Land acquisition Bill will work for industry, farmers if leases are preferred over acquisitions

Many fear that the proposed land acquisition Bill will greatly harm economic progress through skyrocketing land prices, rewarding speculators while eroding India’s global competitiveness. Fortunately, the government has now accepted an opposition suggestion to make long land leases an alternative to outright acquisition. This is a huge improvement, and must become the preferred route.

The Bill aims to ensure “fair” compensation to farmers. Land prices are typically understated in sale deeds to evade stamp duty. Most state governments fix a minimum price for each area to limit undervaluation, but actual prices often exceed this minimum.

In the past, the local collector typically fixed the acquisition price at 30% above what he judged was the market rate. Farmers complained that this was often less than the true market rate. Besides, land prices typically shot up after acquisition and development, and farmers wanted part of the appreciation that accrued with development. To meet these grievances, the new Bill provides for compensation at double the market price in urban areas and four times the price in rural areas.

However, this threatens to convert a problem of undervaluation into gross overvaluation. Already, every politician and rural grandee is into land speculation in a big way, getting insider knowledge of future projects and then buying up all the land in the proposed development area. So, land prices often shoot up well before acquisition. Paying four times this already inflated price will be crazy.

To reduce speculative purchases, the new Bill proposes that in the case of recent purchases, half the appreciation on acquisition will go to the original owner. This will help at the margin. But it won’t reverse prices already at stratospheric levels that bear no relationship to the land’s productive value. Land that rents for 30,000 per acre in Punjab is being sold or acquired for 50 lakh to 1 crore per acre, representing an annual rental return of a pathetic 0.6% to 0.3%. That is a measure of how ridiculously inflated land prices have become, thanks to rampant speculation.

UNREALISTIC LAND PRICES

The multiple-payment principle of the Bill promises to reward speculation even more, further inflating land prices. In Punjab, for instance, land acquisition has already been done at Rs 1 crore per acre. If the government now has to pay Rs 4 crore per acre for future acquisitions, this will become totally unaffordable by any industry.

India today suffers from a record current account deficit, reflecting a loss of competitiveness. Instead of restoring the old competitive edge, high costs of land acquisition will permanently blunt that edge. There is no earthly reason why land in India should be far more costly than in competing neighbours like Thailand or Indonesia, which have a higher per-capita income than India.

Besides, it has commonly been observed that when farmers get a large lump sum for their acquired land, they often blow it up in conspicuous consumption, and can soon be left with almost nothing. Having already lost their main asset and livelihood, this puts them in a sorry state. Only a few invest their money wisely in other assets and investments yielding a regular income.

Finally, owning land in rural areas bestows social status on the owner. The landless have no status. A farmer whose land is acquired loses not just his land but also status (save for the few who buy land with compensation money). This is an important reason for resistance to acquisition.

LANDLESS TO RICH LANDLORD

Compulsory leasing, instead of acquisition, will solve most of these problems. The farmer will get a lump sum upfront, followed by steady rental income in years to follow, ensuring he does not blow up his cash gains. Instead of becoming landless, he will be a landlord, and the company that leases his plot will become his tenant. Having Tata or Ambani as his tenant will bestow status on a farmer, whereas outright acquisition will reduce his status to that of the landless.

We need to create a new climate in which farmers are stakeholders in industrialisation. This cannot be achieved by acquisition, but through long leases for, say, 30 years, renewable on mutually-agreed terms.

CHEAPER LAND FOR INDUSTRY

A farmer who has leased his land to industry still owns it, can sell it and can bequeath it. He remains a man of property, and richer than before. He or his children will get another lump sum and higher rent after 30 years. If the rent is fixed at, say, double the typical farm income, this should be welcome to the farmer.

In the bargain, this will make land much more affordable to industry, improving its global competitiveness. Companies will not have to make large upfront payments for land, paying just a reasonable rent. They will happily renegotiate leases every 30 years. It will be a win-win situation.

Whatever legislation may emerge from New Delhi, the states will ultimately decide how to implement it. They need to enact their own legislation facilitating long leases, and then go wholesale for the lease option.

2 thoughts on “Land acquisition Bill will work for industry, farmers if leases are preferred over acquisitions

  • 2013.May.11 at 21:53
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    There are a few of things i would like to point out here.
    Firstly, when we consider that weather farmers should be compensated with a higher value ( twice of market value for urban areas and 4 times for rural areas), isn’t this justified in a way because even the buyer who buys this land will ultimately convert this agricultural land into commercial land ( for corporates or for residential apartments) and it would be a windfall gain for the buyer within a very short period. It would be a classical case of buying cheap and selling dear.
    Secondly, fixing the compensation with respect to sale deeds based on last 3 years is i believe another of the clauses in the bill. Since these deeds are already undervalued to evade stamp duty, it will in a way usher in an era where people will use the correct market values to get their land registrations done or they risk that the valuation of the land at a later time would be critically low. Thus bringing in transparency as well as an increased tax collections for the states. There is a lesson here for both the owners to show the correct amount of transaction as well it would help the government to determine the actual real market rates for the land, which till now is grossly undervalued.
    Thirdly, the idea of leasing out land instead of buying may inhibit the industries from participating for they will always run the risk of evacuation from the land once the lease gets over and if the original owners are not willing to renew it due to differences in the rental in the henceforth lease agreements. Imagine a hypothetical scenario where Infosys after a 30 years of presence in say, Punjab suddenly says that we are pulling down the curtains since we could not agree upon a fresh lease agreement. It would not only cost the state in terms of taxes but would also affect the employment in the region.
    The intent of the bill clearly shows the balance tipping in favour of the original owners but the views of the industry also needs to be taken into consideration as high land acquisition costs would not only deter domestic investors but foreign investors as well.

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  • 2013.May.02 at 14:04
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    A welcome idea. But will industry accept this model?

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What do you think?