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Why It’s So Hard to Fix Land Acquisition-Tripti Lahiri

India Inc. was aghast at the recent report of a parliamentary committee that recommended that a new draft land acquisition law limit occasions when the government may intervene to acquire land for use by private firms.

But in a paper published in the Economic and Political Weekly last month, Delhi University economics professor Ram Singh laid out data that supports the committee’s recommendations.

Mr. Singh argues that government-driven land acquisition is generally inefficient, unfair and often ends up snarled in litigation.

And presently, there’s a real incentive to go to court. Looking at 525 judgments from additional district judge courts in Delhi between 2008 and 2010, and another 305 judgments from 2009 from the Punjab and Haryana High Court relating to compulsory land acquisition, Mr. Singh found that in 86% of the lower court cases and 97% of the High Court cases plaintiffs got higher compensation through litigation. According to the paper, that’s because the courts routinely use higher-value sale deeds to award compensation, while local officials use government-set tax rates, known as circle rates, which are often lower.

Even though the new draft law mandates that compensation in rural areas be awarded at four times the “market rate,” Mr. Singh said in his paper that if officials continue to use government-set circle rates as their benchmark for market rates rather than the highest of the recently registered sales deeds, litigation will continue or even increase. Under the draft law, the potential lost compensation is not just the difference between circle rates and the highest sale deed – it’s four times that amount. In urban areas, it’s two times that amount.

“What worsens the situation is the fact that the burden to prove the market value is on the owner, notwithstanding the fact that all of the relevant information – records of the sale deeds, land type, etc. – is solely possessed by the government,” the paper said.

Mr. Singh says that, in any case, it isn’t generally stubborn owners who are holding up land acquisition. It’s state government regulations, such as limits on the amount of agricultural land one owner can acquire, and laws that make it difficult to re-zone such land for other kinds of activity.

“The decision-makers use these regulations to extract rent from the project sponsors,” he said in his paper. “It is these obstructive regulations that are responsible for the absence of frequent transactions involving transfer of agricultural land to other developmental activities. When granted exemption from them, the project developers have been able to buy large tracts of land through voluntary transactions.”

By making zoning changes so difficult, he contends that state governments have created a situation where it makes sense for companies to bribe state administrations to acquire land for them.

“When land is compulsorily acquired and given to a private company in the name of a public purpose, the CLU [change-in-land-use] clearances are not needed or are provided along with the land,” the paper said. “As the land price under eminent domain is much lower than the market price, the developers have been getting land at a rate much cheaper than what they would have ended up paying under voluntary transactions.”

In a recent interview Mr. Singh said that states need to revamp their zoning policy – right now a lot of land is zoned as agricultural land and is extremely difficult to convert to other uses – so that case-by-case clearances aren’t required. He suggested that except perhaps for irrigated multi-crop land, most other land should be rezoned as suitable for a range of activities. Then, when a company acquires that land, it won’t have to worry about getting land use clearances.

What about food security fears? He suggested that market forces will take care of that, since land that is very productive agriculturally will command higher prices than less fertile land, steering industrialists towards the latter.

But the problem, as Mr. Singh admitted, is that “the state machinery does not have an incentive to come out with socially desirable zoning.” If they do that, profits from corruption will decrease, so officials focused on short-term gains aren’t likely to push to do this. And the central government has no role to play in how states handle zoning.

That’s why Mr. Singh believes it’s wise for the central government to restrict the use of compulsory acquisition as part of a federal law on land acquisition.

“That is the only tool available to the center to do some disciplining,” he said in the interview. “Then states would be incentivized to relook at zoning.”

So at present, is there anything to feel cheerful about in the land acquisition reform process?

Mr. Singh said a central government initiative that offers states money to put land records online will pay off for industry later, by making it easier to verify the true owners of a land parcel. That will also make it easier for companies to engage in collective bargaining, which tends to result in agreements that stick, he said.