Wednesday, December 06, 2006

Government as Real-Estate Broker

Good and bad news for all the fans of Milton Friedman.

The good news is that Govt (Govt of India, GOI, to be precise) is no longer in-charge of the state of affairs (or rather, the affairs of state).

The bad news is that GOI is still relevant to business/ free-market economy.

Just when everyone - in corporates, media, urban intelligentia - had given up about the relevance of GOI in the booming liberalised economic scenario, the GOI has found a new role for itself... ...it has become the middleman for the land deals for corporates!!

The need for such a role lies in The Paradox of the Present Model of Growth and Development, viz:

In order to grow (SEZs, Express Highways, Mega-dams, Infrastructure, new ventures, etc.), the 'free-market' enterprises need to own land/ private property in convenient locations (the "convenient location" is also the reason why most projects are located on fertile land, while the wasteland remains untouched). However, if the companies have to pay the 'free-market' price for others' 'private property'/land, their projects will become financially unviable (more so, since market-forces shoot up the land prices, once a project gets announced).

And therein lies the paradox:
In order for the free-market enterprises to grow in the liberalised economy, they need to be shielded from the forces of free market!!!

GOI/State Govts provide a way out of this paradox because they have access to a legacy (competitive advantage!!?) - the Land Acquisition Act of 1894, enacted by the British - that none others have, but need its protection.

This is how this arrangement works:

  • 1. According to the Land Acquisition Act (1894), the GOI/State Govts have the right to acquire land from private owners for any "public purpose".

  • 2. To acquire the land - at the behest of any party - GOI needs to give/publish a 'Notification of Acquisition' to the owners of property, e.g., farmers. (This will be published in the gazette and at least two local daily newspapers)

  • 3. The owners of the property can file an objection within a month of the notification.

  • 4. The "concerned authority" - normally the Distt Collector or Dy. Commissioner - needs to deal with these 'objections' within a year, hold an enquiry, and then "award" the acquisition. The Award, i.e., transfer of property, can be done within 2 years of Notification.

  • 5. The Land Acquisition Act does not define the meaning of "public purpose" - that is the discretion of the "concerned authority"... Someone's "private property" can be acquired to build a school, a road, clear a slum, a hospital, etc.... Or to hand over to a corporation as its "private property" for "public purpose".

  • 6. The original owner is, of course, entitled to compensation for loss of his "private property". The compensation is calculated as per the market value of the land at the time of the Notification. The valuation is done by the "concerned authority", not by any independent agency.

  • 7. After acquiring the land, the Govt sells (or leases out) the land to the private corporate party. The sales/lease price is calculated according to the MOU or as per the market value of land at the time of selling.

  • 8. The Corporates get the land at below the market rates. This makes their projects viable.

  • 9. The GOI/state govts pocket to difference between the "acquistion" and the "sales" price... This adds to revenue earning in the state budget. Govt also gains by transfering the agricutural land to industy, since now it can be taxed as the 'corporatised' land - agriculture income is non-taxable in India.

  • 10. This is a mutually win-win arrangement between the GOI and corporates...."development" happens... Industrialisation, GDP, Sensex - or whatever - zooms up...

    Some, however, lose in bargain.... These are the "victims of development who sacifice for the larger good" of the economy.


    Sources:
    Land Acquisition by Government
    Land Grab and "Development" Fraud in India
    One-Sided Law on Land Acquisition

  • 12 comments:

    Gautam Ghosh said...

    and this is only the official part. The GOI members (MPs, babus) would make "un-official" profit for personal use also :-)

    Anonymous said...

    Jayaprakashnarayan of Loksatta has an interesting suggestion in his blog:
    "Third, in all developmental projects like special economic zones, land losers can be given equity in the form of ownership of a portion of the developed land. This will give farmers a share in the prosperity and make available more land for development."
    (http://jayaprakashnarayan.blogspot.com/)

    Madhukar said...

    Prof

    thanks for the link.

    Yes, equity sharing can be a more equitable alternative. The problem, however, would be that projects take years to get commissioned, when returns on equity will start flowing. For the small farmer, who has no savings, and depends entirely on land for subsistence, this would be a long wait. This would be practical alternative, only if there is a social security network for them.

    Anonymous said...

    is there any evidence/report thats leads to the conclusion that the quality of life led by the farmer has actually deteriorated after he has moved on spheres other than farming... The key question here is do we know what happens to the farmer after the land grab?

    Madhukar said...

    JC
    that is an interesting question!
    The general phenomenon of consequences of development on displaced people is so wide-spread that there is a separate term for it: Development-Induced-Displacement.

    If you 'google' the term, you will find plethora of reports about what happens to them...

    Common sense, and one looks around, however, suggests that most of them end up in urban slums or become landless labou elsewhere, or become bankrupts/ beggars, or join the growing maoist/naxalite movement in the country.

    Prometheus_Unbound said...

    Tink this maybe of interest:
    http://indiauncut.blogspot.com/2006/12/classic-example-of-government-dacoity.html

    confused said...

    Prof,

    I agree. Eminent domain is widely misused in India against the poor. Anything done in the name of free markets cannot be termed free markets. By that yardstick the whole License regime would also have been part of free markets because some industrialists, most notably, Ambanis definitely benefit from it.

    Those who truly advocate free markets are not pro-companies per se, they are pro choice. And respect for property rights is one of the fundamental pillars of that. If you recall, the right to property was taken away by the 44th constitutional amendmnent and that was passed, cheered on by liberals as a pro-poor measure.!

    Madhukar said...

    Rex:
    thanks for the link to Amit Verma's post.

    Confused:
    thanks for the comments - and the response in your posting...

    The point, I guess I am trying to make (or at least questioning the assumption) is that the "true free-markets" do not exist!... not even in "the land of free market" - the USA (if you look at the GINI index)... they are 'free' for some, and not-'fair' for others.

    In any case, at best, free-market is a nice-to-know (good-to-believe)theory/myth that that has nothing much to explain the ground-level realities... e.g.,
    - Ricardo's 'compaative advantage' is based on two-nation/two-product assumption that doen not hold in reality, and
    - Adam Smith is so widely misquoted, that it has acquired a flavour of truism... and a whole set of people bainwashed by this misquote by Paul Samuelson. see:
    Will the Real Adam Smith Stand Up Please?

    But on another note,

    1. my post is not just about Singur, as is being interpreted (also by you in your post). It is about a whole host of acquisitions that have been happening at the behest of private corporations by the govt, recently (ranging from SEZs, to Expressways, to private builders)

    2. Yes, the GOI always had this right to acquire private land for 'public purpose" - that is how, as you point out many PSUs and Chandigarh and Bhakra Nangal, etc. came up... What has changed now is that the "public purpose" is being redefined to serve corporate interests.

    3. Lastly, just a small corection about the history. The 44th Amendment was passed in 1978, during Morarji Desai's/ Janta Party's govt. By no stretch of interpretation, that was a 'liberal' (and I guess, you equate that with socialist/communist) govt.

    Even though we differ on many things, thanks for the comment and your post.

    sanjiv said...

    The remedy may lie in challenging the 44th amendment provisions which took away property rights. I don't think it has been challenged so far?

    While I respect Medha Patkar, Arundhati Roy, Mahasweta Devi and others who have raised their voices, I pitty them because all of them still remain on left which in created the problem in the first place.

    I think even Gandhi was against the socialist disrespect for property rights.

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