India's Road to Riches Is Running Out of Land: Bloomberg.com, 3/19/07


By Andy Mukherjee

For 400 years now, Anglo-Saxon common law has protected the right of a government to take over private property for public use.

From the U.S. interstate highway system to Tokyo's Narita Airport, important pillars of the global economy couldn't have been built without the state acquiring land it doesn't own.

Over the centuries, there have been two important additions to this principle of legalized coercion, variously known as ``eminent domain'' or ``compulsory purchase.''

For one, it has been recognized that the person whose property is being taken away has the right to fair compensation.

Simultaneously, the scope of what constitutes ``public use'' has become wider to cover even purely commercial redevelopment projects funded by the private sector.

Both the principle and the modifications were put to a violent test last week in the Indian state of West Bengal.

At least 14 people were killed when farmers clashed with the police after refusing to give up their land for construction of a 10,000-acre industrial park by Indonesia's Salim Group.

This was no isolated incident. In January, six people were killed at the same project location for exactly the same reason.

Violence erupted at another large industrial project site in West Bengal - Tata Motors Ltd.'s proposed car factory - in September and December as a local opposition leader incited protests against the state's possession of farmland.

Resentment is also growing in the western state of Maharashtra, where Reliance Industries Ltd.'s proposed 35,000- acre special economic zone may disrupt lives in 45 villages.

Industrialization Imperative
Arcelor Mittal's 12 million-ton steel project in mineral-rich Orissa state has also run into rough weather over the same issue: land acquisition.

There's no denying that India needs to make the transition from a primarily agrarian society to a more industrialized one.

Agriculture, which directly supports three out of five Indians, accounts for less than a fifth of the country's annual gross domestic product. It's time to shift the surplus labor out of farm-related occupations and into manufacturing.

Chinese-style special economic zones, which will inevitably require the government to exercise its eminent domain, may be the quickest way to meet this goal.

However, the question that's being increasingly asked is whether such a development strategy can work in democratic India where agricultural land is private property. Communist China passed its first law recognizing non-state ownership last week.

At the heart of the discontent is compensation.

Two models exist for determining the payout.

The conventional practice is for the local government to acquire land from farmers at a 30 percent premium - or ``solatium'' - to the prevailing rate in the area; the state then resells the land parcels to the investor, sometimes requiring the latter to guarantee jobs or small-business opportunities to the displaced persons.

In the second model, which is being tried now, the investor directly buys the land by offering a mix of one-time payments, annuities and jobs. The state acts as a facilitator.

Neither of the two systems is working satisfactorily.

The first is flawed because the benchmark price is often too low. Even when it's acceptable to the absentee landlords who live in the city, the tenants who cultivate the land resist eviction because their compensation, a multiple of the annual value of crops, is grossly inadequate.

In some Indian states, the actual tiller of the land may have no legal status and no right to receive compensation.

Legal Quagmire
The second model suffers from an absence of coercive power; it dilutes the state's eminent domain. Farmers begin to see the sales as voluntary and, therefore, open to bargaining.

There's no easy fix. Everyone agrees that India's land acquisition law, which dates to 1894, needs a revamp. In its present form, it helps neither the buyer nor the seller.

There is, however, a risk that if the current climate of anger and violence persists, then the law may be tightened to disallow eminent domain in pure commercial redevelopment.

That's the direction in which many U.S. states - Minnesota, Delaware, Ohio and Texas to name a few - have moved recently.

Stung by criticism that it was encouraging a land grab, the federal Indian government has already put on hold the allocation of new special economic zones. After last week's killings, there's little chance of the deadlock being broken anytime soon.

What will happen to India's goal of rapid industrialization, which is as much a national imperative as railroads were to the U.S. in the 19th century?

New Solutions
It may be possible to free large tracts of land in India without stoking large-scale resentment.

Villages in coastal southern China earn millions of dollars in rental income from leasing out land to factories. Why can't Indian farmers, too, become industrial landlords?

One strategy could be for the government to form a massive real-estate investment trust, to which all acquired land that is later developed by private capital for commercial use would be assigned. Both the farmers and the developers would be allotted equity in the REIT, which would earn rental income from long- term leases to industrial and commercial tenants.

Every farmer whose land has been taken would earn an income from his units in the REIT.

This may be just a wild, impractical idea. There may be better solutions. The challenge is to discover them before India's road to riches runs out of land.

Bloomberg.com: http://www.bloomberg.com