Aim higher, reach further.

Weekend Panorama: India’s $25 Billion Annual Oversight

By Ajit Mohan

The murky business of land in India is about to get even murkier.

Last September, the UPA government drafted a bill to address an issue that has been at the heart of the developmental debate in the country: how best to deploy land on a large scale for private enterprises and public utilities in a fair manner, especially in rural areas. The bill, termed the Land Acquisition, Rehabilitation and Resettlement Bill, aims to create a framework for land acquisition, defining the purpose and terms of such transactions.

Manpreet Romana/Agence France-Presse/Getty Images
Women protested against the land acquisition policy, in New Delhi, Nov. 22, 2010.

As pointed out by PRS Legislative Research – an organization that tracks the functioning of Parliament — the bill, the purpose of which has been misrepresented in most media reports, sets the terms for forcible acquisition of land involving unwilling sellers. It is not about the government purchasing land from voluntary sellers.

The bill allows the government to acquire land for its own use or for use by private companies for “public purpose.” If more than 100 acres is involved in rural areas or 50 acres in urban areas, the bill requires affected people (not just the land owners) to be rehabilitated and resettled. The total compensation (including the value of the land and the “solatium” amount for the forced nature of the transaction) is linked to the average sale price of transactions over the most recent three-year period. Here, the bill has a marker for the size of the total compensation, set to be four times this benchmark price in rural areas and twice the benchmark in urban areas. Every acquisition, regardless of size, will also require a Social Impact Assessment by an independent body before the District Collector can approve the project.

While an argument can be made in favor of the central government crafting a national framework for an important subject such as land, what may well have been an honorable intent has translated into a highly flawed bill that promises to do more damage than good. For a start, it is not clear if the bill is even legally sound. Agricultural land is a state subject, while the concurrent list only allows the centre to legislate on transfer of property other than agricultural land. So, the bill may be attempting to legislate on a terrain clearly marked out for the states.

But the flaws run deeper. At the heart of the bill is the new compensation framework. The idea of a bill that sets the “market price” as four times the actual market price is an amusing non sequitur. The unofficial justification in government circles is that most property is registered for far less than its actual transaction value. So, effectively, the disturbing outcome is a bill introduced in the country’s highest legislating authority that is attempting to correct a distortion in registered prices arising from a blatantly illegal practice.

At the same time, the bill completely ignores a key element of fair compensation (one that was core to the 2007 version passed by the Lok Sabha that was blocked by the Rajya Sabha): intended use of the land.

Getting the permission from development authorities to convert land classified as rural to urban has often passed for real estate “entrepreneurship” in this country in the last two decades. Underpinning this is a straightforward fact: amidst poor agricultural productivity and rapid urbanization, the land’s classification has a direct impact on its value. Land that can be used for urban housing and industrial activity has a lot more value than the same land that is restricted to farming. The new draft completely ignores this. Thus, while the terms of the compensation may seem high, the bill, by attaching compensation to agricultural land price rather than the final use of the land, represents a large transfer of wealth from sellers to purchasers.

The other disturbing attribute of the bill is that, for the first time, it creates a new basis for forced acquisition by the government. This bill is expansive on what public purpose means. It seems to go beyond the creation of specific public goods to a remit that includes “planned development and improvement of villages” and “provision of public goods and services by private companies.” In other words, so long as even a tenuous linkage is made between a commercial activity and broad developmental impact, the government can forcibly acquire land on behalf of private enterprises.

The bill, therefore, sets the government up to play the role of a land agent for private corporations. Cynics may argue, of course, that this is only institutionalizing within the government a role that has been traditionally played well by freelancing political leaders.

And yet, if the intent was to create fairness in pricing for landowners while making it easier for manufacturing enterprises to set up businesses, other provisions in the bill only create new contradictions and uncertainty.

The requirement for a Social Impact Assessment is likely to delay the implementation of every single public utilities project in the country, from the installation of a roadside tap to the expansion of a highway. And while it may generate new revenue sources for the fast growing industry of independent consultants who churn out banal project reports, such assessments are unlikely to be meaningful. In the past, a similar provision in the National Urban Renewal Mission generated thousands of pages of similar-looking City Development Plans across the country, but no new insights or direction.

The requirement for consent from 80% of “affected persons” and not just the landowners further muddies the waters. The legislation effectively cedes decisions to a vaguely defined group who will have the ability to supersede the interests of the landowners.

Raul Arboledad/Agence France-Presse/Getty Images
Other countries have used land to generate resources to invest in their public infrastructure. Pictured, a neighborhood in Medellin, Colombia, December 26, 2011.

The bill could have attempted to provide a real solution to an entrenched problem that has two faces. One is the blatant exploitation of natural resources (and people whose livelihoods depend on them) by a few large corporations. The other is that entrepreneurs find it difficult to purchase and consolidate land needed to run enterprises critical to economic growth. However, what reinforces the lurking suspicion that this bill is aimed to be more a manifesto headline than a real solution is that both Special Economic Zones and mining are out of the purview of the bill. Led by powerful entrenched interests, these two sectors have been poster children for arbitrary land acquisition and muscular approaches that have bulldozed the interests of rural communities. That the principles of the bill do not apply to these two sectors suggests insincerity from the drafters.

The government’s response to an issue that is, quite obviously, a huge impediment to growth has been a flawed bill focused on the wrong issues. It has chosen to use a crude and unwieldy machete to hack away at a complex problem. And in the process, it has created legislation that is unlikely to appeal to landowners or farmers, small businesses or large corporations.

More glaringly, even as the bill has ventured into the terrain of acquisition in urban areas, it has completely ignored the huge potential of using urban land to fund public investments.

Throughout history, governments have leveraged land in cities to raise funds to invest in public infrastructure and services. This was true in the Western world and it is now the case in developing countries like China. Among fast-growing, fast-urbanizing countries in the developing world, India remains an exception in not having an approach to use the value of rising urban land prices to build public services and utilities.

India’s requirement for funds to build trunk services that raise the living standards of its people is substantial. The bill for creating water supply systems, roads, sanitation, and waste disposal will run to more than $1 trillion over the next 20 years.

The enormity of this task usually pushes the conversation in two directions, both unhelpful. One is the pursuit of futility, the conversation about how we should try to reduce the pace of our urbanization and find ways to keep people in villages. The other is the debate between an increased role from a government with limited budgetary resources, and the need for greater involvement from a private sector which will just not invest capital if it doesn’t see a path to get its money back.

What is lost in this pointless debate is that the one way to bring together a rising urban population, the need for more space and public utilities, and rising land values is for the government to devise an approach that uses land to fund public infrastructure.

Is this rocket science? Hardly.

All that the government has to do is put a price on the enormous value that it helps to create for private parties by leveraging rising land prices.

There are many ways in which the government can extract a fair share. One is to demand a share of the increased land value, when rural land is reclassified for urban housing or industrial activity. The other is to auction public lands when the government has adequate foresight about the infrastructure being built around it that will directly and substantially contribute to the value of the land. A third way is to charge private landowners who directly benefit from an infrastructure project, such as land near a newly built highway. This charge can be levied when they sell off the property.

But the most common approach is to charge private developers for building high-rise offices and apartments. When developers add floors to houses and offices, they are adding new space that is then sold to the market. While the profits from this additional space go to the developers, the bill for creating public services and utilities to serve the additional population fall on the government.

There is no way a government – even one that has an adequate tax base – can keep up with this new demand. This is exactly how our roads get clogged, our water supply systems dry out and our waste piles up.

The answer is not to prevent developers from building more. In most cases, they are responding to a real market need for more houses, more office spaces and more retail outlets. What has to change is the notion that there is a market in which developers make all the money, and a separate government authority that is stuck with all the responsibilities. In the absence of levying adequate charges on developers, they are extracting abnormal profits that are just not in line with the level of their risks and the value of their expertise.

That is not capitalism at work; it is bad policy on display.

The principles involved here are clear and defendable. It is fair for the government to levy a portion of the value it helps to create from private landowners who disproportionately benefit from public infrastructure. It is not only fair but necessary for the government to generate revenues to invest in raising the living standards of all its citizens, not just a few, wealthy landowners. And, in the case of charges on developers, it is absolutely irresponsible for a city authority not to charge for the additional space, which, at the end of the day, is public land. Imagine the uproar if government land in prime locations were to be given away for miniscule amounts. This is no different.

A recent economic estimate, in fact, put the value of such an approach at close to $25 billion annually. In other words, India could raise 1.35 trillion rupees every year if the government crafted a sensible approach to monetizing urban land. That’s a lot of money that could be used to create public utilities and services.

Yet the government continues to shy away from such an approach. Across the country, some authorities levy small fees.  But the approach is muddled, and rarely are the fees commensurate with the value created.

This is certainly not from a lack of understanding of the enormous, hidden value of urban land.

Nothing has happened precisely for the reason that the two constituencies that have the most to benefit from the current status quo are also the ones with the best understanding of what is being left on the table: political leaders and bureaucrats in urban development authorities, and large real estate developers.

The need to change this status quo is urgent. Much of the private infrastructure that will last the 21st century is going to be built over the next 20 years. Other countries at a similar moment in their development journeys have used land to generate resources to invest in their public infrastructure. Such an approach is the only way to create a virtuous cycle without which even private landowners and enterprises will start to see steep declines in their land values.

So the message is this: stop expending political capital on the wrong issues and start building a framework for leveraging land that will have a clear and direct impact on our ability to raise the living standards of our citizens.

Ajit Mohan is based in New Delhi and writes the Weekend Panorama column for India Real Time every two weeks.

Follow India Real Time on Twitter @indiarealtime.

Failed to load comments
Show More Archives

Popular on WSJ