I would like to deal with the most important issue of land: that of government acquisition and the associated mechanism for dealing with compensation and displacement of affected people. This has become increasingly contentious.
The market for land in India is underdeveloped, non-transparent and extremely distorted. A fundamental underlying problem is the balkanized manner in which land records are maintained, making land titles difficult to establish and often contestable.
A second problem emanates from a historical, albeit no longer relevant, concern with preserving farm land. This concern has led to a number of regulations controlling the sale of farm land to non-farmers and of tribal land to non-tribals, the net impact of which is to prevent the proper functioning of land markets by creating artificial supply shortages and myriad opportunities for hugely profitable regulatory arbitrage.
The result is that land acquisition involves enormous transaction costs, is uncertain and extremely time-consuming. This makes infrastructure projects, which are supposed to be subject to regulated returns, quite unattractive for the private sector.
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Given the associated risks, promoters are focused on aggregating land not so much for building infrastructure, but for monetizing gains that come with getting land use changed from farm to non-farm purposes. And where they do need land for infrastructure, they prefer to get the state to acquire land on their behalf.
The problem is that the state has been invoking its powers of eminent domain too often to acquire land for projects, the benefits from which are not perceived to be fairly distributed.
The Land Acquisition Act of 1894 empowers the state to acquire land for public purposes, subject to the payment of just compensation. But what exactly is public purpose and just compensation?
In the absence of a clear definition, public purpose has been widely interpreted by our courts. In a recent Supreme Court judgment on the legality of land acquisition in the Ranga Reddy district near Hyderabad for use by private entities, the government argued that the acquisition is in line with the policy to develop Hyderabad as a business destination. The court held that public purpose was wider than public necessity and included land acquisition by the state for use by private entities.
The wider application of public purpose has caused resentment among those whose lands are forcibly acquired.
The proposed Land Acquisition (Amendment) Bill, 2007, which is pending in Parliament, correctly provides a narrower definition of public purpose. It says public purpose includes strategic acquisition (such as for a military purpose), acquisition for building government’s own infrastructure projects and acquisition of land for a person who has bought 70% of the land through market mechanisms but is unable to acquire the rest due to a hold-out problem.
Though a significant step forward, the draft Bill needs improvement, especially in clarifying the precise mechanisms for invoking eminent domain in the case of the hold-out problem. For instance, suppose the vast majority of landholders own a small fraction of land, the 70:30 rule could ignore the majority view.
Determining just compensation has been contentious. The draft legislation requires that compensation for loss of land and associated assets should be estimated at market value but it does not specify how such value should be determined.
Taking the average of the past few transactions suffers from several problems: recorded sale values are generally underreported, transactions are few, the market quite illiquid, and there are various regulatory distortions, such as restrictions on sale of land to non-farmers that may have kept past prices artificially depressed.
More importantly, should the compensation be based on market prices based on past land use or should rather be based on likely future prices resulting from the new or proposed land use? If the landowner gets a compensation based on past or existing land use, as is the case, a windfall gain accrues to those when the land use is changed from say, agriculture to non-agricultural use.
The increase in property values also benefits the adjacent landowners whose land has not been acquired. Moreover, development of the land further raises its value. There is inequity in distribution of these gains.
Land acquisition displaces people. It affects not just landowners, but others whose livelihoods depend on the land. Displacement also has psychological and socio-cultural consequences.
While it is true that new development projects generate employment opportunities, there is a mismatch between the skills of local people and skills typically required for the new jobs.
The 1894 Act makes no reference to rehabilitation and resettlement but there is a national policy of rehabilitation and resettlement which recognizes the non-monetary consequences of displacement. Since the policy does not have legal backing, such aspects have suffered from neglect.
The proposed Rehabilitation and Resettlement Bill, 2007, is more comprehensive and inclusive and, notwithstanding some weaknesses, should hopefully provide the basis for effective rehabilitation and resettlement of affected persons.
Land pooling and readjustment is used successfully in many countries as an alternative to eminent domain. The principle underlying land pooling schemes is to aggregate the land required for a project not by displacing and compensating the specific owners of that land, but by getting a larger group of adjacent land owners to make room by contributing a portion of their land parcels to a common pool in a manner that no one is displaced and all get to benefit from the project. The Sardar Patel Ring Road in Ahmedabad is an excellent example of this.
Land readjustment schemes involves the use of land-for-land swaps or other mechanisms for exchange of property ownership rights as a way of aggregating land. The idea is again to minimize displacement and eliminate the need for cash compensation. Under these schemes, land owners are typically provided serviced land of similar value to what they part with.
In countries where private property rights are strong, as in Japan, or the definition of public purpose is narrow, as in Israel, land readjustment is the only way to acquire land for development projects.
In conclusion, there are three points to note. First, while the draft land acquisition Bill and the draft Rehabilitation and Resettlement Bill represent a significant improvement in existing legislation related to land acquisition, the former in particular could benefit from changes to make it fairer and less vulnerable to abuse.
Second, land acquisition under eminent domain by its very nature will always raise fairness concerns that could easily become controversial in a vibrant democracy such as ours, no matter how refined the legislation becomes. This means that eminent domain must be invoked only sparingly in our country and we must actively experiment with alternative approaches to land acquisition such as land pooling and land readjustment schemes.
Third, much more than the proposed Bills, land aggregation, especially for privately sponsored projects, would become much easier, more transparent and fairer if only the government applies itself to cleaning up the administration of land records.
Rajiv Lall is managing director and chief executive officer of IDFC.
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