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