India should promise investors profits, not land

By Mihir Sharma

When India’s IT hub of Bengaluru was in its infancy, tech companies would fight over more than just talent — they were competing for land. A decade ago, giants like Infosys Ltd. owned more property than the country’s biggest real estate firms. Amazon.com Inc.’s largest office globally is in Bengaluru’s rival Hyderabad, spread over 10 acres granted by an eager state government.

That practice is coming to an end. Priyank Kharge, the IT minister who oversees Bengaluru, said recently that the state of Karnataka would no longer “give away land for cheap” to possible investors. The change is long overdue, and other states should follow suit. Governments using their control of land as a lure for investment was always politically fraught, and has now become unsustainable.

When Prime Minister Narendra Modi took office in 2014, he said he wanted to preside over a period in which various regions would compete to attract investment. It was a promising, hopeful vision. But the age of industrial policy that he subsequently ushered in featured state governments doing their best to lure companies, particularly foreign firms, through tax breaks, subsidies — and big land grants.

Many sub-national governments already bear heavy debt burdens, and find it increasingly difficult to find the cash for subsidies. Constitutional amendments over the past decade have reduced the leverage they have over the tax system as well. Too often, therefore, they compete over land alone.

This suits some firms. Holding big tracts of soil makes investors feel comfortable. And it makes sense for them to ask the government to help find it. Buying land on your own in India can be a nightmare for even well-established companies.

Nor can you just ask farmers to sell you their acreage for your software park or factory. Agricultural land must be officially recorded as having been set aside for industry before it can be sold — which means the government has to get involved anyway. A survey in 2021 rated Kharge’s state of Karnataka as having the most straightforward rezoning process, but it’s still not completely frictionless.

Poor records and long-running legal disputes mean that any such purchase carries major risks. Even one of India’s largest renewable energy companies, Tata Power, got in trouble a couple of years ago when officials decided that it did not in fact have rights to ground on which it had already started setting up a 100-megawatt power plant. Delhi-based Land Conflict Watch estimates that at least $280 billion worth of investment in India is currently at risk due to these issues.

Some state administrations have tried to get ahead of this problem by building up big reserves in advance that they can dangle in front of possible investors. Telangana, home to Bengaluru’s rival Hyderabad, has over 70,000 acres in its “land bank;” other investor-friendly states along India’s coast, like Maharashtra, Tamil Nadu and Gujarat, have almost 50,000 acres each. Others have started later but are more ambitious: Uttar Pradesh in north India wants to set aside 150,000 acres that it can offer to companies. It’s this tendency that Kharge is pushing back against.

In a country as crowded as India, building up land banks isn’t easy. People are often displaced by the state to create these reserves well in advance of any benefits that a new industrial zone or IT park would bring. Opposition parties have organized campaigns against these, claiming that they’re real estate scams in disguise. Last week, the government of the northern state of Punjab had to withdraw its plan to acquire parcels of agricultural holdings for industry and new townships after months of street protests.

The compulsory purchase of farmland for industry has had a long and fraught history in India, and no political party has gotten it quite right. Modi’s rise to national prominence was accelerated when he won investment from Tata Motors by offering them space in his state of Gujarat after agitators drove them out of their original choice, Bengal. But then the momentum of his first term as prime minister was broken when he had to withdraw a new land acquisition law after the opposition accused him of being biased towards big business.

The fact is that there is usually more than enough ground available for productive activities — it’s just that markets aren’t allowed to work. The reduction of zoning requirements, alongside a register immune to legal challenges and a dispute settlement process that would dispose of any questions in a short and predictable timeframe, would take state governments out of the equation entirely.

Competing for investment is a great idea. But India’s states shouldn’t try to outshine each other by giving companies larger holdings or bigger subsidies. Instead, they need to pledge better infrastructure, fewer processes, and smarter regulations. Promise profits, not land.