Posts Tagged ‘economic development’

Land Acquisition – Much Ado About Nothing

This is the way the world ends

Not with a bang but with a whimper.

(T. S. Eliot: The Hollow Men)

This famous poem, which ends with the above quoted lines, is linked to a number of overlapping themes. The entire drama covering the period from the introduction of the amendments in end 2014 to the Land Acquisition, Rehabilitation and Resettlement Act, 2013 (LARR Act 2013) through an ordinance, to the “sound and fury” over its introduction in Parliament as a Bill in 2015 (LARR Bill 2015), down to its final quiet burial in the end of August 2015 reminded me of this piece of 20th century literature. What was touted to be a grand effort at reform in making land available for the nascent “Make in India” industries and the infrastructure to support rapid industrialisation came a cropper in the face of a politically motivated, generally ill-informed campaign to preserve the “pristine” nature of the LARR Act 2013 which the LARR Bill 2015 sought to amend. After the heat and dust of the battle settled, there was only one clear loser — the average Indian citizen who hoped for better amenities, job opportunities and an improved standard of living.

What was the LARR Bill 2015 trying to do that so aroused the ire of the supporters of the LARR Act 2013? The Amendment Bill sought to exempt certain categories of projects from the social impact assessment and public consent provisions, including public private partnership infrastructure projects on lands owned by the government, going beyond the exemption from public consent already available in the LARR Act 2013 to projects of the government, its public sector undertakings and other entities essentially in the public sphere. There was no dilution of any of the provisions relating to compensation or resettlement & rehabilitation. This makes the defensiveness of the government of the day about the LARR Bill 2015 all the more inexplicable; it dissimulated where it should have unequivocally come out with a confident statement about its commitment to improving the lot of India’s citizens. In any case, as has been pointed out by Sanjoy Chakravorty (A Lot of Scepticism and Some Hope: Economic & Political Weekly, 8 October 2011), about 90 percent of land acquisition and displacement of people has been occasioned by government projects, so it is rather strange that an impression has been created that the LARR Bill 2015 is intended to further private corporate interests. A lot of hullaballoo has been created around non-issues to score political points and the likely damage to India’s long-term growth prospects by a seriously flawed Act has not been analysed or debated.

The manner of calculation of compensation has major implications for the economic viability of projects requiring acquisition of land, apart from its implications for the distortion of already imperfect land markets. Land valuation at four times the market (or consented) price, for rural areas, and twice for urban areas has no rationale. This will sharply raise project costs and also create a piquant situation in peri-urban areas, with demands for compensation as in rural areas impacting the economics of urban and industrial development in the peripheral areas of cities. The requirement for the social impact assessment to be carried out before the preliminary notification of the land is incomprehensible; any administrator connected with land acquisition will tell you that this will immediately lead to land speculation in those areas. Bengaluru witnessed this phenomenon when land was to be acquired for the NICE corridor road on its fringes; the Vijayawada-Guntur belt is also experiencing sharp escalations in land prices with the forthcoming development of the capital city for the new state of Andhra Pradesh. Inordinately high land cost will act as a dampener for land acquisition and will also exert upward pressure on prices of land privately acquired.

Multiple layers of bureaucracy will have an adverse impact on prompt acquisition. A potential investor will have to run the gamut of a social impact assessment, getting public consent, fixation of land compensation and approval of the resettlement and rehabilitation package before getting possession of the land for actual construction. This is, of course, presuming that environmental clearances and approval of the District Collector for conversion of agricultural land to non-agricultural use are forthcoming in a timely manner and that the proceedings do not get bogged down due to, firstly, lack of public consent and, secondly, demands for enhanced compensation and other contentious issues to be decided by the Land Acquisition, Rehabilitation and Resettlement Authority set up under Section 51 of the LARR Act 2013. Recourse to other legal procedures (e.g. writ petitions) by interested parties to secure higher compensation or to contest the need for acquisition can further delay matters. Even with an outmoded Act like the Land Acquisition Act 1894, with its anti-landowner bias, it took anywhere up to several years for land to actually come into the possession of the acquirer. The LARR Act 2013 is likely to further increase this period, leading to project cost escalations.

Historically, industrialisation has proceeded based on the conversion of land from agricultural to nonagricultural use and on the ability of the agricultural sector to feed a population increasingly dependent on off-farm employment. This process has not been without its share of conflict, as brought out by Richard Hofstadter in his seminal book “The Age of Reform (1955)” where he describes the agrarian revolt of the 1890s in the USA and the attempts to harness it for political purposes. Not only did these agrarian movements fail to take off, quite to the contrary, as Hofstadter puts it “…the prosperity of the commercial farmers was achieved not only in spite of but in good part because of the rise of American industry and the American city“. As urban demand for food grew, agricultural prices registered a significant upturn. Improved efficiency in and mechanisation of farming operations, coupled with finance and transportation arrangements, contributed to a rise in farm incomes. At the same time, the excess rural population found employment opportunities in the cities. State support and guidance on farm produce distribution issues and the rapid growth of farmers’ cooperatives (in the areas of credit, mutual insurance, public utilities, marketing and purchasing) reduced the exactions of middlemen and diverted more income into the pockets of farmers.

What is truly unfortunate about the entire land acquisition mess is the ill-conceived effort to create a hostile relationship between the agricultural sector and the industrial/infrastructure sectors. On the one hand, there has never been a holistic approach of government to tackling issues from the farm to the table, nor has there been any concerted effort by organised farm lobbies to get government to invest in measures designed to enhance agricultural productivity and incomes. The result, with a large population still dependent on agriculture for survival, has been increasing pressure on land and temporary or permanent migration to urban settlements. With greater access to education and growing aspirations, the younger generation seeks a shift from an unviable life in agriculture. The distressing occurrence of farmer suicides is testimony to the failure of government to address farm issues, be they irrigation, crop insurance, productivity or remunerative markets. Archaic labour laws and an entrepreneur-unfriendly business environment have limited job creation in industry and related ancillary services. When 3 million people, many of them graduates, apply for a few hundred jobs as peons in government, something is definitely horribly wrong. And yet, the present debate on land acquisition procedures has not sought to focus on what could be done to ease the availability of land for industrial growth while also protecting the interests of the agricultural community. One interesting suggestion from Maitreesh Ghatak and Parikshit Ghosh (The Land Acquisition Bill: A Critique and a Proposal, Economic and Political Weekly, 8 October 2011) is to allow the land transfer price to be determined through an auction process rather than rely on bureaucratic determination through generally flawed sales statistics. Displaced farmers would be given the option to receive compensation either in cash or in the form of land. The government would buy more land than needed for the project to enable offer of land outside the area acquired for the project to those farmers who want land in return for land surrendered. This approach has the advantage of allowing the farmer to quote his consent price, which will probably reduce subsequent litigation for enhanced compensation. I am not advocating this or any other specific measure; what I seek to highlight is that there has been no informed debate on possible solutions that meet the needs of industry for land while also giving farmers a fair deal.

In fact, the entire brouhaha is reminiscent of the lines of another famous poet, W. B. Yeats “The best lack all conviction, while the worst are full of passionate intensity“. A law which was passed in a spirit of misguided sympathy for the farmer but is likely to severely impede economic development did not come up for a sorely needed review. The government of the day sought cosmetic changes in the law but, faced with an obstructive opposition in Parliament, meekly capitulated, consoling itself with the reflection that, since land acquisition is a concurrent subject under the Constitution of India, state governments can pass their own laws to simplify and speed up the land acquisition process. In that case, no purpose is served by Section 107 in the LARR Act 2013 which only permits such legislation by state governments as provides more favourable terms in respect of compensation and rehabilitation and resettlement provisions; it is anyhow unlikely that any state government will enact legislation that is seen as more onerous than the Central law, since this gives its opponents a ready political handle to beat it with.

We are, therefore, in a situation where a neo-Luddite combination of professional politicians and city-bred intellectuals, both without exposure to the realities of the farming sector, are effectively sealing opportunities for a large agricultural population to benefit from industrialisation. Adding to land market rigidities, while also stumbling on labour market reforms and doing little to improve the ease of doing business (best exemplified by the flip-flops on the Goods and Services Tax legislation), are hardly the best recipes to enthuse private Indian and foreign investors. The brunt of this economic obtuseness and political opportunism will, as always, be borne by the long suffering masses of India.


The Fear of Creative Destruction

As an undergraduate student of economics in Delhi University some four decades ago, I was immensely flattered when my classmate and dear friend Ramachandra Guha conferred on me the name “Schumpeter”; he was in the habit of naming after famous economists those of his classmates whom he considered scholastically minded. Many years later, Schumpeter came to my notice again when his famous concept “creative destruction” was referred to in that brilliant book by Daren Acemoglu and James Robinson “Why Nations Fail: The Origins of Power, Prosperity and Poverty (2012)”. The central thesis of their book is that countries with extractive political and economic institutions falter on the growth path because their elites are preoccupied with their ability to extract rent from economic activities through the exercise of unfettered political authority coupled with keeping out groups that constitute a threat to their economic oligarchy. These countries are, therefore, in a situation where innovations leading to high economic growth are not possible, because of the opposition to change from vested interest groups benefiting from the current system. When Schumpeter referred to the “process of creative destruction” in his 1942 book “Capitalism, Socialism and Democracy”, he was emphasising the fact that capitalism involved the destruction of existing economic structures and their replacement by new structures. This was not price competition between existing producers but a discontinuity following the introduction of new technology, new products and new forms of industrial organisation, many of which could not even have been envisaged prior to their development.
W. Michael Cox and Richard Alm, co-authors of “Myths of Rich and Poor (1999)” have given a graphic example of creative destruction in the transportation sector. Water transport was increasingly replaced by railroads, which in turn (along with animal transport), was supplanted by road and air transport. In our own lifetime, we have seen typewriters and fax machines vanish with the advent of personal computers. The impact of these revolutionary changes was felt not just in the eclipse of once powerful industries but also in dramatic changes in the job market and a churning in industrial enterprises, with new companies elbowing their way to the top. Of the top hundred companies in the USA in 1917, only five retain their position in the top hundred. Half of the top hundred companies in the USA in 1970 have been replaced by newer companies today. We don’t need to go as far as the USA; India itself is abundant proof of this phenomenon. Who had heard of Reliance Industries or Sun Pharma in 1970? Infosys and Tata Consultancy Services were nowhere on the horizon till the 1991 reforms and the development of the information technology industry. The nature of jobs also registers dramatic changes over time. Occupations like those of drivers of motorised vehicles were almost non-existent at the start of the twentieth century, while computer programmers and scientists were nowhere in evidence at the end of the Second World War.
I give these instances to buttress my theory that the failure of the Indian economy to grow rapidly (in the sense of benefiting large sections of its population) can be linked to an almost mortal dread of “creative destruction”, at considerable cost to the people of India. The landed aristocracy and the agricultural elite, in the decades after independence, kept land redistribution efforts at bay and successfully resisted the imposition of an agricultural income tax. Coupled with high support prices for agricultural produce grown by the rich farmer and extensive subsidisation of the profligate use of fertiliser, power and water (largely by the rich farmer rather than his humble subsistence farmer cousin), this has implied a reversal of the traditional pattern where a booming agriculture sector finances the growth of a robust industrial sector. By stifling the growth of the industrial sector, which would enable off-farm employment to reduce the growing pressure on agricultural land, it has been ensured that agricultural productivity remains low and farming has become (or remains) a non-viable occupation.
Other policies of the state continue to impede rapid industrialisation. The 2013 Land Acquisition Act is a case in point. In a classic case of the remedy being worse than the disease, the requirements (in case of acquisition for public private partnerships and for private companies for a public purpose) of consent of at least 70 to 80 percent respectively of affected families, the high rates of compensation and the provision of a social impact assessment, as well as the passing of a resettlement and rehabilitation package by the district authority (even for negotiated sales by a private company) taken together will ensure that no project or industry can get off the ground in a reasonable period. The fear of creative destruction operates here too: rural poverty is sought to be addressed through complicated (and infeasible) compensation and resettlement packages rather than giving the rural community a chance to be a partner in rapid industrialisation and to move to more remunerative work in the industrial sector. The same holds true for official urban policy (or what passes for it) — there has always been a bias against promoting opportunities in urban areas, given the misguided view that Gandhi’s “gram swaraj” must be kept intact at all costs, never mind the wretched and inequitable condition of India’s villages and the reality of massive rural migration to urban areas.
Nor do the political class and bureaucracy want their monopoly over patronage to be disturbed. Independent India has seen the politician use the public sector to disburse jobs to his constituents apart from skimming off economic rent through manipulating award of contracts. Controlling licenses also enabled the politician/bureaucrat to extract rent from the private sector. Only the form and manner of rent extraction changed in the post-1991 liberalisation era. With growing urbanisation, land use permissions in urban and semi-urban areas became a major area for abuse of discretionary powers. The lack of clear norms for allocation of natural resources and for infrastructure development project contracts contributed to the suspicion (often genuine) of manipulation of selection processes to favour cronies, the fallout of which is being experienced to this day. Failure to reduce government control over public enterprises and improve their public accountability meant that this cash cow (where it did not fall sick) was available for patronage distribution. Wilful major defaulters of bank loans are able to use their political connections to delay takeover/liquidation of defaulting concerns.
In preventing or delaying the “gale of creative destruction”, the political class at least has the alibi that it is looking after its narrow economic interests. The same defence is not available to India’s “thinking” classes, its intellectuals, media and bureaucracy, who have consistently opposed thoroughgoing reforms in different sectors. Efficient exploitation of natural resources through impartial bidding processes is slowly becoming a reality more than two decades after the start of the liberalisation process. But even now, vociferous sections in India’s middle class oppose moves to open natural resource sectors to private investment to add economic value. Trade unions in the coal and mining industries will, of course, oppose all such steps since it will diminish their powers. But the opposition of the bureaucracy, sections of the media and academia to these measures defies understanding. The same logic holds where freeing public sector enterprises from the stranglehold of government by reducing government holdings in these enterprises is contemplated. There still seems to be a touching faith in the ability of government to micromanage these enterprises. Foreign direct investment in retail would give better profit margins to the farmers by eliminating middlemen in mandis (market places) and agricultural produce marketing committees. It would also provide the badly needed investment in reducing wastage by streamlining the supply chain system from the farmer to the consumer. No such luck — by allying itself with vested interests protecting their traditional fiefdoms, the intelligentsia betrays the interests of the large body of farmers.
Ultimately, India’s middle classes have to decide whether they want to be in the vanguard of rapid economic change or are content to wallow in mindless, outmoded socialist rhetoric with a credulous belief in the capabilities of the state. The next two decades are crucial to India moving on to a path of sustained development. “Creative destruction” is no respecter of size or reputation. Consider the example from India’s favourite sport, cricket. India took over fifty years from its entry into international cricket to win a World Cup. Sri Lanka took about two decades to reach the pinnacle of world cricket by winning the World Cup in 1996. By defeating Pakistan and India in quick succession earlier this year, the Bangladesh team has shown its resolve to shorten the time span it needs to reach the top. Countries like Vietnam, South Africa and Bangladesh can well pose major challenges to India’s markets (both local and global) in the years to come and at a much faster pace than is anticipated. “The gale of creative destruction” can blow in both directions: move it outwards and you control your destiny; if it turns against you, you may well get blown away.