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Why Do We Need A Land Acquisition Act- II

In this part, we look at questions regarding the ownership of the premium arising from change of land-use purpose

The first part of this series focused on the need for a land acquisition act. In this part we focus on a substantive issue on one particular component within the compensation and rehabilitation package.

Confused Worldview of Farmlands

The Western worldview of farmland is that of a capital asset owned by the farmer. There are no inordinate restrictions (other than certain zoning regulations) on what the title holder can do with the farmland. Hence whether the holding is for productive, hobby or speculative purposes they focus on purpose independent valuation of the fair market value of that parcel of land. However the Indian worldview of farmland is different. The dominant narrative is farmland not just as a source of livelihood to the farmers; it is also a source of financial security, lifetime memories and emotional strength. Hence we argue, any amount of money would perhaps never compensate for the emotional loss of giving it away by volition or by force.

The general theme of the 157 amendments made to the 1894 act were resonant with this worldview (barring some minor inconsistencies there too!). They attempted to regulate the process or redefine public purpose with this worldview. However the LARR act 2013 contains a remarkable confusion in its worldview. On one hand it focuses on onerous – consent, social audit, rehabilitation and resettlement – measures. This is consistent with the Indian worldview of farmland. However, on the other hand it offers compensation as multiples of fair market value. This multiple is set as at least 1 for urban area and at least 2 for rural areas. This differential treatment for rural agricultural land is to adjust for the premium accruing out of change of land use purpose. This follows a western worldview of farmland as a capital asset. The inconsistency is hard to ignore.

If we take the Indian worldview then compensation cum rehabilitation package needs to be fair and holistic; but in line with the specified land use purpose. Logically it should be equal to the lifetime agricultural replacement value to all affected people i.e. the package should enable the affected farmers and their families buy a similar farmland elsewhere, transfer and settle down smoothly. The R&R part of the old land acquisition act (certain amendments to the 1894 act and some of the relevant SC judgments) were towards this direction. However NGOs/activists and certain powerful farmer lobbies (who carry the western worldview) had been demanding inclusion of this controversial component into the package i.e. the premium accruing out of change of land use purpose. Their justification is, if the transaction happened in a free market this premium would have entirely gone to the seller net of any taxes.

We may not disagree as much with this argument if we decide to enact the entire LARR act 2013 from the same worldview. It is the inconsistency which makes the whole act lopsided. Since LARR act 2013 was essentially drafted by activists it incorporates their justification into the compensation package. The inflated multiples over the fair market value account for the premium accruing out of change of land use purpose. Please note that in the LARR act 2013 the (onerous) rehabilitation and resettlement package is different and is over and above this premium.

Now should the LARR 2013 act pass this entire premium to the seller? Who really has ethical claim on ownership of this premium accruing out of change of land use purpose from agriculture to urban/industrial use? That is the question we address in this article. We assume that the Indian worldview (which has persisted for many centuries) is how lawmakers want things to remain. If this was not the case and they wanted farmland to be treated as a mere capital asset then the onerous rehabilitation and resettlement package will certainly require re-evaluation. But from a reading of the preface of the act we believe such a radical departure in worldview was unintended.

History of Land Tenure in India

Land tenure is the legal relationship an entity (person, group of company) has with the land. Land tenure consists of three broad legal rights viz. (a) Use rights – right to use the land for grazing, growing subsistence crops etc. (b) Control rights – rights to decide what crop to plant, how to plant and enjoy the benefits from the act (c) Transfer rights – right to sell, lease, transfer to intra-community members, inheritance etc. Read here for more details on the legalese surrounding land tenure. In the Roman/European notion of private land ownership all these rights are absolute and exclusive. There is abundant material available (e.g. here and here) on how Western settlers imposed their concept of private ownership on Native American Indians and how those gullible natives naively signed and lost out on their land rights. Likewise the other Asiatic societies including India have historically had alienable, not mutually exclusive, and some complicated land rights that were very difficult to fit within the western framework of absolute private land ownership.

Asiatic societies had either communal ownership (entire community/village owns it) or it was all owned by the king who then leased it out to peasants for farming. Documents from the early British Raj indicate that India followed the latter pattern. Some of the proponents of this claim are Voltaire, Richard Jones and James Mill in their works on land ownership in ancient India. However post-independence Marxist historians argue that this assumption was a fallacy and the farmland was historically collectively owned by the community [1]. Similarly there are also several complicated rules of land use and ownership mentioned in our Dharma shastras, Manu smriti, Chanakya niti and Brihaspati smriti [2]. They include complicated rules such as field belongs to the person who first removes the weed, a stranger tilling a land unopposed has full claims on the land, any uninterrupted possession for 30 years gives ownership etc.

One of the Ashrafur plates discovered (dating to 7th/8th century) speaks of a plot of land that was enjoyed by a person Sharvantara, cultivated by Shikara and others, and donated by the king to a Buddhist monk named Sanghamitra [2]. These examples clearly show that the land rights in ancient India had a hierarchy and the rights were not as absolute and exclusive like the western notion of private ownership. Even if the agricultural land title has changed many hands in the interim period, the historical hierarchy of rights are taken to perpetuate. That is why in the Indian worldview compensation and rehabilitation goes much beyond the title holder. So what is to say the current title owners of the agricultural land have absolute land rights like their western counterparts?

Furthermore an extended Hindu joint family system was/is prevalent in India that goes much beyond immediate family. These are the reasons why Raja Todarmal during Mughal rule and the later day British surveyors found it extremely complicated to assign land titles to private individuals. Hence the focus of their exercise of land title assignment was solely to establish accountability on someone to pay the taxes that were due. This historic perspective of land tenure in India cannot be wished away. Then aren’t the current title holders only acting as custodians of the land for the specified land use purpose i.e. agriculture? Isn’t this history the reason for defining land use purpose the way it is defined in India?

Land use purpose in India

Land use purpose is an inalienable attribute to land titles that specifies what exactly can you do with the land and what is not allowed. For example, India has restrictions on mining, construction and even drilling for water based on the specified land use purpose. This is very different from the western concept where the private owner has right to pretty much do anything he wants with the land; as long as it doesn’t affect his neighbours. Their regulations are focused only on controlling for such negative externalities. However in the Indian context land use purpose is far more paternalistic (in the language of liberals) and inalienable.

The land use policies in our urban body acts are close to the western notions of zoning and exclusivity. However the same certainly can’t be said about our treatment of agriculture. We shall use certain examples to illustrate the importance given to land use purpose in our constitutional framework.

The FEMA act prohibits any foreigner or person of Indian origin to buy farmland. In many states like Tamilnadu conversion of agricultural wetland of the size required to construct a small college would require signature and approval from no less than the Governor of the state. In many states including Karnataka and Gujarat, non-agriculturists cannot buy or hold agricultural land. Some states have legal penalties that prohibit holding of agricultural lands without cultivation. For more information on such interesting restrictions read this article.

These express restrictions demonstrate the inalienability of land use purpose as an attribute of the land title of an agricultural land. These restrictions are consistent with the Indian worldview of farmlands. The decision right for change of land use purpose is also solely vested with the government; whether it is district collector or higher official depends on different parameters. This is NOT to suggest that just because the government has decision rights, they have the ethical right to the premium accruing from change of land use purpose. On the contrary, we argue this ethical problem disregarding this aspect.

To understand ethically who owns this premium, we should start by asking what makes it suddenly attractive to convert the land use purpose for a parcel of agricultural land. Some of the accentuating factors could include urban expansion of a nearby city, connectivity to rail/road/port/air which has come up nearby, presence of river or other huge source of water nearby, or arrival of mines or other industrial clusters nearby. If you carefully look at this list of factors, it is hard to ignore that all these are positive externalities that have existed/accrued by serendipity to the title owner of the parcel of land. It may require a great deal of imagination to find an accentuating factor that arises from intended action of the title holder of the agricultural land.

Since speculative holding of agricultural land is expressly not allowed as a policy, there is no ethical merit in arguing that these positive externalities get factored into the price of agricultural land with a view of future change of purpose. In reality they may well do, because of the corruption and cronyism prevalent in our system. But a good public policy cannot be based on such considerations. Hence, there is no ethical argument why the premium of change of land use purpose should be owned by the current title owner. If there is anyone this premium belongs to, then it has to be the exchequer.

What can the Exchequer do with the premium pie?

The above argument is NOT to suggest that the exchequer should keep this entire premium. On the contrary all we suggest is that, it is the prerogative of the exchequer to decide how to split this pie between the various parties. These parties include the sellers, buyer, other affected persons in the local society, the local bodies, and the exchequer himself. In fact from a transparency point of view the exchequer should develop a formula for a % split of this land use change premium pie and publish it as an amendment to the LARR act. For the title owner, a cut from this % split is of course over and above the fair market value of the agricultural land.

This suggestion of prior published % formula of premium split will help in multiple ways:

(a) it will reduce speculators from directly or indirectly holding agricultural land to cash in on premiums from future change of land use

(b) it will also signal a commitment to ensure a fair and transparent split of the accrued pie. Furthermore this will pave way for the government to discover the fair market value of the land in its ‘amended’ use.

Why is that? Typically an auction, tender or some other bidding process is a must to discover fair market value. We expect the government to do just that before selling the acquired land to the eventual buyer. Based on findings from auction theory, pre-publishing the formula of the % split of premium pie will aid in the fair price discovery process. This is because the bidders would not only factor their % cut in their bids, but also bid closer to their true willingness to pay; as the size of the translated % pie grows linearly with the bid size they put in.

To summarize, the new government has to first appreciate the inconsistencies in the worldview with the framing of LARR act 2013. This article is not to argue that one worldview (Western or Indian) is correct or superior. But the government has to take a clear position and amend the law consistent with a worldview. On the premium accruing out of change of land use purpose, the government has to recognize its obligations and responsibilities that come from owning the pie. Mindlessly passing the entire premium to the seller could perversely incentivize more and more speculators to hold agricultural hand. This is a double whammy; because productive use of agricultural land will decrease & the same will also remain unavailable for alternate use. Transparently incorporating this formula of % split in the LARR act will deliver social benefits including reduction in speculative holding and discovery of fair price of the land parcel under the amended use purpose.

(To be continued)