The Game is on Again -- Part I

The Seventh Pay Commission is not only likely to lead to a 250-300% hike, but so cleverly is the system rigged that it will also, most likely, include a 15% Performance Related Incentive for government employees; actual performance be damned.

A new version of a very interesting bureaucratic game was kicked off on September 26, when Indian Finance Minister P Chidambaram announced the formation of the seventh Central Pay Commission (CPC). Over the next two to three years, it will go through extremely interesting twists and turns till reaches its final denouement sometime in 2016.

It will have a lot of high drama, employees unions making demands and threatening with strikes, economists decrying the additional burden on the exchequer, politicians weighing in and accusing each other of using the process towards political ends etc. But the match is already fixed. The result is more or less a foregone conclusion – Indian government employees will get a pay hike that is anywhere between 250-300% of their current pay. How can I be so certain of these numbers? Here is an interesting analysis done by – of all the people – the Indian Railway Technical Supervisors Association (IRTSA), a union of the technical supervisory staff of the railways.

What will be the impact of this potential pay hike on the Indian government’s finances and the fiscal deficit? Does the cash strapped Indian government even have the wherewithal to pay its bloated work force these hiked salaries? Will the announcement of setting up the seventh CPC a few months before the general elections help the incumbent government? These are all separate discussions left for a future date.

This post is about how the system is being gamed in a systematic manner. The sheer bureaucratic genius involved makes Antony Jay and Jonathan Lynn – creators of the world famous Yes Minister and Yes Prime Minister series – look like bumbling novices. And this relates to Performance Related Incentive Scheme for the Indian Government employees.

Now anyone who has had any brush with the Indian government or in fact any government body in India – Central, state or local – will tell you that you cannot mention “Indian government” and “performance or efficiency” is the same sentence. It is not just wrong on facts, but so fundamentally wrong that perhaps the rules of grammar will allow you to use those words together!

No one in his right mind can accuse the Indian Government of efficiency

So where is this Performance Related Incentive Scheme coming from? What will be its impact? Will it actually – incredible though it may sound, improve Indian government’s performance?

To understand all these issues let’s get some background.

Background

The Indian government constitutes a CPC every decade to revise pay scales of its employees. The salary of an Indian government employee consists of two main components – a base pay that typically constitutes about 60% of the salary and inflation linked allowances under various heads that constitute about 40%. While the inflation-linked allowances are revised twice a year, the base pay grades remain constant, till they are revised by a CPC.

While the CPC only decides on pay revision of the central government employees, its recommendations are used as a basis by state government and various other government and quasi-government bodies to revise the pay scales of their employees.

Together these constitute a significant percentage of the voter base. Indian government employs about eight million people – in military as well as civilian spheres. Various state governments, public sector enterprises owned both by the central and state governments and other quasi-government and local government bodies employ almost a similar number of people. These 16 million or so direct beneficiaries are able to influence the vote of almost 60-70 million voters (through family and friends); which constitutes almost 10% of the total Indian electorate. So any political party in power in the centre can draw significant political mileage from loosening is purse strings for its employees.

Keeping these simple facts in mind, let us return to the interesting bureaucratic game that is going to be played out over the next couple of years.

Recommendations of the sixth CPC

The last CPC – the sixth such commission – was constituted in 2006 and gave its report in 2008. It recommended an across the board base pay hike ranging from 250% to 330%.

The impact of these pay hikes has been devastating. According to the Economic Times, the world’s largest selling business daily, the Indian government salary and pension bill for its civilian employees – 42% of the total government workforce -- was about Rs. 686 billion in FY08. It has since gone up to an estimated Rs. 1.92 trillion by FY14. (In India the financial year is between April 1 of that year and March 31 of the subsequent year). This is a rise of 180% in six years. (See ET’s report here.)

The level of minutiae that a CPC goes into has to be seen to be believed. Indian government employees are divided in 34 different grades – from the lowest ranked helpers etc. to the highest ranked Cabinet Secretary. Then there are different kinds of services from administrative to medical, to engineering to scientific. There are different allowances that range from the standard such as Dearness Allowance, Leave Travel Allowance, City Compensatory Allowance, Overtime, Allowance for being posted outside the headquarters, allowance for being on deputation to a different city, a different post etc. Incidentally all these allowances are inflation indexed.

By the way the above description is only of the pay and allowances of the civilian government staff. The details involved in the pay and allowance of the Defence Services is completely different level of complexity altogether.

Little surprise than that a CPC report is a voluminous document. The Sixth CPC report, including an annexure was over a 1,000 pages long. This was then followed by literally hundreds of other notifications, rules, circulars etc. that the government brought out.

Tucked away in all these pages was one innocuous looking chapter/subsection in the Sixth CPC report. It was titled Performance Related Incentive Scheme. The chapter was only about 13 pages long – the annexure to the report dealt with the topic on at slightly greater length, all of 40 pages.

This chapter/section had its origins in one of the Terms of Reference of the Sixth CPC related to fixing a framework for Performance Related Pay (PRP). To do this, the Commission took the help of Indian Institute of Management, Ahmedabad (IIM – A) to help them devise a structure.

IIM - A after studying various PRP models in governments across the world as well in the private sector, observed, “For a larger (majority) section of (government) employees there is hardly any performance for pay incentive available to them. Their salaries are today only a composite of basic pay plus certain allowances (variable) including DA that are admissible depending on the nature of jobs and duties and accompanying working conditions. In fact, natural increases in salary are very much guaranteed to Government employees. This leads to a situation where employees do not exert themselves for a higher level of on-the-job performance and achievements, thus depriving the Government of potential productivity gains and service delivery enhancements, both in terms of quantum and quality.”

After studying this report and other submissions, the Sixth CPC came out with this recommendation. “the Commission recommends introduction of a new performance based pecuniary benefit, over and above the regular salary, for the Government employees. The benefit will be called Performance Related Incentive Scheme (PRIS) and will be payable taking into account the performance of the employee during the period under consideration. It is based on the principle of differential reward for differential performance.”

Notice anything? Performance Related Pay (PRP) has in the Sixth CPC’s hand become Performance Related Incentive Scheme (PRIS). The difference this subtle change in nomenclature makes is huge. PRP would mean that someone doesn’t perform up to the benchmarked standards; he/she will get lesser amount of the variable component. This is the way the private sector works. But PRIS means that if an employee’s performance is above the benchmark, he/she gets additional pay. There is no penalty for non-performance.

In order to leave out no ambiguity about which route the CPC wanted to take, the report went further and made it explicit. “To ensure that employees do not lose any of their regular salary as revised by this Commission in case they are found ineligible for this incentive; the Commission proposes to pay this incentive over and above the regular pay of the employee. In this sense, the incentive being recommended in this Report is different from Performance Related Pay (PRP) in other countries as, unlike in PRP; it is a benefit over and above the regular pay of the employee.”

It is almost certain that the Seventh Pay Commission will recommend a 15% Performance Related Incentive for Indian Government employees. Actual performance be damned.

So if a clerk in a government department routinely walks in at 11.00 AM and goes home at 4.00 PM, not counting the time he spends on lunch, tea, paan etc. and generally performs at a 30-40% capacity, his pay is not docked. He gets is full pay and allowances as well as annual increments.

Now admittedly, the Indian government is like an ocean going super tanker – you can’t turn it around on a dime. It requires a huge amount of time, distance and effort to turn the ship around. The Sixth CPC acknowledged this. It also pointed out that measurement of performance in the government has to be different than in the private sector, where it could be linked to profits.

“In the Governmental context, performance can be defined as the ability of the Government to acquire resources and to put these resources to their most efficient use (input-output relationship) and to achieve the desired outputs and outcome goals (output-outcome relationship). It is the shift from inputs-process emphasis (efficiency) to results, social goals and outcomes (effectiveness). Performance can, in the final analysis, only be viewed in terms of the final deliverables to the user/stakeholder,” the Commission observed. It also pointed out that definitions of performance would necessarily be different in different government departments. Therefore while recommending the adoption of PRIS; the Sixth CPC suggested that the government work out the methodology of how it is to work in different departments and situations.

When the Government accepted the Sixth CPC report, in 2008, in toto, it left the door open for another fraud to be perpetuated on the Indian people in the name of Performance Related Incentives. Work on that, within the bureaucracy started the very next financial year.

For details of how carefully and beautifully the system is being rigged to ensure that practically every government employee becomes eligible for PRIS; resulting in an additional burden of about USD 40-45 billion per year -- actual performance related impact on the ground be damned -- read my next blog post.

IT'S THE JOBS, STUPID!

Bharatiya Janata Party’s Prime Ministerial Candidate, Narendra Modi. Will he makes jobs as a key election plank? 

In his speech in New Delhi today, BJP Prime Ministerial candidate and Gujarat Chief Minister Narendra Modi briefly mentioned some figures about job creation during the NDA regime and compared them to job creation in the UPA II regime. The references were cursory and buried in the other political points that he was making.

But here is the thing, job creation probably offers the most potent political plank for any party. Consider the numbers. Almost 65% of the country is under the age of 35 — a point that Mr. Modi also made briefly in his speech. For over a decade now, basking in a fast GDP growth rate, we have been blissfully regarding this huge under-35 population as a ‘demographic dividend’. True, having among the largest working age populations in the world is a blessing – but only we are able to find this population, productive jobs. Otherwise the ‘Demographic Dividend’ could well turn into a ‘Demographic Curse’.

There are already signs of that happening. As India GDP growth rate slows down, where it is going to hurt most is on employment. A prominent infrastructure company recently announced sacking half its work force – about 4,000 people – because of economic slowdown and the fact that several of its projects are stuck for government clearance. It is not the first and will definitely not the last.

And it is not just the job losses in a slowing economy that we need to be worried about. Inevitably, as a society transitions away from agriculture – as India is in the middle of doing – agriculture jobs are lost and have to be replaced by enhanced job creation in the industrial sector. This year’s economic survey, brain child of Dr. Raghuram Rajan, then Chief Economic Advisor and now Reserve Bank of India Governor, predicted that by 2020 – over 11.8 million jobs will be lost in agriculture and will have to be replaced by jobs in the Industry. This is not an easy task by any means.

If India does not create enough jobs, the ‘Demographic Dividend’ could turn out to be ‘Demographic Curse’

During 2009, 2010 & 2011, again according to the Economic Survey, Indian GDP grew at 8%, 8.5% and 6.5% respectively. Yet during this period, employment in the organized sector grew by only about 3% — just about 900,000 jobs.

Of course, this figure is only half the truth, because almost 80% of the jobs in India are in the Micro, Small and Medium Enterprises (MSME) sector – which the government classifies as unorganized. As a result, it has no data on the number of jobs being created or lost in this sector. And if we have no data, can any effective policy really be designed to help this sector to create more jobs? But this lack of data is a topic for a separate discussion.

In the last two years, the Indian Rupee has depreciated against the Chinese Yuan by 33% of its value. If we get our industrial policies right, this depreciation can prove to be a huge competitive advantage. The key to this is to address the MSME sector.

According to various estimates MSMEs employ 81 million people. Clearly if we have to create more jobs, it has to come from the MSME segment. Yet the fact is an overwhelming (almost 70%) of these MSMEs are micro-enterprises that do not grow to become Small or Medium enterprises clearly inhibiting prospects for job creation.

While there are a number of reasons inhibiting growth in this sector, one major contributing factor is the eco-system that they operate in. And correcting that is a low hanging fruit.

India ranks 132 out of 185 in the ease of doing business according to the World Bank“Doing Business – 2013” report. Yet, according a similar World Bank report in 2009, if a hypothetical city say, “Deshpur” were to adopt the best practices from several Indian cities — number of procedures to start a business from city A, days to start a business from City B, procedures around construction permits in City C etc. — the country’s rank in Doing Business would jump to about 67. With improved ease of doing business will come growth and that will bring in more jobs.

After agriculture, MSMEs employ the most people in India. Any strategy for job creation should be aimed at boosting these enterprises. 

But for the MSMEs to grow and create more jobs, we also need to concentrate on the growth of the organized sector since MSMEs typically supply goods and services to the larger enterprises. This would require a slew of measures from creating an industry friendly climate to increased investments in infrastructure and getting stalled projects off the ground.

The most important of these reforms would have to centre on our labour laws. India has the dubious distinction of having some of the most comprehensive labour laws in the world, even while having one of the largest fractions of the working population unprotected. There is enough evidence to point that our labour laws actually hinder the growth of large-scale manufacturing. And when companies do expand production, it is most often done through the use of contract labour. Inevitably these jobs have low productivity and companies make little investments in training and skill upgradation.

Probably the one sector which can have the highest multiplier effect on the economy and job creation is the BFSI sector. Whether it is Banking or other financial services like insurance, the penetration in India is far below globally accepted standards. If we deregulate the BFSI industry and allow it to grow; while giving incentives for financial inclusion; the potential for job creation is massive. The entry of private sector insurance companies has seen almost two million jobs created in the last decade. According to estimates, if de-regulated, the banking sector itself has a potential to employ over one million people through direct employment, work as banking correspondents and financial inclusion initiatives.

There are two other advantages of a thriving BFSI sector. First, various studies of employee productivity show that productivity among the BFSI sector is seven times the average productivity in the country.  So the economic spin-off from a job created in the BFSI sector is far greater.

Second, a strong BFSI sector would help solve one of the biggest problems confronting the MSME sector – lack of adequate credit. The conditions laid down by the RBI in the new banking license applications, will ensure that MSMEs will get a greater flow of credit, helping them to prosper, with a multiplier effect on job creation.

The rapid GDP growth of 2003-2010 led to a kind of complacency among policy makers and analysts. But what the last 18 months have shown is that India’s continuing on a rapid growth path is not pre-ordained. It requires vision, fortitude and deft policy making.

In the 1992 US Presidential Election, Bill Clinton’s team came up with a memorable slogan – “It is the Economy, Stupid”, which many analysts say played a significant role in his winning the election. As India nears what promises to be an intensely contested general election, perhaps it is time to paraphrase this to “It is the Jobs, Stupid” and ask our political leaders their plans in this regard! 

Blame the Mahatma Not Rahul

Rahul Gandhi is just following the tradition set by Mahatma Gandhi in violating intra-party democracy.

Rahul Gandhi’s tantrum about the proposed ordinance to overturn the Supreme Court judgment in the convicted politicians’ case, effectively burying the ordinance, has attracted a lot of criticism for being undemocratic.

After all, the idea had been discussed at the highest levels within the Congress Party and then cleared by not just the party, but also the Union Cabinet. Should Rahul Gandhi then, effectively just another MP, have a veto over his own party’s government — however ghastly the objectives of the ordinance? Doesn’t this undermine an elected government and overturn democratic norms?

Well, the fact is that if Rahul Gandhi is exercising a veto or using a remote control, he is following a well-established political tradition laid down by a man called Mohandas Karamchand Gandhi. Shocking though this may sound, this is the history of our nation.

Till the rise of Mahatma Gandhi, decision-making in the Congress was a collective effort. But once Mohandas Karamchand Gandhi returned from South Africa and emerged as the foremost leader of the Independence movement, this decision making became subservient to his wishes, whims and fancies.

Perhaps the earliest example of this was withdrawing of the Non-Cooperation Movement. The movement had been formally endorsed by the Congress convention in September 1920 at Kolkatta and launched in December 1920. So this was a democratically passed resolution. Yet when policemen were murdered in Chauri Chaura in February 1922, Gandhi decided to call off the agitation – a decision that was opposed by most of the Congress leadership. His methodology was unique and effective. He decided to go on a fast as repentance for Chauri Chaura and threatened to continue it till people withdrew the agitation. Congress leadership comprising stalwarts like Nehru, Patel, Azad, even Jinnah, had no option but to give in.

Over the years, this became the norm. Gandhi inevitably had the last word. In 1929, Vallabhbhai Patel, having led the hugely successful Bardoli Sathyagraha the earlier year, was the overwhelming choice of the rank and file as Congress President. Yet Gandhi wanted a much younger Jawaharlal Nehru (Jawaharlal was 14 years younger than Patel) to succeed his father Motilal Nehru as Congress President. (This was the first instance of dynastic succession in Congress, something that has become a norm now). Patel gracefully accepted Gandhi’s choice and seconded the younger Nehru’s name. Patel would become the Congress president only in 1931.

Gandhiji and Netaji Bose before the split

Another prominent example of Gandhi’s remote control working was when Netaji Subash Chandra Bose was elected as president of the Congress in 1939. This was Netaji’s second term. In 1938 he had been elected unopposed. But in 1939, with World War II imminent, Netaji had taken a much more strident and militant stand. He advocated armed struggle against the British – likely to be weakened by War – unless they granted India Independence in six months.

The concept of armed struggle, of course, went against Gandhiji’s belief in non-violence. In an effort to checkmate Netaji, Gandhiji proposed the name of Dr. Pattabhi Sitaramyya as Congress President. Despite support from Gandhi, Nehru, Patel and the entire Congress establishment, Netaji won the election. Gandhiji went so far as to say that Sitaramyya’s defeat was his defeat.

This decision of the rank and file of the party was overturned, when (at Gandhiji’s behest?), the entire Working Committee of the Congress – with the notable exception of Nehru – resigned because they did not want to work with the democratically elected president. (Nehru, who shared Netaji’s leftist ideology, it is said, did not want to go against his friend). Unable to function, Netaji not only resigned as president but also from the Congress.

Perhaps the one use of Gandhiji’s remote control that had the greatest impact on Indian history was when he convinced Sardar Patel not to become the President of Congress in 1946. This election was extremely significant, since with Independence imminent, the President of Congress was most likely to be chosen as the first Prime Minister of India.

Thirteen of the sixteen Pradesh Congress Committees had recommended Sardar Patel’s name. The remaining three had named the incumbent president Acharya J B Kriplani. Not one PCC had opted for Jawaharlal Nehru. But Gandhi’s choice was Nehru. So Patel, ever-faithful to the Mahatma, stepped aside and Nehru was elected as the Congress President. Patel as the first Prime Minister of India is perhaps the most intriguing “What if” moments in Indian history.

What would India have been like if Gandhiji had respected intra-party democracy and let Sardar Patel be India’s first Prime Minister?

Thankfully, though there was one crucial moment when Gandhiji’s remote control did not work. This was when, in his desperation, to avoid the Partition of the country, he offered Jinnah the Prime Minister’s post of the interim government with all other cabinet posts being manned by Muslim League appointees.

Without for a minute, doubting his best intentions, Gandhi’s total defiance of democratic norms in even making this suggestion is staggering. The Central Assembly had a Congress majority. Yet, here was person, who was not even a primary member of Congress, leave alone an elected decision-maker, offering to overturn all democratic norms and make Jinnah the Prime Minister.

Thankfully, both Patel and Nehru, who lived in the real world, rejected this suggestion because of the possibility of escalated violence and the intractable problems it may have caused.

So burying of democratic norms for the whims and fancies of the “supreme leader” is nothing new in Indian politics. Every time the Gandhi family or Bal and now his son Uddhav Thackeray, Mamata Banerjee, Karunanidhi or an organization like the RSS, exercise their remote control to overturn intra-party democracy, we need to remember that they have learnt from that master – Mahatma Gandhi, Father of the Nation.

De-Industrializing India Part II

The new land acquisition bill passed by the Indian parliament will make it impossible for industry to acquire land for new projects

It is not just the ridiculous nature of the cost of the land in the new Land Acquisition Bill that is the problem. The entire process has been so designed that it can only result in endless delays ensuring that the economic viability of any project proposed on such land will be seriously threatened. Here are various steps involved in the acquisition process.

Social Impact Assessment (SIA)

The Bill specifies that for every acquisition of more than 100 acres in rural areas, a Social Impact Assessment, be carried out in consultation of the affected Gram Sabhas, to ascertain among other things number of families affected, extend of lands, housing and settlement affected, impact on families residing in adjoining lands etc.

Along with these reasonable sounding provisions, the Bill mandates that the SIA is also supposed to assess two key parameters and these have the potential to derail any project anywhere in the country. According to the Bill, The SIA is supposed to also assess whether the project in fact is in public interest and whether land acquisition at an alternate place has been considered and found not feasible.

What this means is that a bunch of villagers and other unspecified experts who are conducting the SIA are to decide if a particular project – be it a power plant, a dam, or an industrial project – is in public interest. This is a complete inversion of Eminent Domain – the legal principle governing land acquisition all over the world.

Apart from this, the acquirer will have to these villagers and so called experts that alternative locations were looked at and not found feasible. The possibilities of the entire process being mired in a discussion about the desirability of one location over the other, even before the SIA – the first step in a lengthy acquisition process – is prepared are very high.

Expert Group

Once the SIA is ready, the government will appoint amulti-disciplinary expert group including two “non-official” social scientists, two experts on rehabilitation and a technical expert on the subject of the project.

Committee of Secretaries

The report of the Expert Group will be referred to a Committee of Secretaries. This committee will have the Chief Secretary as its chairperson and have a bunch of other secretaries from Finance, Revenue, Rural Development, Social Justice, Tribal Development, Panchayati Raj besides secretaries of the concerned departments. The committee will also have three non-official experts.

This Committee will examine the SIA, the recommendations of the Expert Group and will finally decide if the project is in public interest and recommend such area for acquisition which would ensure minimum displacement of people, minimum disturbance to the infrastructure, ecology and minimum adverse impact on the individuals affected. It will also ascertain whether consent of 80% of the people affected has been obtained.

Preliminary Notification

If the project proposal passes all these hoops, the Collector of the district where the project is located will issue a preliminary notification giving details of the project, the quantum and locations of the land to be acquired, its public purpose etc.

If for whatever reasons this preliminary notification is not issued within twelve months submission of the SIA, the report will deemed to have been lapsed and a fresh Social Impact Assessment shall be required to be undertaken.

Any person interested in any land – note not just the land owner – which falls under this preliminary notification, has the right to object to the project, its public purpose, amount of land required or findings of the SIA. The Collector will have to give a hearing to all such people objecting, record their objections and then submit a report to the government with his/her findings.

Interestingly, once the Preliminary Notification is published, no one is allowed to make any transaction of land which falls under the purview of the notification. Effectively what this means is that while the government machinery grinds on, the villagers have already lost the right to their land. So much for social concerns of the Bill!

Surveys

Now starts the survey phase. The Collector and the Administrator appointed for rehabilitation and re-settlement – typically a Deputy Collector — will conduct a survey of the land, built up properties – both public and private – people affected, livelihoods lost besides public amenities and infrastructure affected by the project.

Based on this survey, the Administrator will prepare a Draft Rehabilitation and Resettlement (R&R) Scheme. This Scheme will conduct public hearings in all the Gram Sabhas affected by the project to discuss the R&R scheme. He will then submit a report to the Collector who with his comments will then submit it to the Commissioner Rehabilitation and Resettlement for approval. The file will ultimately move the a Secretary in the Government who, provided the scheme has passed all these hoops will make a declaration.

Award

The next stage is where the Collector will make the award – i.e making payments to the people affected.

Payments have to be made based on individual awards to all the affected families. The compensation amount has to be paid within three months and the monetary component of the R&R in six months. Further all the infrastructural aspects of the R&R have to be provided within 18 months. It is only after all these payments are made and infrastructure provided that the land can be acquired.

If this process of award is not completed within two years of the declaration then the entire proceedings lapse and the process has to start all over again.

Applicable also to Private Purchases

Now here is the strange part. The provisions of the Act will apply even if someone is acquiring 100 acres of land in rural areas through private negotiations. So the whole process of SIA, Committees, R&R will apply even if the deal is between willing parties. No land use change shall be permitted if rehabilitation and resettlement is not complied with in full.

National Monitoring Committee for Rehabilitation and Resettlement

The Bill also envisages establishing of a National Monitoring Committee for R&R. What this Committee will do, besides collating data from various state governments is not presently clear, but it creates another potential roadblock to the process of land acquisition

Land Acquisition, Rehabilitation and Resettlement Authority

To confuse matters further, the Bill also establishes a Land Acquisition, Rehabilitation and Resettlement Authority (LARR). This will have judicial powers and will be headed by a functioning or retired Judge. Strangely, the Bill says that the LARR will not be bound by the procedure laid down in the Code of Civil Procedure, 1908 but shall be guided by the principles of natural justice and subject to the other provisions of this Act and of any rules made there under. It will have the power to regulate its own procedure.

Any person who is not happy with the award by the Collector can approach the LARR which then provide a hearing. If the LARR finds that award provided by the Collector inadequate and decides to raise it, its orders will apply to all people similarly affected by the award.

Of course the orders of the LARR can be challenged in the High Court or the Supreme Court, leaving the door open for further judicial delays in the land acquisition process.

As environment minister he was responsible for stalling countless industrial projects. Now in his avatar as Rural Development Minister Jairam Ramesh has ensured that no industry will come into India thanks to the new Land Acquisition Act.

What this long winded procedure means is that it will be almost impossible for any industry to acquire substantial parcel of land to set up new industries. The process will have endless delays, open to countless challenges and mired in controversies. It is highly unlikely that India will attract any Foreign Direct Investments in manufacturing. Even large Indian industrial houses like the Tatas or the Birlas will find it easier to set up plants overseas than in India. This has drastic implications for the Indian economy.

This Bill represents a mindset that frowns on industry and wants to “protect” the farmers. The best comment on this mindset comes from Dr. Amartya Sen, Nobel Laureate and darling of the neo-liberal, “activist types.” While reading the comments reproduced below, one should keep in mind that Dr. Sen has recently co-authored a book on Indian economy with Jean Druze, who happens to be member of the National Advisory Committee (NAC) which has been one of the driving forces behind the Bill.

Speaking to Kolkatta-based The Telegraph newspaper in July 2007, Dr. Sen made several telling comments on land acquisition and industrialization. Though he was speaking in the context of the land acquisition controversies in Singur and Nandigram in West Bengal, they hold true for the whole of India as well.

“The prosperity of the peasantry in the world always depends on the number of peasants going down. That is the standard experience in the world. It is not that historically agricultural production goes up so much that they become hugely rich on that basis. Bengal has done very well in terms of agriculture compared to other states. But that has not made Bengal immensely prosperous. In countries like Australia, the US or Canada, where agriculture has prospered, only a very tiny population is involved in agriculture. Most people move out to industry. Industry has to be convenient, has to be absorbing.

When people move out of agriculture, total production does not go down. So per capita income increases. For the prosperity of industry, agriculture and the economy, you do need industrialisation. Those in effect preventing that, either by politically making it impossible for an industrialist to feel comfortable in Bengal or making it difficult to buy land for industry, do not serve the interest of the poor well.

The Communist Party made a mistake earlier when it drove industries out by union action, which was intended to create benefits for workers but ended up making the workers having no job. Second time it is happening now, not from the Communist Party but from the Opposition, preventing industrialisation, which is not in the interest of Bengal in general and the poor in particular. So if Bengal is to regain what it used to be — being one of the richest in the world — industrialisation has to happen. Prohibiting the use of agricultural land for industries is ultimately self-defeating.”

“…There is no way in which you will be able to avoid industrialisation around Calcutta, any more than you could have avoided it in London, Lancashire, Manchester, Berlin, Paris, Pittsburgh. You will find industry will come up where there are advantages of production, taking into account also the locational preferences of managers, engineers, technical experts as well as unskilled labour.

But we should not make the mistake of thinking that somehow while you are trying to attract business based on the market that the government can say: ‘I want you to go to Siliguri and that is where you are going to be.’ That is not the way the market economy works. The market economy has many imperfections…. but it also creates job and income and if the income goes up, government revenues go up, so there is money available for education and healthcare and other things.

So in order to do that, you have to give the market economy the operational rational of choosing one location over another, depending on their market-based calculation. You cannot be governed by the market but nor can you ignore the logic of the market if you want to use the market as one of the instruments in advancing the country.”

De-Industrializing India Part I

Once the new Land Acquisition Bill becomes the law — it awaits Presidential Assent now — we can forget about new industrial plants coming into India. (Photo for representational purposes 

“A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves money from the Public Treasury. From that moment on, the majority always votes for the candidate promising the most benefits from the Public Treasury with the result that a democracy always collapses over loose fiscal policy always followed by dictatorship.”

— Author unverified. Ascribed to Lord WoodHouselee, a Scottish Historian

We have seen two excellent examples of this phenomenon in India recently. The way in which the Food Security Bill and the Right to Fair Compensation and Transparency in Land Acquisition and Rehabilitation and Re-settlement Bills were passed by both houses of the Indian parliament, is nothing but an example of people voting themselves money from the Public Treasury.

The incentive for the Congress to push these bills through were clear enough. It was the last, desperate, throw of the dice for a completely discredited regime trying to woo voters. But why did the opposition parties agree to support these bills? It was because in the competitive populism sweepstakes they did not want to be left behind. An unnamed senior leader of the Bharatiya Janata Party — the principal opposition party in the parliament — has admitted as much in some interviews.

While there has been a lot written in the media about the pros and cons of the Food Security Bill and the entitlement versus growth debate, the media has failed to critically analyze the impact of the Land Acquisition Bill on industrial activity in India. There have been only two prominent critiques of the act. The first was by Swaminathan S. Anklesaria Aiyar, Consulting Editor of the Economic Times.http://bit.ly/16kVO1x. The second by R Jaganathan, Editor of Firstpost.com here http://bit.ly/19I6WoZ.

Both articles, while making valid points, are more rhetorical in nature and do not analyse exactly what is the impact of the law that has been passed in monetary terms.

Indian media has harped upon just one aspect of the Bill, that the compensation to be paid while acquiring land should be four times the market price. But this is a gross fallacy and underestimation of the actual monetary cost of land acquisition.

Here is a simple calculation based on the provisions of the Bill, that now awaits Presidential assent, which should make it clear why this bill will be the death knell of any large project — industry or infrastructure — in the country.

But to understand the calculations, it is critical to understand the provisions of the act and underlying assumptions for my calculations, because they play a significant role in inflating the cost of land.

Assumptions

Let’s start with the assumptions

1) 100 acres of land needs to be acquired for a particular project.

2) The market rate for the land is Rs. 20,000 per acre.

3) This land is owned by 10 families (or home owners as the Bill calls them)

4) Another 100 families are dependent on this land for their livelihood — these could be labourers, share-croppers etc.

Basic provisions of the Bill

Now let’s understand the key provisions of the Bill relating to compensation, resettlement and rehabilitation.

1) Primary price to be paid would be four times the market price.

2) Each land owner (or home owner) — 10 in our example — will be entitled to:

a) Additional subsistence allowance of Rs.36,000 for the first year

b) Additional entitlement of a job to the family member, or a payment of 500,000 up front, or a monthly annuity totalling Rs.24,000 per year for 20 years with adjustment for inflation – the option from these three choices shall be the legal right of the affected land owner family, not the land acquirer

c) Additional upfront compensation of Rs.50,000 for transportation

d) Additional upfront resettlement allowance of Rs.50,000

e) If the land owner loses a home in a rural area, then an additional entitlement of a house with no less than 50 square meters in plinth area

3) Each of the families that lose their livelihood — 100 in our example — will be entitled to exactly the same levels of compensation as outlined above.

Calculations

So having got our arms around the basic provisions in the Bill, let us see how this translates into costs for the acquirer in our example.

1) Primary cost of Land:

100*20,000*4 = Rs. 8 million …. (A)

2) Home Owners’ and Livelihood Loser’s entitlements (10 Home Owners + 100 Livelihood Losers = 110 families)

a) Additional subsistence allowance = 36,000*110 = Rs. 3.96 million …. (B)

b) Upfront payment in lieu of job = 500,000*110 = Rs. 55 million …. (C)

c) Additional upfront compensation = 50,000*110 = Rs. 5.5 million …. (D)

d) Additional upfront resettlement allowance = 50,000*110 = Rs. 5.5 million …. (E)

e) Cost of 110 houses with minimum plinth area of 500 sq feet @ Rs. 200,000 per house (including land and construction cost) = 110*200000 = Rs. 22 million … (F)

Total cost of acquisition of 100 acres of land (with the underlying assumptions) = (A) + (B) + (C) + (D) + (E) + (F) = Rs. 99.6 million … (G)

Cost per acre = (G)/100 = Rs. 999,600 — say Rs. 1 million

So effectively what the Bill does, through its completely unrealistic provisions about compensation is raise the cost of per acre of land from Rs. 20,000 to about Rs. 1 million — an astonishing increase of 50 times!

This of course is not all. God save the acquirer if there are any Scheduled Caste or Scheduled Tribe families that are being affected by the land acquisition — either as land owners or livelihood losers. In such a case additional entitlements along the following lines kick in:

a) An additional land grant of 2.5 acres per affected family

b) An additional assistance of Rs.50,000 per family

c) Free land for community and social gatherings, and special  benefits under Schedule V and VI of the Bill.

What the above calculations do not take in account is that the land acquirer will have to provide 25 additional services to families affected by the land acquisition including schools, health centres, roads, safe drinking water, child support services, places of worship, burial and cremation grounds, post offices, fair price shops, and storage facilities.

What is incredible is that these services have be provided even by private companies willingly buying land from willing sellers!

Let’s add a bit of perspective to this price of land.  The most expensive farm land in UK is valued at 7740 sterling pounds a acre – about Rs. 750,000. (http://bbc.in/17JnQU5). Similarly the most expensive farm land in US is valued at $12,200 or about Rs. 800,000 per acre. (http://bloom.bg/18yfEZU)

So in one stroke of a our legislative pen — so to say — we have made Indian farm land, far from the most productive in the world, the most expensive in the world.

The most expensive farmland in the world? Photo for representational purposes only.

But the unrealistic price is only one part of the story. The acquisition process is convoluted and in bound to lead to endless delays. We will examine this in some depth in the next post.t