Tuesday, February 5, 2008

Free India's land market

It is legal to invoke eminent domain to acquire private land for industrial projects, even though the investors could afford to buy the land. But why can't a farmer buy a thousand acres. In this article "Free India's land market", published in the Mint, on 4 February 2008, I look at the problems affecting land market.

Small as it is, the Tata Nano has sent the world automobile sector into a big spin. The Nano reflects the potential of the new industrial revolution, which has so far passed India by. However, for the manufacturing to take firm root, the land needs to be prepared.

The Nano has been developed in four years. But Tata Motors may not have been able to buy the necessary land from landowners during the same period.

Which leads us to the question: Why is it legitimate to acquire land for industrial use, but prohibit farmers from consolidating and expanding their landholding to improve agriculture? Why shouldn’t a farmer be able to legitimately acquire a thousand acres?

Indian industry can raise capital from the global market on the basis of a prospectus, which promises performance in the future. But Indian farmers can’t raise adequate capital on the basis of the land asset which they already possess.

The most significant fallout of the Nano is the realization that low-cost manufacturing is not the exclusive domain of China. The Nano’s real contribution will be to demonstrate the competitiveness and technological viability of manufacturing in India. The industrial revolution may yet come to India, riding the Nano; a century late, perhaps, but better late than never.
But one swallow does not make a summer. One Tata Motors factory in Singur will not be able to spur the much-delayed industrial revolution.

Much more economic reform is necessary if India is to experience the much-needed industrial revolution. But the Nano gives us a glimpse of the possibilities.

Let’s take the Singur connection. The debate should not be for or against industrialization. The real debate ought to be on the glaring discrimination between agricultural land, and non-agricultural usage of that same land. Apparently, 40-50% of agricultural landowners are believed to be willing to sell their assets, at least partly, and move their economic activities beyond agriculture. It is imperative to facilitate this shift from agriculture to industry, and then to services.

No country in the world has been able to develop by keeping the bulk of its population dependent on land. With almost 60% of the population dependent on agriculture, which today contributes less than 20% of India’s GDP, it is no surprise that agriculture has become synonymous with poverty. The only way to pave the way for development is to increase agriculture productivity and at the same time absorb millions of people in non-agricultural activities.

However, it is critical that the value of the land of farmers, often their only asset, is maximized, and it is made simple to capitalize. The problem facing the poor is not their poverty, but inability to capitalize their assets. Typically, agricultural land hardly fetches Rs2-3 lakh per acre. Agriculture income, even if the land is cropped twice a year, can hardly be more than Rs30,000 per acre, at current productivity levels.

Restrictions such as zoning, land ceiling and land use laws, along with unclear titles and poor land records, grossly undervalue land prices. On top of that, there are transaction costs such as registration fees, property tax, etc. The result is a greatly distorted land market. At one end, there are landowners, millions of small and marginal farmers, who can’t even know the market value of their land. At the other end, there are the land mafia and speculators, who make a killing because of the large gap between restrained supply and inflated demand.

The Tata Motors project in Singur illustrates this quite vividly. This Rs1,500 crore project needed about 1,000 acres of land. For a typical industrial project of this kind, land rarely contributes 10% of the project cost. This means, Tata Motors could have purchased the land for around Rs150 crore. Or in a functioning land market, could have leased or rented the land at a much lower capital cost. This would translate to a price of around Rs15 lakh per acre in the Singur area. Tata Motors, with a production of about 250,000 cars per year, could have a turnover of Rs2,500 crore. One doesn’t have to be a financial wizard to know that if the Nano finds acceptance among buyers, this project would be an eminently viable one.

Rather than opposing land acquisition by the state, farmers may freely agree to sell their land if the offer is attractive enough. But they should be equally free not to sell, and instead give the land on lease or rent, and earn an assured return. The industry could also offer shares or bonds in lieu of land. Or even provide alternative land if the farmer decides to continue with his vocation. In an open land market, with protected property rights and security of contract, there would be a wide range of choices to meet almost every requirement. Only then would agriculture and industry become truly equal partners in the process of economic development, rather than being pitted against each other.

If the government no longer tries to act as a broker in industrial mergers and acquisitions, there is no reason for it to become a land broker either. But for this to happen, we need to radically liberalize the land market. If we are beginning to enjoy the fruits of industrial liberalization, and the Nano is a product of that reform, the potential benefit of unlocking the economic value of land is beyond our imagination.

The success of the Nano, coupled with the bitter debate over land in Singur, should help us appreciate the urgent need for liberalizing the land market, and pave the way for truly “inclusive growth”. Farmers as well as industrial enterprises deserve this. The Nano is a small car, but if it helps expose the self-imposed brakes that have held back our economic development, it could drive us towards a new industrial dawn.

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