Lease land, don’t acquire it

Prosperity requires a massive shift of labour out of agriculture into industry and services. Agriculture accounts for barely 14% of GDP, but for over half all workers. The average farm size is below two hectares.

Farmers simply cannot get prosperous on such tiny plots. They need to shift into industry and services. Unfortunately, all political parties follow labour and land policies that discourage this shift.

No party wants to change labour laws to permit easy hiring and firing that will facilitate giant factories employing millions for labour-intensive export production, as in south-east Asia and China. Land policies greatly hamper industrialisation. State governments have to approve conversion of agricultural land to non-agricultural use. Politicians demand and get thousands of crores for this conversion.

Anna Hazare and the Comptroller and Auditor General say nothing about this racket, but it is perhaps the biggest scam of all. The solution is simple. Every state should identify nogo areas unfit for industrialisation, and give automatic approval for all other areas. This will end the racket, facilitate industrialisation, and expand jobs.

The biggest issue is land acquisition. The Bill under consideration in Parliament aims, at long last, to give justice to farmers and tribals whose land is compulsorily acquired. But the Bill will unwittingly encourage rampant land speculation that makes industrial investment uncompetitive, and so stalls industrial employment.

In past decades, land was acquired at throwaway prices by state governments, and then sold at exorbitant mark-ups to industries, or given cheap to political cronies. Much land ostensibly acquired for industry was diverted to real estate. This sparked major agitations against acquisition that has now forced politicians to draft a new, fairer Land Acquisition Bill.

This rightly limits forced acquisition to only large areas. The Parliamentary Standing Committee suggests a compensation formula providing roughly four times the average sale price registered in the last three years, giving farmers a better deal.

But when speculation has already driven land prices sky-high, quadrupling prices yet again will hit the shift out of agriculture that India badly needs. The old land acquisition rule gave farmers maybe 30% above the fair price as determined by government officials. This was unfair, since farm sales typically understated prices to escape exorbitant stamp duties.

Besides, after an industry comes up, land prices in the vicinity appreciate sharply, and those losing their land get no share of this. To overcome these problems, the new Bill suggests quadrupling the registered rates. This is not the best way forward. Land speculation has already driven up prices crazily. Politicians know in advance where land is going to be acquired, buy up all the land available, and then make huge profits.

The notion that all registered prices of land are underestimated to avoid stamp duty used to be universally true. But once it becomes clear that owners will get four times the registered price, there will be every incentive for speculators to register the full price, or even to overstate it. The extra profit they get from fourfold-appreciation will be far higher than the extra stamp duty they will pay.

Unwittingly, the proposed Bill will en-courage rampant land speculation and exaggerated registered prices. We need a different scheme that is fair to farmers and tribals without unduly rewarding speculators, and which keeps land prices at levels that promote the shift out of agriculture into industry and services. The Punjab government wants to promote industry, but has been obliged to pay one crore per acre for acquisition near Mohali. Even deep rural land costs Rs 50 lakh/acre.

This bears no relation to the returns from land-it simply reflects massive speculation. The proposed Bill will (through quadrupling) increase Punjab land prices to Rs 2-4 crore/acre! That’s suicidal for industrialisation. Farm sale prices have historically been understated, but the aim must be to stop understatement, not create a system assuming that the evil will continue forever.

Already many states fix minimum registration prices for stamp duty purposes, reducing or eliminating understatement. We need an alternative approach that makes the farmer or tribal a partner of industry. Why should acquisition make him landless?

Instead, acquisition can be designed as a 99-year with substantial down payment plus annual rent (linked to the cost of living). The farmer should have an entitlement to buy a certain number of shares in the company at face value.

When the lease ends after 99 years, his heirs should be able to repossess the land or negotiate a fresh lease. This will transform the farmer from a victim to a landlord. A farmer without land has no social status. A farmer with Tata and Birla as tenants will have high social status.

Some states have an excellent provision: 12% of acquired land is returned to the farmers after development. Given the appreciation in land prices after development, this 12% may soon be worth more than the original farmland acquired.

This again will make the farmer a partner, not a victim, of development. By aiming to give the farmer a very high price for land, the Bill in Parliament risks encouraging speculation, discouraging industrialisation, and making India industrially uncompetitive. The Bill treats farmers and industries as antagonists.

Instead, we need to aim for a partnership. The details will take a lot of working out. But let us start by accepting the principle.

4 thoughts on “Lease land, don’t acquire it

  • 2012.Oct.10 at 17:34
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    Its a Brilliant IDEA but negotiations after 99 years looks not practical, The farmer should have an entitlement to buy a certain number of shares in the company.

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  • 2012.Sep.26 at 18:08
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    The moment C B Naidu (ex-Andhra CM) uttered the words ‘shift from agriculture’ in one of padayatras, his party was lynched to death in the following Assembly elections. It seems (at times), speaking common sense in India is considered as spitting venom on the innocent lot, almost blasphemous!

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  • 2012.Jul.29 at 21:17
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    Brilliant Idea. This reduces the Capex of the industrialist.
    Farmer is not forced to loose his right and his psychological attachment to the land is respected. Farmers have become paupers by misusing the money paid as compensation.

    However

    negotiations after 99 years looks not practical considering the number of farmers will be high. However i feel that the land rights vested with the farmer may be traded with the industrialist at mutually accepted price or traded on a stock exchange, which operates on market dynamics after a lock in period. The commonalities may be

    1. Some upfront amount for agreeing to lease. This should be maximum of 10 times of the annual lease amount of the first year.
    2. Lease amounts payable annually liked to some index.
    3. Trading of the title should be made easier like stocks with nominal stamp duty. Offering shares of the company to the farmers will have positive effect as farmers will support the company.
    4. A minimum 80% of the land area should be offered voluntarily. Further majority of the land owners should accept (simple majority should do.). The voting rights for this majority should be as per records at least three years in advance to exclude speculators.
    5. farmers who want to pursue cultivation shall migrate to other areas and lease agricultural land with the annual amount thet receive from the industry.
    6.A representative of the land owners should be appointed as a director of the company. He should be elected by the land owners and should be a alnd owner.

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  • 2012.Jul.06 at 14:52
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    Nice article again …. I have one request to make.
    Can you also put some reading links from writer’s/analyst like you?

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