The upside of Land Bill: Curbing insider trading
The Land Acquisition should be seen as the first attempt to correct the information asymmetry that works against farmers interests when land use is changed.
Around the time the Land Acquisition Bill was being debated and was being finally passed last week, an innocuous policy change was being planned for the national capital. The Delhi Development Authority (DDA) plans to allow a fifth of the land meant for industry to be used to create housing, according to this report in Hindustan Times.
Powered by the usual justifications of being people-friendly, worker-friendly and so on, this change in land use will benefit the owners of industrial plots in populated areas around Okhla, Patparganj, Mayapuri and Naraina. Change in land use is the oldest trick in the game of wealth creation. The price of agricultural land will always be lower than that being used for industry, which in turn will be lower than land for real estate development. By changing the land use pattern of a particular plot, the government allows huge benefits to go to incumbents, making this little notification a breeding ground for mass corruption at a scale that can only be matched by greed.
This leads to needless scams. At the same time, when the debate was being held in the Lok Sabha, a superb investigation by Headlines Today exposed how Congress MLAs colluded with middlemen and agents to get a change in land use.
Depending on the kind of housing - low cost or premium - the returns on conversion range anything from 10 to 40 times, according to builders and brokers operating in the area. This premium is shared between the owner, the agent and the politician. The end user pays the final price, in which all these components are embedded.
The philosophical question around land acquisition is: to whom should returns from information asymmetry accrue? The farmers who do not have information but whose land is being acquired? Or companies to whom the acquired land would be sold, with returns-multiplying change in land use embedded into it? Feeding off this asymmetry are the usual parasites of society - brokers, dealers, builders, bureaucrats, politicians. Consumers and small investors are incidental and irrelevant to the big picture - a home buyer will pay the final rate, a small investor the final price. It is the economics before the final transfer of ownership that needs cleaning up.
Debate on whether rural landowners should be paid four times the value of land and urban landowners twice the market value is futile, as the comments placed before the standing committee report on the Right to Fair Compensation &Transparency in Land Acquisition, Rehabilitation & Resettle6ment Bill, 2012 attest. Arguments can be made either way. The Ministry of Housing and Urban Poverty Alleviation says that the basis of different multiplication factors for rural and urban areas is unexplained. The government of Chhattisgarh says the arbitrariness would create distortions.
Arbitrariness can and does result in prices rising as much as 10 times the market value of land, according to Sangharsh. The response of the Confederation of Real Estate Developers Association of India was predictable: the government needs to take the needs of middle-class citizens, who are in dire need of good and affordable housing, into account and so, the compensation should not be high. Further, farmers should become shareholders in the project, a demand that the Kisan Morcha debunked, saying it can be misused and farmers are not the best equity investors.
I asked Rural Development Minister Jairam Ramesh, the mind behind the law, about the logic behind these numbers - four times market value for rural areas, two times for urban. “There is a very sound economic logic to the compensation formula devised,” he said. “After much deliberation and research it was found that while the accuracy of rates fluctuated depending on how developed the land market was, most registered or reported land values were one-fourth to one-sixth of the actual value. The idea behind paying four times the value (in rural areas) and twice the same (in urban areas) was made to correct this shortcoming.”
The arbitrariness of this number has the potential to become a political tug-of-war between the Centre and states, between governments, on one side, and industry and farmers, on the other. Lost in translation is the real value of land that has been honed with changed regulatory conditions, or land use. Because of this change, we need to relook at the same piece of land differently. I argue that if the land use is changed on a particular tract of land, it is no longer the same land at all. If until yesterday only agriculture was a legitimate activity and today it is real estate, a new product has been created within the same boundary.
This has been the cause for never-seen-before corruption in India, a point that RBI governor Raghuram Rajan points out in his fascinating book, Fault Lines. “Well-connected industrialists, developers, politicians, and the home-grown mafia have the means of enforcing property rights, either because they have power in, or over, the government, or because they can resort to illegal force. This group can buy property cheaply because other competing buyers are far less confident of their rights over the property on sale. Having bought the property, the group has the means of having its rights enforced and even enhanced by altering the zoning restrictions on the land.”
Recall the farmers’ agitation two years ago around what was informally called ‘Noida Extension’, and you would remember how the UP government acquired 400 hectares of land from farmers to set up an industrial zone. The government used Clause 5 under the Land Acquisition Act that prevented farmers from even protesting. Halfway down the line, the government changed the land use to residential.
Prices jumped. The extent of that jump: anywhere between 10 and 25 times. While farmers got “a few hundred rupees per square yard,” according to an October 2011 Allahabad High Court judgement, the Noida authority sold the land to “builders and colonisers for Rs 10,000-20,000 per square yard. Doing further math is a little difficult for lack of the following information - FAR per builder, number of storeys and the price per square foot that 6,000 buyers paid - but it is safe to assume that the final multiple would not be insignificant.
In terms of multiples, real estate, particularly around the five sides of Delhi - Gurgaon, Noida, Ghaziabad, Kundli and Najafgarh - is an altogether different story. But the numbers around Chennai, Bangaluru, Hyderabad and Kolkata won’t be much different. Along highways, between Pondicherry and Chennai, Vadodara and Ahmedabad, Delhi and Chandigarh, Mumbai and Pune, the list is long and high are the returns. Investors in the business of change in land use don’t talk about a 15-25 per cent CAGR, the sort of stuff equity investors are comfortable with. The entire goal of abusing excessive state power by the high and mighty is to increase their wealth 10-fold, 20-fold and more.
At such a point, when the new land acquisition law sets a minimum floor of four times in rural areas - irrespective of whether it is justified or not - is a starter. Farmers could argue that the number could be higher. Businesses say it will increase the cost of setting up industry. But all of us are missing the bigger point: any change of land use creates a new product and it is extremely difficult to price that product. What, then, are the options?
First, a change in land use must not be immediate. Existing owners must be given adequate time to understand the ramifications of what is going to happen to the value of their land. So, instead of deciding that the land use in a particular plot or an area will be changed to real estate from agriculture on a particular date, it must be left a little open-ended to allow for information implications to settle down. Let’s just say, we reduce information asymmetry and make it more inclusive, more democratic.
This can be done in various ways, including a strong mix of prospective and retrospective laws. Prospective law is the easier one - decide a date that is, say, 12 months from announcement, so that farmers in the area get time to evaluate. The retrospective law would be that if the date of change of land use is going to be 1 January 2015, all transactions in the area up to two years before the announcement, that is, from 1 January 2012 to 1 January 2015 would get the same rate. Which means that if an excessively-connected businessman buys a land, the risk of time gets expanded and he doesn’t get away with the abuse of information asymmetry. You can look at it like putting curbs on insider trading, this time in land.
Second, link the returns to farmers with the final sale of the land. If land is one factor of production, capital the second, labour the third and entrepreneurship the fourth, it is clear as daylight that without the primary asset land, the other three cease to exist. In such a case, to allow information asymmetry to get the better of this primary resource, the starting point, would be unjustified, leading to dissent that can have implications on law and order. By making farmers stakeholders in the final project, policy can align the interests of land losers with entrepreneurs.
Industry leaders, who say that the new law will increase the cost of land and will come in the way of industrialisation, can work with farmers and policymakers to ensure that the returns from the capital appreciation in the land don’t sit exclusively in the balance-sheets of companies - or, as is often the case, as a personal asset of the promoter. If land is a determining factor for any project, the land loser must benefit from it, fairly. Smothering his returns is not the way forward. What would help glue the farmer to the promoter would be better communication, backed by sharply-drafted and strongly-enforced contracts.
The new land acquisition law is only the first step towards a more inclusive capitalism. The journey ahead is going to be bumpy, risky and tense and the job of governments is to ensure that farmers and investors both reap the benefits.
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