Macroeconomics

Land acquisition debate: The price is not right

  • Blog Post Date31 March, 2015
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Maitreesh Ghatak

London School of Economics; IGC Bihar

m.ghatak@lse.ac.uk

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Parikshit Ghosh

Delhi School of Economics

pghosh@econdse.org

The central government’s move to amend the 2013 land acquisition Act has come under criticism for being ‘anti-farmer’. In this article, Maitreesh Ghatak and Parikshit Ghosh argue that while the amendments would streamline the land acquisition process, the law will still be fatally flawed unless a more rational method of determining compensation for land owners is put in place.



Even as the government presses ahead with seeking parliamentary approval for its amendments to the 2013 land acquisition Act, it appears nervous and defensive. In a country where two-thirds of the population still lives in villages, the taint of being anti-farmer is something no political party can afford, even one with a mandate.

The 2013 Act raised compensation amounts to four times the market price in rural areas and twice in urban regions, topped up by a Relief and Rehabilitation (R&R) package for affected families. It also made the acquisition process more arduous by requiring a social impact assessment as well as consent of 80% of the affected families (70% for PPP (public private partnership) projects), whenever land is acquired for private companies. The new Bill leaves compensation amounts and R&R obligations untouched, but tries do away with social impact assessment and consent for certain projects like defence and infrastructure. This is what has brought the government under fire.

A muddled Law

The 2013 Act combined three different approaches. One is to let money speak – hiking minimum compensation amounts significantly to win farmers’ support. The second is to let farmers speak – making project clearance based on a referendum among affected households. The third is to let bureaucrats speak – getting it vetted by committees doing their own social cost-benefit assessment.

The result fits quite well the definition of a donkey – a horse designed by committee. The law stacked up every idea on the table instead of choosing the best one. If acquisition cannot proceed without farmers’ consent, why impose an inflexible compensation formula or a top-down, ill-defined process of “social impact assessment” that sounds like a recipe for bureaucratic hold-up and bribery? Either farmers get to decide if it is a good enough deal, or the government decides it for them. Why both?

The Act had social impact assessment to please bureaucrats, consent requirement to make civil society happy and large ad hoc compensations in the hope of actually getting farmers on board. This kitchen-sink approach has made the new process of land acquisition not only expensive but also cumbersome and slow. Its architects completely missed the point that making land acquisition difficult is not the same thing as protecting farmers’ interests.

Public sector: A holy cow

The outrage over withdrawal of the consent requirement rings hollow if you consider a simple fact. According to the 2013 Act, the consent clause applies only if a private company is involved in some “public purpose” project (acquisition for pure profit is ruled out on paper). If an airport is to be built by the Airport Authority of India, the opinion of farmers who lose land do not count, but if the project is awarded to a private company like GMR to get around public sector inefficiency and funding crunch, grassroots democracy suddenly becomes sacrosanct.

This reflexive and hidebound suspicion of the private sector is funny if you consider history. Less than 10% of forcible land acquisition in post-Independence India was for industry. Most of it was for public-sector projects like dams, roads, railways and administrative buildings. It is the State, not the greedy corporates, which has been the hungry monster gobbling up people’s land. The 2013 Act also excludes several types of public acquisition listed in the 4th Schedule from even paying the higher rates of compensation. If a new bill is not passed, land for mines, railways and highways can continue to be acquired under the old colonial era rules.

Protesters seemingly had no problem when the government exempted itself from putting its own projects to the vote or forking out its own money, which is a lot like the wolf guarding the henhouse from everyone else.

It is also time we actually reflected on what “public purpose” truly stands for instead of using it as a lazy invocation to justify or shoot down the state’s violation of property rights. The false dichotomy implicit in this language is that whatever government traditionally does promotes the interests of the poor while the corporate sector only looks after the rich. Does an airport or modern highway serve the common man who travels on the roof of trains? Will a privately-owned textile mill not generate low-skilled jobs and supply cheap, mass produced consumption goods to low-income households? What logic dictates that the government can grab land to fly the rich but not clothe the poor?

The fundamental problem that eminent domain law was designed to address is that it is very difficult to purchase huge amounts of contiguous land from the market. Any large project, whether in the public or private sector, faces the risk of getting stuck, or worse, not even started due to this problem. The crux of the matter is how to determine a compensation amount that will protect the interests of farmers as well as allow land conversion whenever it stands to increase the value of what is produced on it. Pointless debates about public purpose, multi-cropped land, involvement of corporations, etc. help to obscure the main issue.

Arbitrary compensation formula

The new government is quite right in seeking to simplify the byzantine process the UPA (United Progressive Alliance) government had created in the name of social justice. However, it fails to tackle the problem at its roots, namely, the arbitrary compensation formula its predecessor came up with.

Even setting aside the fact that price of land transactions is often underreported and poorly recorded, compensation according to past market price (as specified in the now defunct 1894 Law) was grossly unfair. If a factory or SEZ (Special Economic Zone) is to be set up in a poor agricultural region, it immediately becomes an economic game changer and can cause a real estate boom almost overnight. If people have to surrender their land at old agricultural prices while neighbours or outsiders made a windfall selling to private parties at new industrial prices, it is no wonder they will erupt in protest.

So compensation has to be paid at the new market price rather than what exists on the records. Without having a clue how to figure out this new price, the previous government simply decreed that prices which prevailed in the past should be multiplied by four. There is simply no logic behind this.

We have proposed a method of assessing the relevant market price through a transparent process that does not rely on the whims of lawmakers and bureaucrats (Ghatak and Ghosh 2011). The basic idea is as follows. Once news about the upcoming project is broken and its implications understood, the government should buy large amounts of land in and around the project site through an auction. All landowners in the region can be required to submit asking prices for their plots and the cheapest offers accepted.

Some of the land needed for the project will be procured straight from this auction. Other owners, whose asking prices were too high, will still be occupying the project site. But if the government also acquires some land outside the earmarked zone, it will be able to compensate the remaining landowners with nearby land, acre for acre, instead of cash. Those who are most dependent on land will thus have to part with their plots but not land in general.

The specifics of this kind of solution can be debated but it is important to stress the general idea. What robs land acquisition of its legitimacy now is the fact that the price is entirely dictated by the State. Unless farmers can meaningfully participate in the determination of this price, the problem will not go away.

In any transaction, however, neither buyers nor sellers have any incentive to reveal how much the asset is truly worth to them unless faced with competition from other buyers and sellers. Once the site for a project has been chosen, each piece of land there has no substitute. This is why the government sees no option but to impose a price from above instead of determining it from the ground up. If it created a provision for project-affected people to be compensated with nearby land, they can be put in competition with their neighbours.

Creating this competition is the key to determining the price of land in a way that is both participatory and practical. This can be extended to allow the government to identify different areas as potential sites for the project, and to ask farmers what their asking price is with the understanding that the corridor where land is cheapest will be selected. Farmers’ self-interest should ensure that they are not robbed but competition for the project will also keep costs from ballooning beyond control.

A crisis of governance

In the last several years, a major crisis we have faced concerns how to put a price on valuable natural resources like land, minerals, natural gas, air spectrum and so on. If there is one lesson to be learnt from the mega scandals of UPA-II, it is this. Relying on the discretion of politicians, bureaucrats and expert committees leads to ignorant guesswork at best and mischief at worst. The best way to put a price on a scarce resource is through transparent and competitive bidding among its many claimants.

Everyone agrees after the fact that allocating coal blocks and spectrum licenses by holding auctions was the best way to go but we seem unwilling to apply painfully learnt lessons to our other problems. We demand social impact assessment, forgetting the track record of experts and officials wielding discretionary powers. We insist on farmers having the right to vote on arbitrary prices determined in Lutyens Delhi but not the right to bid on their own land reflecting local conditions and opportunities. The problem with the 2013 land acquisition Act is that it patronised farmers, not empower them.

Also, the debate on land has been dominated by ideological posturing and political opportunism. Ruling parties feel the onus to deliver on industrialisation but opposition parties are eager to hem them in with anti-farmer charges. Elections only switch roles.

It is unfortunate that the current government’s effort to streamline the land acquisition process has run into a storm. However, even if the government prevails, the law will be fatally flawed unless a more rational method of determining compensation is put in place.

Reprinted from THE INDIAN EXPRESS with the permission of The Indian Express Limited © 2014.

Further Reading

Ghatak, Maitreesh and Parikshit Ghosh (2011),The land acquisition bill: A critique and a proposal”, Economic and Political Weekly, Vol. XLVI, No. 41, 8 October 2011.

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