'What applies to private business must apply to private land'

(a) compensation for farmers would be six times the registered sale price for rural land and two times for urban land; and (b) land can be acquired by the government for public purposes (including industrialisation and urban residential purposes). Both are highly flawed though the silver lining in all this is the new minister for Rural Development’s position that for him public purpose involves roads, railways and bridges and not shopping complexes.

I am hoping that he will also say that housing societies, or residential complexes to be built by developers, regardless of whether they are private entities like DLF and Ansals or public entities like the state-run urban development authorities, are not public purpose activities.

The first issue is the amount of compensation. Land is an asset and the commercial value of any asset is determined by the present discounted value of the future income stream that it generates. In other words, the historical value of the asset, regardless of how high or low it was has no significance.

And, therefore, whether it should be six times or five times or even half of its last registered sale price has no meaning, unless we are confident that should the lands be aggregated and acquired, that will be the value it generates in the future. Indeed, if any form of restructuring of the use of land increases its value it should be done; what the government needs to worry about is whether the institutional mechanisms exist for enabling such value enhancing transactions.

Incentive to corruption

There are two immediate problems with fixing levels of compensation. First, suppose that a particular modification of the use of rural land will increase the land value by four times. If a compensation of six times is required, either one of two things can happen. The value enhancing transaction may not be carried out because it will lead to losses in the government exchequer - it will pay out six times when it can generate value of only four times. And, therefore, though such transformation of the land is value enhancing it will not be undertaken. Worse, it will encourage corruption through the acquisition of not so valuable land at exorbitant prices if these lands are owned by the decision makers in the government - politicians, bureaucrats and power-brokers.

One may say that in the past, land values have multiplied more than six times. And, indeed, over the next many years as this law is used, such valuations may be justified.

However, if this process goes on, say for 5-10 years, it is not inconceivable that we would have had enough industrialisation and urbaniasation so that any additional transformation will generate less than six times the value. Should not an improvem­ent of five times the value be undertaken? Well, the law passed today will not allow that to happen. And, law has this habit of binding one to the nature of all future actions!

Why bring in govt?

The second point is the use of public purpose. If we restrict ourselves to what the minister for Rural Development has said, there will be no problem. I am, however, worried that the way the present law is stated, it will allow for the transfer of land from one group of private owners - farmers - to another group of private owners - home-owners and industries. The standard argument people give for affecting such transfers is the increase in employment, increase in incomes, increase in government tax revenues for the provision of public goods, etc. Observe that when I open a shop, I do so for greater income; I employ people in my shop and, hence, generate employment; I pay taxes on my profit which the government uses for providing public goods. Indeed, any private economic activity does all the things that one is referring to when defining public purpose. In a market based, free enterprise society this is what everyone does as a natural activity within the rules of the markets and the legal institution that define contracts, fair practices and fraud.

Why are we asking the government to play the larger role of an intermediary in such private land transactions?

There are obvious problems in such land transactions where a number of small plots of privately owned land must be aggregated before large increases in value can be realised.

First, there are transaction costs involved in dealing with a large number of small owners; second, the big buyer often has an asymmetric advantage over the small sellers in terms of information, resources and bargaining power; third, and finally, there is the hold-up problem wherein the last seller has more bargaining strength than the first seller and, hence, no one wants to be the first to sell. These problems are uncannily similar to that faced during the takeover of a public corporation by an acquirer. Imagine how we would have reacted if there was a law that said whenever there was a takeover offer by an acquirer, it must pay six times the registered value of the share! We developed a takeover code that enables such transactions without stating in law what the compensation should be. Neither did we say that the government can take over companies from current shareholders and hand over to another set of private shareholders for a public purpose defined by increases in employment and value of the current company. So, why are we doing this for land?

(The writer is Research Director, India Development Foundation, New Delhi.)

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