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Surjit S Bhalla: Land grab or great expectations?


Surjit S Bhalla  |  New Delhi 

One can't fool mother nature""you cannot get away from a fair market determined price of land.
It seems that the hysteria over the land grab aspects of the special economic zones (SEZs) can only be matched by a lack of knowledge among the major participants. The debate has gained urgency, and poignancy, ever since the Congress leader, Ms Sonia Gandhi, opined on the issue. It is the latest hot topic in the glitterati circuit, even more than the Sensex making new highs. Since the land grab charge is being led not by the usual suspects (the left) but their close allies and my close friends (the left-leaning liberals), I will try and document my accusation in some detail.
Devoid of hysteria, what are the issues about SEZs that should concern the policymaker, and us? Most importantly, is the seller of the land being given "fair value"? A famous economist, Prof. Charles Kindleberger, famously said that "fair exchange is no robbery"; he is right, provided the sale is not made under duress. When land is acquired for "public projects (e.g. the building of roads, dams, railroads, etc) it enters the domain of a non-private good, i.e. an "eminent domain". In the eminent domain, the government can "rightfully" acquire the private land, provided it pays a fair price for it. Is the notion of "eminent domain" duress? Only if the farmer, or tribal, or the urban elite do not get a fair price. So the debate comes around to, centres on, the oldest of debates: what is the fair price for your land?
The noblesse oblige crowd has decided that the poor farmers are not being paid a fair price for the land purchases""hence the epithet "land grab". This extra-fortunate crowd has seen its prime property prices double or sometimes treble in the last few years. As only the feudals can, this crowd automatically assumes that remote area farm land prices in Bihar, or Orissa, or even Punjab, should be double or triple the value of just a few years back. Just like not everybody can come first, or live on Prithviraj Road, not all land prices rise by a similar amount""unless we live in a Communist fascist regime, and even there the Politburo members' land prices rise a lot faster than the land belonging to mere mortals.
The debate has now a PC Plus (politically correct people like us, or PC+) halo. Ms Gandhi stated that hereafter, because of national security interests, etc. farm land will no longer be sold for the development of SEZs; "prime agricultural land should not normally be diverted to non-agricultural uses". Hedging herself, like a good politician, Ms Gandhi goes on: but " farmers must get proper compensation when their land is purchased". And then she asks plaintively: "Could farmers not become stakeholders in the project", a worthwhile idea first mooted by Nitin Desai in a Business Standard column.
What is "proper compensation"? The search for this (market) grail leads to an interview with the Mittal brothers (Rakesh and Sunil, of Airtel fame) published in Business Standard, October 7/8, 2006. The Mittal brothers (MBs) are changing the face of agriculture in Punjab, via their involvement in the "FieldFresh" venture. It is a safe prediction that this private sponsored venture will spawn other such ventures and transform agriculture into a major industry over the next decade or so. Such projects will get the agricultural growth rate to 3 per cent plus, much faster than all the starry-eyed assumptions that pass for agricultural policy today. Let us assume that agriculture should grow at 4 per cent, because it "must". (Parenthetically, an unsolicited suggestion: change the procurement policies for wheat and rice, and then watch agricultural growth speed up, even without the help of MB initiatives.)
But what about a fair price of land? According to the MBs, a Punjabi farmer earns somewhere between Rs 20,000 and Rs 25,000 an acre. This stream of income, when capitalised into an asset, translates into an asset value of Rs 2 lakh per acre if the interest rate is assumed to be 10 per cent and Rs 5 lakh if the interest rate is assumed to be 5 per cent. So a fair price for 1 acre of the best agricultural land in India is about Rs 3.5 lakh. Yes, I understand that buys only a few square feet on Prithviraj Road but in the case of SEZs, we are mostly talking about the outskirts of farm land in Orissa or Haryana or even Punjab. (Note that to be economical and profitable, an SEZ cannot be set up in prime rural land, let alone prime urban land that the "land grab" glitterati is so seized with.)
Data on large purchases of land have been reported in the table. These data have been obtained from newspaper reports, often not the most reliable of sources. But the bias can only be towards understatement of the actual price, since journalists, as a tribe, are card-carrying members of the L4 group (left leaning limousine liberals). One of the important acquisitions, by Posco in Orissa, has not been classified because the information on it is incomplete. Newspaper reports state that Posco has paid "Rs 2.83 crore towards cost of 1,135 acres". It is unclear whether this is a downpayment, or the entire cost.
The table lists the actual, and an adjusted price. The latter attempts to correct for the different locations of the land by adjusting the price paid by the ratio of the per capita income in the state to that in Punjab (so all land prices can be compared to a fair price of Rs 3.5 lakh for 1 acre of Punjab land). The lowest adjusted price is for the Kakinanda project in Andhra Pradesh""Rs 4.1 lakh. Perhaps co-incidentally, the project is in the state ruled by the ostensibly pro-farmer aam aadmi Congress party! The average price is well above Rs 12 lakh an acre or more than 300 per cent above the "fair" price.
What about giving farmers a stake in the land? Let us say a firm offered a farmer a package of Rs 3 lakh and a share valued at Rs 50,000 or a plain cash grant of Rs 4 lakh. What if the farmer chooses the latter? One can't fool mother nature""you cannot get away from a fair, market-determined price of land.

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First Published: Sat, October 14 2006. 00:00 IST