Land use and economic reforms

MANOJ PANT
ET, JANUARY 19

Singur and now Midnapore. The West Bengal CM’s woes just don’t seem to end. Yet what he has said is unexceptionable: that industrialisation is essential to move the state on to the second stage of economic reforms after decades of success in agriculture. While Singur allowed Ms Banerjee to earn some brownie political points, the Midnapore agitation seems to be getting out of hand with a number of deaths and hints at possible involvement of Naxalite elements. In other news, the SEZ in Haryana seems to be on course while SEZs in Maharashtra and other states are slated to get operational soon. The common issue in all cases seems to be related to land use. In my earlier article (ET, Oct 13) I had argued that the debate on the issue of land acquisition for SEZs was diverting attention from the fact that tax and such incentives to industrial (or export) clusters have no grounding in economic theory. Yet, such is the nature of structural change in a democracy that political issues tend to get precedence over economic issues. The agitation in West Bengal must be seen in this light. In a strange turnaround from previous experience, it is the Left-run West Bengal which is facing problems in land acquisition while Maharashtra and Haryana don’t seem to have the same problems. In Haryana, it is now clear that the initial agitation against the proposed SEZ was the response of a disgruntled Congressman. Now things seem relatively quiet. But this may well be the lull before the storm if the issue of land use is not addressed at the national level. It is thus crucial, before a disastrous political solution is reached, to get the analytical issues sorted out. Consider one argument which seems to be getting some acceptance. That only barren or single-cropped land should be made available for industrial purposes. Anyone who is familiar with the low return to all agricultural land relative to industrial (and residential) use would immediately see that this militates against the more efficient double-cropped farms. In fact, if this becomes policy then it would be rational for the farmers on double-cropped land to slowly convert to single-crop or better still barren land! It is clear that double or single-cropping is a function of the price of agricultural produce and existence of facilities like irrigation, rather than the land per se.

The price of land derives value from the final product it is used for. As agricultural prices rise, cultivation moves to the marginal land while existing land gets cultivated more intensively. Land use restrictions here would only create perverse incentives for farmers. Critics of land acquisition have rightly asked why the state must acquire land. The answer seems to be the Land Acquisition Act, 1894. Yet the sense of the Act is surely that the state, being presumably more forward looking and less myopic than the individual, often needs to acquire land in the “public interest”. While for lawyers the last term has no clear meaning, economists have less disagreement. The expression ‘public interest’ must surely be related to the provision of “public goods”: those for which a market does not exist. One can broadly classify in this category national highways, bridges, rural roads, etc. But obviously the state acquiring land for a “Tata car” or “Salim chemicals” can hardly be justified under “public interest”. However philanthropic the Tata group may be, the “Tata car” is surely only in Tata’s interest. But how then does one industrialise in an agricultural state? Why not by simply changing land use restrictions? Why not let the farmer, after change in land use, simply sell his land to the highest bidder? Competition between land dealers and industrialists will then ensure that farmers get the market price for the land. This has been happening in the growth of residential areas around major urban centres. This is also how land is being acquired for SEZs in Haryana. The West Bengal CM’s argument would probably be that industry needs this incentive to come to the state. But, as I have argued earlier in these columns, very few serious businessman respond only to tax and such incentives in taking an investment decision. It is far better to create the infrastructure (the political climate, power, roads, etc.) and let the market decide the structure of business. It is for this that the land Acquisition Act was intended. Any other use is bound to be made a political issue, however good the intentions. Admittedly, state control of land allows for larger kickbacks in land disposition. But (so I am told) so does change in land use. Yet the latter does not distort economic incentives. Why not use this route?

The author is professor, Centre for International Trade and Development, JNU