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Resource centre on India's rural distress
 
 

Leave It To The Market by Dilip Modi

Land acquisitions in India are invariably marked by violent protests. Is politics responsible for stirring up passions? Is it loss of a means of livelihood that landowners resent? Or is there a fundamental problem with the way acquisition is done that stirs up a hornet's nest?

Look at the last issue first. There are two fundamental problems with the present system of land acquisition: the process of acquisition, and the compensation issue. In India, mostly land is fragmented into small parcels (excepting forested areas). Acquisition of a few hundred acres, necessary for an industrial or infrastructure project, requires dealing with several landowners. Also, not everyone wishes to sell. This makes the process cumbersome and increases the transaction cost of acquiring land.

However, the Land Acquisition Act, 1894, gives sweeping legal powers to the government or its authorised agencies to acquire almost any private land or property provided such acquisition is for "public purpose". Invariably this route is adopted. This is also known as 'eminent domain', regarded as an inherent right of the state to take private property for public use. It is legal in many countries, including the US, UK and France.

The problem lies in interpretation of the term "public purpose". Unfortunately the Act does not define the term. So interpretation was left to the courts. The Supreme Court in 1971 took a very wide view of the term in the case Jage Ram vs the State of Haryana. Yet it did not provide any definition and left it to the state governments to define and thus (mis)interpret the term. Strangely the judgment was delivered when 'right to private property' was still a fundamental right. Subsequent apex court judgments further widened the scope of interpretation.

The economics behind eminent domain and thus the interpretation of the term public purpose assume that the state would always act in the public interest and, therefore, any taking of private property would be to provide certain "public goods" that otherwise would not be provided by the markets.

Lighthouses or clean air are typical examples. One or several ships can use the light at the same moment. Yet no single ship owner would build the lighthouse. The government needs to build it - in other words, provide public goods as the market will not provide them automatically.

This clearly implies the Act's provisions should only be used when the government itself is to provide infrastructure facilities (public good). They should not be used for land acquisition for private investments, whatever the benefits. For such transactions, the market must play out. The government should not undermine market processes.

Yet the very opposite has been the bane of land acquisition in India. Private parties tend to pass off the high transaction costs of negotiating with individual landholders onto state governments. The latter have been more than willing to oblige, taking advantage of the sweeping powers to acquire land and justify investments in it.

When markets are not allowed to play out, and sweeping powers are used by the state, compensation is invariably low and not just. The question of compensation needs to be based on value of the land sought to be acquired. This can be done on the basis of prices prevailing in the past or the expected future value of land. Typically investment in industrial activities or building of infrastructure leads to creation of positive externalities that ends up as increased land value, benefiting primarily landowners, who are passive recipients of this windfall.

When farmers whose land gets acquired are compensated based on past prices, they do forgo potential benefits from urbanisation. This is a loss of opportunity cost in terms of forgone benefits, which in reality far exceeds the compensation received, in the long run. There are also substantial income redistribution effects between farmers whose land is acquired compulsorily and farmers who still possess their land. The latter can sell in the market at an appropriate time when urbanisation reaches them. This indirect redistribution invariably causes tension between governments and farmers. When acquisition is not purely for public cause, tensions mount further.

Asset pricing should always be based on the future. The present system that defines compensation based on past transactions is not just or justified.

We need a new Land Acquisition Act to replace the outdated Act of 1894. The new Act should define public purpose, restrict such acquisition only for public goods, and address the issue that land markets in India are not free. Farmers are not allowed to sell their land for non-agricultural purposes. This has prevented industrial development in rural areas as well as direct negotiation by private enterprises vis-a-vis acquisition of land for, say, an SEZ.

We also need to understand that landowners lose out on a means of livelihood. So states need to frame proper resettlement and rehabilitation policies taking care of resettlement and providing alternative livelihood means.

There are emotional pangs in parting with land. But it is also true that farmers can never improve their economic positions substantially by cultivation and by selling, say, potatoes. At least they have not been able to in the past. What they need is ample compensation and financial inclusion that will guarantee substantial and safe returns on their received compensation, enabling them to dream of sending their children to good educational institutions and not to plough land to produce potatoes.

Or is my argument not selfish enough? After all, the more potatoes they produce, supply increases and prices of potatoes remain low.

The writer is president, Assocham.