Regulating land markets: The colonial inheritance

State intervention in markets is usually thought of as a post-independence phenomenon. However, this column demonstrates that extensive State intervention in land and credit transactions can be traced back to policies adopted by the British Raj in India, beginning in the late 19th century.

It is usually thought that extensive State intervention in market transactions is a post-independence phenomenon in India. Such intervention is closely identified with import-substitution, which was a strategy to promote industrialisation. But as liberalisation has proceeded we are increasingly aware that the State also heavily intervenes in markets in land, and, relatedly, private (non-bank) credit. What are the roots of these interventions? Should these also be traced back to the days of Jawaharlal Nehru and Indira Gandhi? After all, wasn’t the British Raj largely laissez-faire ¹? The short answer is No. Despite lip-service to laissez-faire, the British Raj intervened extensively in land markets, and particularly in the relationship between land and credit transactions. This goes back to the 19th century. Independence marked a break in policies pertaining to trade and industry, but on land and non-bank credit this is a story of continuity.

If we consider the land market in 1850 in (say) Bengal or the Bombay Deccan, there was little State intervention. The colonial State wanted its taxes and would seize the land if the owner did not pay. Barring this, owners were free to sell or mortgage their land. But this state of affairs did not last. When land is freely transferable, people will borrow against it. Some will default, and lose their land. Even when land has not been explicitly pledged as collateral, it may have to be sold to repay debt. This process is inevitable at least to some extent, and will occur in any market economy. But its social impact depends on the identities of borrowers and lenders. In a relatively rich region (say, much of Bengal), there was enough capital, so the lenders were local and long-standing members of agrarian society. If land went into their hands, this did not necessarily increase social tensions. However, in poor region (say, Bombay Deccan, or numerous tribal areas), many lenders were immigrants. They were often professional trader-lenders, with no connection to agriculture. When land was transferred to them on a significant scale, this led to social tension. In some instances violence broke out, as in the (tribal) Santhal areas in eastern India in 1855 or the Bombay Deccan in 1875. The colonial State then chose to intervene. They chose two main types of policies: regulating the moneylender; and directly banning land transfers.

British intervention in land markets in colonial India

The first major regulation to curb the power of lenders was the Deccan Agriculturists’ Relief Act of 1879. Some of the rules were innocuous: moneylenders had to be registered, and loans had to be documented. Others were more substantive – there were limits on the interest rate (usury laws), and even a ceiling on interest accumulation. Perhaps the most striking feature of this Act was the discretion it gave to judges to go “behind the bond”, to investigate the history of the transaction, and use their discretion to reduce the amount the borrower needed to repay.

A more radical approach was to make some land transfers illegal. Perhaps the most (in)famous of these policies was the Punjab Land Alienation Act of 1900, which disallowed the transfer of land from “agricultural tribes” to others. Land transfers were also restricted in numerous tribal areas around British India, because these populations were viewed as especially vulnerable.

If the British Raj claimed to believe in free trade and laissez-faire, how did it justify these policies? The main reason was political. Especially after the “Mutiny” (1857)² , the Raj was extremely sensitive to social unrest, afraid it would threaten their rule. The Raj’s officials also developed a convenient theory; societies were at different stages, and Indian peasants could not responsibly handle the additional credit that became available once land was made transferable and could be borrowed against (West 1873). For Indians (British officials argued), transferable property in land was a “fatal boon” (India 1898, 303). Of course neither of these arguments, products of imperial thought, is particularly relevant now. A third argument has more contemporary value. British officials argued that the lender was more sophisticated than the peasant, especially in legal matters. So though borrower and lender were on a level playing field according to the letter of the law, in practice the borrower was vulnerable and the State had to protect him or her. This was especially true for tribals (adivasis), whose lifestyles were more distant from the mainstream.

The process which began in the 19th century intensified in the early 20th century. In 1918 the British-India-wide Usurious Loans Act was passed disallowing “excessive” rates of interest. In the 1930s a slew of provincial laws were passed to regulate the moneylender. There were also numerous laws under which borrowers could petition Debt Relief Boards to reduce their obligations (Roy and Swamy 2016, chapter 4)

Colonial hangover

Both types of regulation (curbs on lenders as well as restrictions on land transfer) have persisted in independent India. In 2007 the Reserve Bank of India (RBI) surveyed moneylending legislation in 22 states and found that interest rate ceilings were common. The Usurious Loans Act of 1918 was still in place. And most states allowed courts to reopen the history of transactions, just as the Deccan Agriculturists’ Relief Act had.

Restrictions on land transfer remain in place. The Fifth Schedule of the Indian constitution (Article 244, (1)) allowed the governor of a state to pass laws to prohibit transfers of tribal land in “Scheduled Areas”. Many states took the opportunity to pass such legislation. For instance, the Andhra Pradesh Scheduled Area Land Transfer Regulation (1 of 1959, amended in 1970) prohibited land transfer from a tribal to a non-tribal.

Tribal lands are often in areas which are rich in mineral deposits, and now corporations want to acquire this land. But the colonial-era concern persists. Will the tribals get a fair deal? Legal controversy has even extended to the government’s right to transfer its own land in a “Scheduled Area” to a non-tribal. This was the issue in a famous legal dispute, Samatha versus State of Andhra Pradesh and Others (1997), decided by the Supreme Court. In this case the state of Andhra Pradesh had transferred government land in a Scheduled Area to (non-tribal) mining companies. The state was sued by Samatha, an NGO. The court reviewed the colonial-era history, and came to the same conclusion as the Raj: the tribals were “innocent” and required protection. It declared the transfers invalid. The issues raised in this case continue to be hotly debated. We are still struggling with policy questions that emerged in the colonial period.

This column draws on chapter 4 of Roy and Swamy (forthcoming, August 2016). The research was undertaken as part of an IGC project.

Notes:

Laissez-faire refers to the theory or system of government that upholds the autonomous character of the economic order, believing that government should intervene as little as possible in the direction of economic affairs.
The 1857 Mutiny refers to a rebellion in India against the rule of the British East India Company that ran from May 1857 to June 1858