Editor’s note: The following post appears on the Food Security Portal hosted by the International Food Policy Research Institute. A previous version of this article was featured in a 2013 AEI publication.
For more than a hundred years, land acquisition in India had been governed by the Land Acquisition Act of 1894. This Act essentially violated the Right to Property enshrined in the Indian constitution (amended by the 44th amendment), since it enabled the government to issue notification to take over any private land that it deemed fit for “public purpose” without actively seeking the consent of the landowners and tenants of that land. While individuals could plead their case with the local collector, the collector, an administration official could issue a final decision which could not be disputed. Given the arbitrariness of the proceedings, the compensation amount was also often inadequate and lead to loss of livelihood and homes for landowners affected by these take overs.
The new land bill recently passed by the Indian Parliament titled “The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act 2013” aims to reverse the inequities of the old law. For one, it requires that when land is acquired for public purpose by private companies, they would need to get the consent of 80 percent of the landowners and tenants. For land acquired by the government, the consent of 70 percent of the people is required. Second, it arbitrarily sets the compensation amount at four times the market value of land acquired in rural areas and two times the market value in urban areas. While the bill is well-intentioned, in its ultimate outcome it is unlikely to achieve much more than the decades old law.
Economist Ronald Coase’s brilliant insight that won him the Nobel prize was that a change in property rights does not change the ultimate outcome. All it changes is the question of who needs to be compensated and by whom. The new law assigns all the property rights to the landowners, while the old law kept them with the buyer—the government or the private firm that wished to acquire the land. Hence under the old system, the government had the right to the land and could decide whether and how much to compensate the owners. In the new system, the land owners can decide whether they want to sell the land and for how much. In both cases, if the transaction costs are low, negotiations between the buyer and the seller should lead to the efficient outcome. Irrespective of who has the property right, the land would be acquired if the value of what the buyer is likely to produce with the land exceeds the value produced from the existing use of land.
However, Coase cautioned that transaction costs could often prevent society from reaching these efficient outcomes. This is not a warning that has been heeded by the new law. Under the new law, negotiations between the landowners and the private firms are likely to be costly and time-consuming, and will not always lead to the most efficient outcomes.
The first obstacle is coming up with a number for the market price of the land. As pointed out by Ghatak and Ghosh, market prices are not easily available particularly in rural areas. In many regions, transactions are few and not well-documented, leaving considerable room for officials to manipulate the figure by use of selective sampling or fake transactions. Distress sales constitute a bulk of the transactions and the full value is often concealed to escape stamp duty.[1] A more efficient system would be to allow competitive land auctions. However, this is not on the cards. Since the market value is not clearly determined, this leaves open the possibility that compensation for the landowners will be subject to manipulation and costly bargaining as well.
Second, by effectively bringing all market transactions between willing buyers and sellers under its purview, the Act impinges on the free market and places limits on what private companies can negotiate by themselves. Private players buying 50 acres or more of urban land tracts and 100 acres or more in rural areas are required to comply with the provisions of the Bill. This restricts their ability to make planned investments that are critical for economic growth.
Third, the Act mandates that buyers are responsible for the rehabilitation and resettlement of those displaced, including giving them a share of equity or jobs for the next 26 years. Not only that, landowners are entitled to a new house, relocation costs, a fixed sum of money for 20 years and 20 percent of capital gains every time the land is sold within 10 years. This imposes huge costs on the buyers, not just in terms of current compensation and resettlement costs, but an effective tax on future profitability arising from dealing with the claims of those displaced. This would adversely affect the financial feasibility of large-scale infrastructure projects and other projects.
Finally, the new bill requires that before any land is acquired for industry, a report assessing the social impact of the acquisition of the land must be prepared in consultation with village councils and residents’ associations.
These changes are cumbersome not only because they impose a heavy cost on the private firms that seek to acquire land, but also because of the time lines that this entire process would involve. By most estimates, it will now take 4-5 years for any transaction involving land to go through. Investment projects requiring land can quickly become unviable at these timelines. For example, even before the Bill was passed, Arcelor Mittal and South Korean firm Posco separately abandoned plans to build steel plants in India because of problems acquiring land. It took over seven years for Arcelor Mittal to get environmental and other clearances and acquiring land, making India a hugely unattractive destination for companies planning large scale capital investments. The new regulations are likely to make the situation worse since they impose even more costs on buyers.
If the aim was to encourage investment and economic growth at a much needed pace in India, this Land Act fails the test. FICCI, the apex body of industrialists issued a statement to the effect that the new bill does not augur well for India’s manufacturing sector, and would have a negative impact on employment. Other experts say that the bill would slow down urbanization and hamper the growth of the economy. But if the aim was to appeal to the large voter base of landowning farmers, this bill shows that Indian legislators are more concerned with elections than with building a strong economy.
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