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A judgement and economics

A judgement and economics
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First Published: Tue, Sep 09 2008. 12 42 AM IST

Illustration: Jayachandran / Mint
Illustration: Jayachandran / Mint
Updated: Tue, Sep 09 2008. 12 42 AM IST
We seem to have learnt little from the land-acquisition imbroglio at Singur. Justices C.K. Thakker and D.K. Jain of the Supreme Court have recently dismissed a complaint against the Andhra Pradesh government for acquiring land for Andhra Pradesh Infrastructure Investment Corp. The court ruled that any project which brings foreign exchange and creates employment is for “public purpose”, clearing the road for more forceful land acquisitions.
Illustration: Jayachandran / Mint
The judgement, however, is based on faulty economics. Government acquisition of land in the name of “eminent domain” is legal in many countries, including the US, UK and France. The economics behind eminent domain says there are certain “public goods” that will not be provided by markets. Public goods satisfy two properties: They are non-rival and non-excludable. Lighthouses and national defence are typical examples of public goods. One or several ships can use the light at the same moment, i.e., non-rival. All citizens benefit from national defence, it is impossible to leave some out, i.e., non-excludable.
Unfortunately, the court does not seem to be following the economics definition. It thinks investments bringing foreign exchange constitute “public purpose”. The view is entirely fallacious; in the 1970s and 1980s, government regulation created an artificial scarcity for foreign currencies; today the central bank has $300 billion in reserves.
The court’s judgement has serious ramifications. India follows a common law system; in which higher court judgements serve as precedents for lower courts. In all future cases, lower courts would ask two questions: (1) Will the project create employment? (2) Will the project bring foreign exchange? And if the answer to either question is yes, the land acquisition is legal.
This opens the door to all sorts of unjust acquisition of private property, especially of the poor who are without political clout. The big lesson from Singur is that private property rights must be protected and entrepreneurs should directly buy land from owners.
A judge is not a socialist planner—he or she is not supposed to evaluate costs and benefits of a project, but to administer “rule of law” so that citizens’ legitimate expectations are met. Such a legal system was the foundation of the West’s rapid economic growth; India deserves nothing less.
Should entrepreneurs directly buy land from owners? Write to us at views@livemint.com
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First Published: Tue, Sep 09 2008. 12 42 AM IST