The West Bengal govt's role as a non-market intermediary in an essentially private land transaction is questionable
The West Bengal government has passed a new legislation that transfers the land back to those who refused to accept the compensation that they were offered during the acquisition of their lands for the Tata Nano factory. The Tata group has promptly gone to court claiming that this is an unconstitutional Act. Surely one will hear a lot more about this and, hopefully, this issue will be resolved sooner or later. The real question one needs to ask is how we got into this royal mess. Since we love foreign examples, let me give an interesting one.
Around 1981, General Motors decided to move its Cadillac plant away from the Detroit region and relocate it to a place in the south of the country. The cities of Detroit and Hamtramck collaborated in a grand plan to bring industry back to the “dying” city. If the US automobile establishment stayed back in Detroit, it would arrest the drop in employment and generate tax revenues for the city allowing it to mobilise resources for other developmental and public projects. General Motors and Detroit Mayor Coleman Young formulated a plan under which the city would give land to General Motors, which would then build a state-of-the-art plant. This would generate 6,000 factory jobs and an unspecified number of indirect jobs in ancillary production units. A total of 1,300 homes and 600 businesses had to relocate for the plan to go through. The earmarked land included a place called Poletown.
Since it was a “depressed” neighbourhood, many homeowners readily agreed since the government’s offer price was much higher than the ruling “market” price. An additional amount up to a maximum of $15,000 was given if the new house bought by the household was more than the buyout price and a bonus of $3,500 was given to households if they moved within a stipulated time. However, like in Singur, some refused to give up their lands. The Poletown neighbourhood association and some other individuals filed a suit in the Wayne Circuit Court. The challenge was to the use of the power of eminent domain to acquire one’s property to transfer it to another private entity to bolster the economy.
Barring some details, this is very similar to what happened in Singur. The most significant difference in detail is that laws in India do not allow us to challenge the acquisition of land by the government for “public purpose”; so, instead of going to court, the farmers took to the streets and a government was voted out.
But, perhaps, what was most interesting is that the court turned down the challenge and allowed the local government to carry out the land transfer. It was, however, not a unanimous decision by the bench and there was a dissenting judge. The points for dissent are extremely significant for what happened later.
The dissenting judge maintained that land acquisition by the government could be supported if there was “(a) public necessity of the extreme sort, (b) continuing accountability to the public, and (c) selection of land according to facts of independent public significance”.
Private property is an essential concept in market-driven economies. Therefore, one must have a solid argument that demonstrates how the objectives of a market economy can be better served if private property rights are suspended. While there exist sound theoretical arguments to support the involuntary transfer of private ownership to public ownership in the construction of, say, public goods, there are no sound arguments for the government forcing a private party to give up land to another private entity. In other words, there is no reason for the government to act as a non-market intermediary in what is an essentially private transaction in the land market.
Even if employment creation is a public purpose goal, who is going to ensure that employment as promised is generated and maintained? If at some time in the future, General Motors has to shed labour as a market-driven decision, will the government hold it liable because it had promised 6,000 new jobs? If not, who satisfies the stated public purpose of increased employment? If yes, we are allowing the government to interfere in its market activity and this is against the basic tenet of a market economy based on free enterprise. In other words, the position is either one of zero accountability or one where the government continually intervenes in a private entity’s profit motive. Indeed, the dissenting judge made a stronger statement: “[w]ith this case the Court has subordinated a constitutional right to private corporate interests.”
The 1982 Poletown judgment opened the floodgates in the US. Local governments, using this judgment as a precedent, started using eminent domain to take over land from private parties in the name of development. It encouraged companies and developers to make wild claims of what would happen after the takeover. Indeed, the Poletown project itself did not live up to expectations. Many have claimed that it destroyed more jobs than it created.
In an unprecedented move, on July 30, 2004, the Michigan Supreme Court reversed its Poletown decision. It said that for forceful acquisition by government, it is not enough to argue that an entity’s profit maximisation contributed to the health of the general economy. The Poletown saga started in 1981 and ended in 2004. The Singur episode started in 2006 and is continuing now. We are hearing the same arguments against such land transfer by the government as was actually demonstrated after the Poletown judgment. It is now up to us to come up with a land acquisition policy that is consistent with a market economy and the principles originally enshrined in our Constitution.
The author is Research Director, India Development Foundation
Budget 2013-14 may manage to control the fiscal deficit, but pushing growth and fixing the current account deficit are another matter