Why state intervention is necessary in buying and selling of land in India
Agricultural land is much more than a mere capital asset owned by farmers. It is not only a source of livelihood but also a source of financial security, lifetime memories and emotional strength. Hence any parting with farmland, whether by volition or by force is always an emotional act for the farmer. That is why many argue, even if the farmer was compensated with a land of equal size and arability, things will no longer remain the same in his life. But for a rapidly growing and urbanizing country like India, industrial growth and urban expansion is inevitable. That is why even after six decades post India’s independence, we continued to use the monolithic Land Acquisition Act of 1894 enacted during the British Raj to acquire land for urban expansion, infrastructure development and industrialization.
Although there were 157 amendments made to the 1894 act, only 26 were substantive in nature . The general themes of these substantive amendments were to regulate the process, redefine public purposes and enhance the compensation. A major revision came in 2013 called the Land Acquisition, Rehabilitation and Resettlement (LARR) Act. This new act was practically drafted by activists/NGOs with strong opinions about the process of acquisition, consent, compensation and rehabilitation. They treat it as a landmark legislation of social justice. However, the new act has been perceived by the eventual buyers of the acquired land (industries, infrastructure PSUs, real estate firms, urban bodies etc.) as draconian. They claim it severely hampers the process and rate of urbanization and industrialization. Many chief ministers of even Congress ruled states have expressed deep reservations about the provisions in the 2013 LARR act. This topic is hence deeply emotional and socially divisive.
The objective of this article is restricted to one controversial aspect of the land acquisition process viz. Why do we need government intervention in the land acquisition process in the first place? Why can’t we let the buyers deal with the sellers directly via market mechanisms? There are many other aspects of LARR that merit a discussion. Some of them include how the overall process is carried out by our inefficient bureaucracy and how insensitive is the communication and rehabilitation process. Similarly, land acquisitions in the past have been mired by controversies arising out of corrupt motive of giving away valuable lands at dirt cheap rates to cronies. There are also squatting issues by buyers from a speculative motive without any interest to deliver the public purpose for which it was acquired. This speculative behaviour is as despicable as non-farmers holding agricultural land for speculative reasons other than farming. The government has to undeniably address all these issues in parallel. But in this article we shall restrict focus to the question of need for a land acquisition act in the first place.
Factors unique to India
A mistake that several policy analysts make is they fail to take into account factors that are contextual and unique to India. They then start comparing apples with oranges. Many of the accentuating factors for the need of a land acquisition act are unique to India. Some of these factors are briefly bulleted below.
– India is many different countries within; when it comes to history of land titles. The southern and western India followed the rywotari System, while the North and east followed the zamindari System. The former involved direct private ownership (by and large) while the latter involved ownership at the hands of intermediaries. Hence a vast region of India still lacks pucca land titles for a legal market transaction.
– Indian demography and population density is such that vast contiguous tracts of usable land are almost always inhabited, and are under some sort of agriculture. Hence unfortunately urbanization / industrialization have to come at the cost of farmlands; very much unlike sparsely populated countries like USA. The only semantic we argue over is whether we acquire a single crop, multi-crop or grazing land. Hence the land acquisition process is virtually a zero sum game.
– India has a pattern of heavily fragmented agricultural land ownership. Some of which is natural because of the population size and density. Some of which is by design due to bhoomi daan movement and socialist policies followed in the 1950s and 60s, like land ceiling act and coercive redistributive policies.
– The socialist redistributive policies were only partially successful, because many title holders fragmented ownership within their extended family and benamis. There are many people, notably Dalits and underprivileged, who depend on farmland for their livelihood, but are still not the title owners. This makes rehabilitation and compensation obligations onerous for the buyer.
– Education and technology reach in India lags severely behind many Western countries. This is a recipe for great information and power asymmetry. Hence there are vested interests and lobbyists on both sides who can spread canards and distort any purchase transaction that spans over a period of time; thereby risking exploitation of one party or the other.
Lack of proper land titles, risk of exploitation due to power asymmetry and proper rehabilitation of the all people collaterally affected by the acquisition make a strong case for government to intervene. These factors have been discussed in the justification of the 2013 land acquisition act itself. Instead in this article we focus on a much deeper structural problem.
Structural problem with land transfer
Owing to the factors unique to India, notably heavy fragmentation of ownership, any act of land acquisition for urban expansion, infrastructure development or industrialization would involve multiple sellers and a single buyer. This problem is further characterized by increasing marginal utility of the land as the acquisition process goes on. Hence the utility of the next piece land to the buyer is higher than the previous sale deed closed. This allows sellers in the end of the logical sale queue to charge a price premium over the sellers in the front of the queue.
Those familiar with game theory can quickly see that there is incentive for people in the front of the queue to jump to the back of the queue. Owing to the social structure/practice in India, within a village information flow is very quick on progress of sale negotiations and price offered to a neighbour. Hence everyone in the village can easily make these jumps. So this entire queue reduces to a “kho-kho” line where people are constantly changing their positions. Hence under conditions of freewill and no information asymmetry (these are ironically two conditions which NGOs ideally want) there is NO Nash Equilibrium for the sale transaction to conclude.
Some experts suggest that one can drive sale closure as a Nash equilibrium if we set a clause whereby if X% (say 60 or 70%) of the required land is acquired by the buyer in volition from farmers, then government can intervene and forcibly acquire the balance. However the problem of how to compensate the balance land owners for forcible acquisition makes this idea unviable. If the balance sellers were compensated at a price equal to the last sale transaction concluded to breach X% mark; then the process can be deemed to be fair. However such a mechanism incentivizes everyone within the X% limit to jump to the back end of the queue to get the higher guaranteed compensation. What if the balance sellers were compensated at a price equal to the average price of the X% acquired under volition?
This mechanism induces the buyer to do under-hand deals (using black money) or create crony transactions at low price to pull the average down and exploit the late comers. Furthermore this mechanism induces everyone in the back of the queue to be the last one to sell in volition within the X% limit. Hence this triggers a mad rush for sale, risking massive exploitation of the farmers and also perversely brings the average price down. So this whole idea is unviable for implementation.
Solution to the Structural Problem
It leaves us with only one option of somehow acquiring the entire portion of land at a fairly equal price; of course excluding any small deviations for differential features in the land. When there is single or very few sellers, this process happens naturally via free market mechanisms. Also when these multiple sellers form a cooperative body that negotiates on their behalf, a sale closure outcome can be achieved.
However there are many reasons why such a cooperative body won’t be formed in volition. Firstly the transaction costs to form such a cooperative body are prohibitive to the farmers, especially because they are under no particular obligation to sell their land. Secondly there is heavy disincentive for farmers to organize themselves collectively, because they are better off individually than if they behaved cooperatively. Hence, when there are multiple uncooperative sellers like this, a market failure / breakdown is inevitable. And free market thinkers would also concede the necessity of an intervention when this happens.
There are two feasible ways to purchase the entire land at a fairly equal price viz. (a) Government intervention via a land acquisition act (b) Powerful politicians/mafia take control of the process and coerce the sellers to sell at an equal price. The coercion need not always be via hard threats to life or property; but it can be soft on how sellers don’t have a choice or run the risk of seeing their property devalued (due to access being cut off, or being too late in the process). In many states where vast land acquisition has happened without government intervention, the footprints of option (b) can be seen when probed further. Since option (b) is also an undesirable social outcome, we are left with option (a). Hence however emotionally hard the act of land acquisition is, intervention by the government is perhaps the fairest way to do this cruel thing in such a zero sum land game.
(To be continued)