Sarkar can’t be zamindar

Tuesday October 3 2006 09:05 IST
Shubhashis Gangopadhyay

Real estate has always been big business in India. It has also been a
very emotive issue since most Indians do not have land. This has allowed
the elite — working through the government and in the name of the
landless — to subvert the use of land as a marketable asset. In the
process, yesterday’s landed gentry allocated to themselves prime
non-agricultural land without having to buy them at market prices.

Whatever the controversy may be over the setting up of special economic
zones (SEZs), one important point is being left out in the entire
debate: the sanctity of land as private property. Private property
rights are at the heart of a society based on free enterprise and, for
some reason or the other, we have chosen to ignore this. In our quest
for market reforms, we are more concerned with lower tariffs and greater
industrial and services growth, without taking into consideration the
framework that sustains growth in a market-driven economy.

The SEZ controversy has brought to the fore this gradual erosion of
private property rights in India. It started with the government taking
over land for developing urban centres. There was a proliferation of
state-run urban development authorities like the Delhi Development
Authority (DDA) and the Haryana Urban Development Authority (HUDA). The
state governments pushed out the private developers arguing that they
bought land at a pittance from the original landholders and then made a
cool sum by developing them for commercial and residential purposes.

The governments said that since they have no interest in profit making,
they would acquire the land instead, develop it and sell it to the small
players who have always dreamt of owning a house, or apartment, or a
shop. Either they were naive or Machiavellian. By subverting the land
market, they unleashed the most endemic form of corruption among state
government officials that resulted in the rise of the land mafia and
fly-by-night private contractors, often closely related to political
leaders.

A similar thing is happening in the acquisition of land for industrial
development. As in urban development, the government is acquiring the
land in the name of development. The basic premise is that private
parties will buy the land at a pittance from unsuspecting farmers,
develop it for industrial use and make a profit that will not be passed
on to the original holders.

Like everything Indian, we have our own take on land reforms. Such
reforms were meant to give agricultural land to the landless. We have
re-interpreted this to transfer agricultural land in a certain area to
those who do not have it in that region. To make it happen we have
first, circumscribed the use of land for agricultural purposes thereby
preventing rightful owners from deciding what they could do on the land.

Second, we have empowered the state to decide whether land for one
purpose can be used for another purpose. Third, we have allowed the
government to decide when, and more importantly how, the land can be put
to alternative use. Acquisition of private land by the government for
various public interests has been an integral part of private property
law in most countries. Our erudite officials and the intelligentsia are
quick to point this out.

However, what they have missed out completely are the details of the
argument. The operative phrase here is “public interest”. The crux of
the argument that allows the state to acquire private property is that
the value of the asset is enhanced if it is not kept in private hands.
Private ownership maximises private value.

The sum of such private valuation, under some circumstances, is less
than public valuation or, the asset value in public hands. The question
is not whether such a thing can happen and, there are many who question
the widespread use of such a principle. The issue is one of consistency
and the framework that allows the suspension of private property rights
in specific circumstances.

What is happening in India is the transfer of property from individual
owners to other private parties, be it in the SEZs or in urban
development. Unfortunately, the framework of a private property-based
market system does not have any logical basis to such activities.

The SEZ lands are not under public ownership, nor are the urban
apartments and commercial shops sold by the DDA and HUDA. Land is being
acquired by the government and transferred to other private individuals.
The fact that wealth is being transferred is evident in the large
numbers of titles that are sold off prior to the actual allotment of
buildings or establishments. Such a transfer of wealth from poor farmers
to the middle-class and the rich is logically wrong and is socialism at
its worst.

In other words, an intervention into the private property process can
take place only if there is a strong argument that clearly supports such
public action as being able to realise greater value for all. Economists
have already shown that markets based on private property rights that
encourage the maximisation of private valuation are good for everybody
in most circumstances.

There is also an extensive literature that talks about when this
argument may fail and the transfer of private property to public
ownership may be more helpful. However, there is nothing in the
framework of economics that allows the transfer of private property to
other private individuals in the name of greater overall valuation of
the asset.

There are two reasons why all this is happening in India. First, we have
legally restricted the use of land. Second, even though we have the rule
of law, we have not entirely understood how it is supposed to work. In
particular, we have used the law to hand over most decision-making
powers to a collective rather than to the individual. In most cases this
collective is the government, full of ideologues, and/or mercenaries.

The writer is director, India Development Foundation
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