Government Should Lease Land, Not Acquire It

The Joint Parliamentary Committee reviewing the proposed land acquisition law has asked for suggestions from the public. I suggest that the law’s thrust must shift from compulsory acquisition to leasing. This will benefit all concerned — farmers, governments and project authorities.

I instinctively dislike compulsion in sales. Yet for linear infrastructure projects like roads, railways, canals and pipelines, compulsion may be justified to ensure contiguous land availability for the provision of public goods. Industries, however, should be asked to buy land from willing sellers.

Farmers oppose land acquisition because it violates their property rights, and often yields sub-market prices. Land is in theory acquired above the going market price. But the market price itself depends on whether it is classified as agricultural or industrial. Just converting the classification from agricultural to industrial can increase the price of land five-fold. Thus farmers whose land is just outside the acquired zone gain hugely, but those in the acquired zone lose out.

Historically, land acquisition has been a terrible deal for farmers. Often state governments have acquired land for a song and then sold it to industries at prices ten or even fifty times higher. Many states have offered free or ultra-cheap land to attract industries and jobs. Such competition between states is commonplace in most countries, and can be healthy overall for the economy. But the cost should not fall disproportionately on farmers losing their land.

Many farmers complain that, after acquisition, they have no other occupation to shift to. Some small farmers go on a spending spree with compensation money, and after a few years have nothing left. To overcome this, some states have proposed an annuity model: a down payment plus monthly payment.

The 2013 land acquisition law aimed to remove the worst features of compulsion. But it had so much red tape that all land acquisition — and hence all new infrastructure — came to a complete halt. States of all political hues said they had found the new law virtually unimplementable.

The best way forward is for state governments to simply lease land from farmers, not acquire it. This can take the form of 33-year, 50-year or 99-year leases, with a down payment, monthly rent, and renegotiation at the end of the lease period. This improves on the annuity model: the farmer gets similar benefits but remains the owner, with the added right of renegotiation.

Land ownership is a big status issue in villages. A landless person loses status, and this carries not just humiliation but other social costs, like the inability to attract desirable grooms for daughters. But landowners who lease out land have a high status: they are landlords earning rents. Many rural grandees are absentee landowners with tenants.

If land is compulsorily leased and not acquired, the farmer in question becomes the landlord of the government agency, or Tata, or Birla, or whoever runs the new project. Losing your land to Tata or Birla is humiliating exploitation. But gaining Tata or Birla as your tenant at a high rent gives you social status.

Right now, politicians have created a situation where farmers view industry as an enemy. This is terrible. India has just 160 million hectares of cultivated land for a rural population of over 800 million, or just one-fifth of a hectare per capita. This is a recipe for endless poverty. Millions of farmers must be enabled to move out of agriculture into industry and services. Farmers should see industrialists as allies and potential saviours, not foes.

Yet compulsory land acquisition makes farmers view industrialists as foes. To end this, farmers must have a stake in industry too. Some industrialists have tried offering shares in their companies to farmers, but share values are notoriously volatile and uncertain. Besides, industries can go bankrupt, and not pay their rents.

The safest solution is for state governments, which cannot go bust because of their tax powers, to lease the land and sub-lease it to industrialists where required. The states must be responsible for all payments to farmers. Farmer preferring to sell outright should have that option too. Part of the developed land should be returned to farmers as part of the compensation package.

Leasing will give farmers a stake in incoming industries. These will no longer be seen as intruders or expropriators but as tenants paying vastly higher rents than imaginable earlier. Industries will create new opportunities to supply goods and services, including domestic services. It will be a win-win-situation.

With such an approach, no social impact reports, rehab schemes or majority votes are needed, since farmers are not actually losing land. This will speed up projects amicably, ensure rapid economic growth, and create millions of new jobs. It will make farmers partners in industrialization, not victims.

Swaminathan S. Anklesaria Aiyar is a research fellow at the Cato Institute.