God, which is by several ways unbiblical.
John's gospel is a wonder of composition, it is simple and complex all at once. It is full of very deep theology and yet simple ideas. Chapter one has this to say (among other things)
The Testimony of John the Baptist
Joh 1:19 And this is the testimony of John, when the Jews sent from Jerusalem priests and Levites to him, to ask him: Who art thou?
Joh 1:20 And he confessed and did not deny: and he confessed: I am not the Christ.
Joh 1:21 And they asked him: What then? Art thou Elias? And he said: I am not. Art thou the prophet? And he answered: No.
Joh 1:22 They said therefore unto him: Who art thou, that we may give an answer to them that sent us? What sayest thou of thyself?
Joh 1:23 He said: I am the voice of one crying in the wilderness, make straight the way of the Lord, as said the prophet Isaias.
Joh 1:24 And they that were sent were of the Pharisees.
Joh 1:25 And they asked him and said to him: Why then dost thou baptize, if thou be not Christ, nor Elias, nor the prophet?
Joh 1:26 John answered them, saying: I baptize with water: but there hath stood one in the midst of you, whom you know not.
Joh 1:27 The same is he that shall come after me, who is preferred before me: the latchet of whose shoe I am not worthy to loose.
Joh 1:28 These things were done in Bethania, beyond the Jordan, where John was baptizing.
Behold, the Lamb of God
Joh 1:29 The next day, John saw Jesus coming to him; and he saith: Behold the Lamb of God. Behold him who taketh away the sin of the world.
Joh 1:30 This is he of whom I said: After me there cometh a man, who is preferred before me: because he was before me.
Joh 1:31 And I knew him not: but that he may be made manifest in Israel, therefore am I come baptizing with water.
Joh 1:32 And John gave testimony, saying: I saw the Spirit coming down, as a dove from heaven; and he remained upon him.
Joh 1:33 And I knew him not: but he who sent me to baptize with water said to me: He upon whom thou shalt see the Spirit descending and remaining upon him, he it is that baptiseth with the Holy Ghost.
Joh 1:34 And I saw: and I gave testimony that this is the Son of God.
What had Nicodemus heard, as a Sanhedrin member, and the teacher of Israel? These are the incidents that were reported back to the Sanhedrin. Nicodemus may have had this baptism of John on his mind. I think he did. But that is my perspective.
You Must Be Born Again
Joh 3:1 And there was a man of the Pharisees, named Nicodemus, a ruler of the Jews.
Joh 3:2 This man came to Jesus by night and said to him: Rabbi, we know that thou art come a teacher from God; for no man can do these signs which thou dost, unless God be with him.
Joh 3:3 Jesus answered and said to him: Amen, amen, I say to thee, unless a man be born again, he cannot see the kingdom of God.
Joh 3:4 Nicodemus saith to him: How can a man be born when he is old? Can he enter a second time into his mother's womb and be born again?
Joh 3:5 Jesus answered: Amen, amen, I say to thee, unless a man be born again of water and the Holy Ghost, he cannot enter into the kingdom of God.
Joh 3:6 That which is born of the flesh is flesh: and that which is born of the Spirit is spirit.
Joh 3:7 Wonder not that I said to thee: You must be born again.
Joh 3:8 The Spirit breatheth where he will and thou hearest his voice: but thou knowest not whence he cometh and whither he goeth. So is every one that is born of the Spirit.
Joh 3:9 Nicodemus answered and said to him: How can these things be done?
Joh 3:10 Jesus answered and said to him: Art thou a master in Israel, and knowest not these things?
Joh 3:11 Amen, amen, I say to thee that we speak what we know and we testify what we have seen: and you receive not our testimony.
Joh 3:12 If I have spoken to you earthly things, and you believe not: how will you believe, if I shall speak to you heavenly things?
Joh 3:13 And no man hath ascended into heaven, but he that descended from heaven, the Son of man who is in heaven.
Joh 3:14 And as Moses lifted up the serpent in the desert, so must the Son of man be lifted up:
Joh 3:15 That whosoever believeth in him may not perish, but may have life everlasting.
Yet perceptions vary from one reader to another.
Nicodemus reveals knowledge of Jesus' signs, yet John has not yet told the stories of any save one, the wedding at Cana. Turning water into wine. It's interesting how John constructs this.
Baptism is not a human work of any kind, it is God's work and God's alone.