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A fatal blow to India Inc

Prashant Kumar, September 8, 2013:

On August 29, Lok Sabha passed, what it hailed, a historic bill. With this, the Land Acquisition, Rehabilitation and Resettlement (LARR) moved a step closer to becoming law and with that, it may well have sounded the death-knell of industrialisation in India. Clearly, the Indian farmers who pay zero taxes and contribute a mere 12 per cent of the GDP, command unquestioned servility of the political class.

While the LARR may be heralded by most political class as bipartisan victory for the poor, it should be better looked upon as the official defeat of the new manufacturing policy. It has potential to stop in its track the ambitious Delhi-Mumbai Industrial Corridor project and force India Inc to look outside and bring to a standstill the process of planned urbanisation. LARR can be foreseen to have disastrous consequences for growth and more importantly employment generation. The government and those who passed this bill may just have ended all prospects of industrial growth and condemned the poor to lives worse than before.

What is worrying further is that by passing the LARR, the government is subjecting itself and others to extremely complicated procedures and provisions for future land acquisitions for infrastructure projects to be undertaken via the PPP method.

Public purpose projects which include steel, infrastructure, power and others are now subject to an array of procedures which include open-ended and complex social impact analysis: identifying those whose livelihoods will be affected and compensating them; sharing capital gains with original owners; providing 25 different infrastructure services as part of the Resettlement and Rehabilitation (R&R) provisions; prohibiting land acquisition beyond 5 per cent of multi-crop agricultural land and 10 per cent of single crop land and requiring the approval of 80 per cent of the all land owners.

Worse is authorizing district collectors/deputy commissioners to arbitrarily determine the price of land rather than use a more objective basis. These complex procedures, put in place ostensibly to protect farmers’ interests, will end up hurting them as the bill will unleash a tsunami of red tape, litigation and administrative discretion rather than diminishing them which was its real objective.

The demand for land from industrial and real estate sectors will be greatly reduced; PPP projects which may face uncertainty in land acquisition, may come to a standstill. This is bound to adversely affect landowners too as they may see a decline in the land prices as a result.

It does not stop there. The panoply of LARR’s Rehabilitation and Resettlement provisions apply with full force to private purchase of land as well if the size of the land being purchased is more than 100 acres in rural and more than 50 acres in urban areas. Therefore, all private purchases of land will be subject to administrative discretion and bear the substantial R&R costs. One can well imagine the extent of rent seeking, corruption and harassment that LARR will unleash.

While the complicated procedures and processes enshrined in LARR are sufficient to derail all future industrial and urbanization projects, the sheer increase in land costs, as a consequence to LARR’s pricing proposal, can potentially drive the industry away and make housing prices unviable. With cost of land four times the decided rate in rural areas and two times in urban, added with compensation packages for landowners and livelihood earners plus the 25 infrastructure services to be provided, the cost of land will soar to beyond affordable levels. Conservative estimates indicate that land costs in the case of a 100 mw thermal power plant could end up between 9 to a whopping 110 per cent depending on the geographical location of the project.

The LARR makes India a less attractive investment destination. Assuming that one acre of land has one owner and five families generating their livelihood from it, with the LARR in place, the land price can range between $138,000 per acre (in Madhya Pradesh) to $2.25 million per acre (in Punjab) at current market prices. As a comparison, the average cost of one acre of land in the US at current prices is $2,041 and in France it is $19,595.

A bill that proposes monetary exchanges in the range of $138,000--$2.25 million per acre, relying on previous experience, is certain to attract rent-seeking attention. It will simply become a source of extensive corruption and not serve farmers’ interests.

The foreseeable impact of LARR on the industry is gloomy. It could conceivably result in India’s de-industrialization. It not only negatively affects the interest of those it seeks to protect but also sends the message to industry and global investors alike, that India is not the investment destination it portrays itself to be. All this damage to just win a few votes!

(The writer is Director (Projects), Bureau of Research for Industry and Economic Fundamentals (BRIEF), New Delhi.)

Read more:

"Land Bill ignores needs of the industry"

Voice ignored, industry sulks


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