Macroeconomics

Land acquisition: Is there a way out?

  • Blog Post Date16 July, 2012
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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

India is hungry for space to grow into a developed economy. Yet this hunger is increasingly raiding farmland and threatening traditional livelihoods. For some, this is a necessary evil, for others it is unjustified exploitation. This column argues that the debate need not be so stark and that politicians, policymakers and the public need to see that another way is possible.

Britain entered the industrial age when powerful landlords started the enclosure movement and kicked the peasants out. When China fell in love with capital after Mao’s death, the state made ruthless use of its monopoly on land to turn paddy fields into factories. In India, capitalism and democracy have come of age at the same time. And like the famous siblings of the Mahabharata, they find themselves on the brink of a war over land.

A liberalised economy, released from its Hindu rate of growth, is hungry for space to build its factories, power plants, highways, mines and townships. It is increasingly raiding farmland and threatening traditional livelihoods. The conflict has given rise to Nandigram, Singur, Kalinganagar, Bhatta-Parsaul, and Jaitapur. It has brought down the mighty Left Front in West Bengal, whose electoral longevity owed much to land reforms.

Whoever wins this battle, it may be a pyrrhic victory. Are we doomed to a Sophie’s choice: either remain a poor peasant economy, or become India shining by dispossessing and pauperising millions? Fortunately, things are not so stark. Politics and ideology present us these false dichotomies. But to choose a better world, we first have to see that it is possible.

The new Land Acquisition Bill

Legislatively, the UPA government seems to have gone into a coma, thanks to corruption scandals and the often impossible arithmetic of coalition politics. This is unfortunate, since several important bills lie in the parliamentary pipeline. Among them, a new land acquisition bill. Questions of political will aside, can the new bill solve the land problem if it became law?

Eminent domain – compulsory land acquisition by the state for developmental purposes – is currently conducted under the Land Acquisition Act of 1894. This law is often sanctimoniously blamed for all the conflict over land. Critics have a habit not of pointing to any flaw in substance, but merely reminding us of its colonial origin. Read the text, however, and it is not immediately obvious why the law is so monstrous. It makes many of the right noises – notices must be issued, objections heard, committees formed, and ‘just’ compensation paid. What is just compensation? The local market price of land, as determined by the collector.

What is different in the new bill? Roughly speaking, it is more of the same. More committees have to be formed, more procedural hurdles cleared and more compensation paid before land can be seized by the government. Specifically, compensation amounts must be at least four times the market price in rural areas, and at least twice in urban areas. In addition, all affected families are entitled to a rehabilitation and resettlement (R&R) package consisting of cash payments, annuities, and in some cases, land or jobs.

In other words, eminent domain remains, and more or less in its current form. The difference is one of degree, not kind. The previous law required that compulsory acquisition must be for a ‘public purpose’, not private profit (such as building a factory), but kept open enough loopholes to render it toothless. The new bill does the same. Multi-cropped land can no longer be taken, but the bill immediately adds that in ‘exceptional circumstances’, it may be allowed.

The bill suffers from a lack of imagination. It stacks up a mountain of bureaucracy and compensations, and hopes the problem will be crushed under its weight. Yet complex economic problems often require a scalpel, not a hammer, and the new land bill fails to provide such a delicate and appropriate tool.

Why not market price?

Beyond the rhetorical spittle, emotional tugs and legal minutiae, there is a simple and practical question that lies at the heart of the land acquisition debate. How to put a price on forcibly acquired land? What is the offer a person cannot refuse if we don’t even allow him to refuse?

Compensation at market price would be fair enough if there was a well-functioning market for agricultural land in India, like there is a market for urban real estate or brand new cars. In that case, a dispossessed farmer who is highly reliant on farming could go back to the market and buy land again with his compensation money. Unfortunately, rural land markets in India are not very well functioning. Unlike most other assets, land is not easy to replace.

To make matters worse, officially reported land prices are often kept down to evade stamp duty and a good fraction of the transactions are distress sales by farmers. Since government officials assess local market price based on spotty records, there is plenty of room for manipulation or mistakes. Moreover, setting up an industrial project in a rural area often leads to a significant rise in local land value, making historical market prices an unfair benchmark.

Yet even if market price could be accurately assessed, it would remain inadequate compensation. Owners are owners for a reason – they personally consider land too dear to part with at the going market price. There may be others who value it less, who would be happy to give up land at the market price, but most of them would have done so already through the market! This is the fundamental flaw in the existing law. It equates the price in voluntary transactions with fair price in forced acquisitions. There is no good reason to do so.

If market price is not fair compensation, what is? There is a nearly tautological yet useful answer. Fair compensation for any confiscated property is whatever the property is worth to the owner himself. Who can quarrel with that?

The principle seems fine but putting it into practice is hard. Owners will differ a great deal in how much they value their land. Some farmers have superior farming skills or better equipment than others. More educated families have better opportunities in terms of alternative employment. The poor can use land as collateral for loans, the rich don’t need to. The value to the owner is a subjective amount, dependent on individual circumstance and preference that no one else knows, certainly not government officials and so-called experts. In negotiations and talks, farmers have every reason to exaggerate their personal valuation. That is simple bargaining.

The bill goes in the right direction in setting the bar above market price, but that is where praise must stop. Why multiply by two or four, why not three or seven? (Indeed, in the National Advisory Council’s initial draft, the multiplying factors were three for urban and six for rural areas). In setting compensation amounts, errors can be costly both ways. Under-compensation gives short shrift to farmers. Over-compensation may discourage a project that otherwise would have been built, killing the goose that lays the golden egg. Short shrift to the farmers, again.

Solution: A land auction

We suggest a new method for determining compensation that, while not perfect, should be a vast improvement over what the bill is currently trying to do. Here is the broad idea (see Ghatak and Ghosh 2011 2011 for a more detailed description).

When a project is to be set up on a large tract of agricultural land, the government should hold a land auction in the region. Farmers should be asked to submit an asking price at which they are willing to sell their land. This includes not only those who own land in the proposed project area but also landowners in the surrounding region. If the project requires 1,000 acres (say), the government should buy the cheapest 1,000 acres or so in the neighbourhood.

Of course the project needs land side by side. The cheapest plots acquired will be scattered all over the place. This is not a problem. Take all the unsold plots within the project site and relocate their owners to the sold plots outside it (perhaps paying a lump sum amount to cover the inconvenience of relocation, possible differences in soil quality, sentimental attachment of ancestral property, etc.). A maximum price may be set for the auction to prevent runaway costs. The project has to be cancelled if the price exceeds this maximum price.

There are four main advantages to this method. First and foremost, it vastly reduces coercion. Existing eminent domain law, including the changes proposed in the bill, gives the citizen no say at all on any aspect of the transfer. The state can not only seize your property at will, it also dictates the price. ‘Bottom-up decision making’ is an empty slogan without the right instruments. The power to choose the price of their property is arguably more useful to the poor person than countless gram sabha meetings and grievance committee hearings.

Second, our proposal effectively gives the farmer further choice in the form of compensation – either cash or land. One of the enduring objections to eminent domain is that for poor, illiterate farmers who lack financial savvy, cash will evaporate but land will keep feeding forever. Under our proposal, farmers can always make sure that they hold on to land (just not the plot he used to own) by bidding above the auction’s maximum price. If it suits them, however, the farmer can also bid less.

Third, among all possible ways to eliminate disaffection and resistance, this should place the least financial burden on the government. It will encourage owners to ask for whatever their land is truly worth to them. The key to keep any seller honest is competition. Our auction makes landowners from the project area compete with those from outside. If the farmer asks for more money than what his land is worth to him, he runs the risk of being stuck with another plot instead of getting the money. This discipline is absent whenever the government tries to negotiate directly.

Finally, this method should help to keep agricultural productivity high. It is very likely that some farmers who owned land in the project area are more productive than some outside. Ideally, their lands should be swapped, and the less productive farmers should be the ones leaving agriculture for some other occupation (after due compensation). Absence of a well functioning land market in the area can prevent this from happening. The auction will make sure that those who give up land are the ones who value it least – that is, the less productive farmers.

The lay of the land

From financial crises to land acquisition, whenever government tries to play a facilitating role for industry, it draws the ire of both the left and the right. To those on the right, a nanny state destroys character and breeds dependency. To those on the left, any assistance to capitalists is a betrayal of the poor by some sweeping zero sum logic. It is not an uncommon view (championed most prominently by Mamata Banerjee) that industrialists must acquire all the land they need through the market, without any help from the state. The new land acquisition bill has given a nod to this sentiment, while keeping open loopholes.

Surely, one reason Indian industry has developed a habit of lobbying states for land is the throwaway prices they often get. State governments are in stiff competition to attract investment, leading to a race to the bottom. The central government has a role to play in stopping these subsidies. Yet it must also play a critical role as intermediary in land transfers between private parties. In Singur, there were nearly 12,000 owners for the 1,000 acres Tata wanted for its Nano factory. Negotiating separate deals with so many different parties is a task of impossible complexity. This is compounded by the fact that property records are often obscure and courts move at a snail’s pace to deal with legal disputes.

The political controversy surrounding eminent domain has prompted industrialists to go the market route in many places, but the record is dismal. The proposed Reliance Special Economic Zone in Maha Mumbai is a good example. Reliance worked out a deal with the Maharashtra government to acquire 70% of the land through the market, and get the rest through eminent domain. After two extensions, one of India’s leading corporate giants, an organisation not known for its tactical reticence, managed to buy only 13%. The project was cancelled. Large scale land acquisition in India needs a gentle nudge from the visible hand of the government.

Rhetoric from the radical left sometimes suggests that the very notion of industrialisation or development is a conspiracy to rob the poor, that messing up corporate plans or even state infrastructure projects is, in itself, a triumph of justice. This is a destructive philosophy that needs to be challenged. If one’s vision of India includes paved roads, electricity, modern housing, indoor plumbing, functioning schools and equipped hospitals for all of 1.2 billion people, the question must be asked how all this will materialise. Building materials or medical instruments do not grow on trees, after all.

Unlike the urban intelligentsia who often champion their cause, our millions of farmers lack the human capital needed to play a vital role in the new economy. Maybe their children or grand-children will be software engineers, but today’s adults are destined to toil in an overpopulated agricultural sector blighted by low productivity and low pay. The kisan, however, holds one key to the vault where India’s burgeoning wealth is being stored –his land. To have it robbed is a tragedy, to have it quarantined is a farce. For our huddled masses, the status quo is no less the enemy than change. What they need is change in which they can be partners, not victims.

Further Readings

  • Ghatak, Maitreesh and Parikshit Ghosh (2011), “The Land Acquisition Bill: A Critique and A Proposal”, Economic and Political Weekly, 46(41):65-72.
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