Thursday, January 18, 2007

Land for industrial use — Issues in compensation, rehabilitation

Alok Ray

Now that the high drama surrounding the protest fast by Ms Mamata
Banerjee is over, it is time to take a sober look at the broader issues
involved. This is necessary as Singur is not the first or the last of
such agitations. In fact, land acquisition and a politically acceptable
compensation and rehabilitation package for the displaced would be major
hurdles for large Special Economic Zones and industrial projects
anywhere in the country.


First, is it legal for the Government to acquire private property for
handing over to a third party, the Government basically serving as a
middleman or intermediary? No doubt, in all countries, the government
has the legal right to take over private property for "public purposes."
It is also true that when thousands of acres of contiguous land needs to
be acquired, it is nearly impossible to do it by relying on voluntary
direct sale by all the landowners to the private industrialist within a
time frame.

Defining public purpose

But questions remain over the interpretation of "public purposes." There
is no problem in the case of an infrastructure project (public good)
such as a road, a flood-control project or a public sector power plant.
However, it is not so clear-cut if it involves the setting up of a car
manufacturing plant by an industrialist for private profit. The
government's stand that it would create jobs and develop the surrounding
areas is true of any private sector project. Can the concept of "public
purpose" be invoked in all such cases? This issue needs to be clarified
in a court of law.


Second, the compensation issue. Equity requires that sufficiently
attractive (not just adequate) compensation should be paid, as the
government is not giving the owners of land the option to sell or not,
unlike in a private voluntary transaction.

The biggest complicating factor is the lack of transparency by the
government. There is no publicly available information from the
government (in the form of a white paper or newspaper advertisements) on
the method of arriving at the quantum of compensation to the land owners
and the terms at which the land would be subsequently transferred to the
private party. In the case of Singur, there have been `unofficial' press
reports to suggest that the return (say, from keeping the amount in a
post-office monthly income scheme at 8 per cent per annum) on the
compensation money would exceed the annual profits the owners of an acre
of land would make in an average year.

It should also be noted that the return from agriculture is uncertain
while that from post-office fixed deposit is totally risk-free and
certain. But the political leaders opposed to the allocation are
alleging that the categorisation of land (barren, mono-crop, multi-crop,
etc) has been done on the basis of land records prepared many decades
earlier. The character of the land has changed much after the spread of
irrigation and other facilities in the area. Since the compensation
price per acre is decided on the basis of gradation, many owners are
allegedly receiving less than they should because of what is called
mis-classification of land.

The problem does not end if the average market price of land over a
number of years is taken as the base price and then a premium is added.
Usually, the officially recorded price in any land transaction is
understated, below the true market price. The motive is to save on stamp
duties and capital gains tax. So, the premium has to be sufficiently
high to make the sale of land to the government attractive enough.

Another problem is that prices of land in the vicinity of large
industrial projects tend to go up. Hence, the use of the average or the
current pre-development price for deciding compensation would appear
"unfair" in future, as the land owners just outside the boundary wall
would reap windfall profits by selling at the post-development price.

So, instead of deciding in an ad hoc, case-by-case manner, the formula
for arriving at the compensation price needs to be discussed and
approved in the State Legislature as a matter of general policy in all
such cases of land acquisition. Once a consensus has been built and
approved in the State legislature, it would be politically easier to
avoid controversies relating to the pricing of land. An even better
solution would be to have a nationally approved uniform policy in this

Third, the price and the terms at which the government would be
leasing/selling land to the private industrialist. In a multi-party
parliamentary democracy, the Government cannot claim that it is a "trade
secret" (as the Industry Minister in West Bengal has allegedly argued)
and deprive the public the right to information on such a matter of
"public interest."

Fourth, the identification of losers. Apart from the owners of land, the
losers would include the sharecroppers (bargadars) who had the right to
till the land, though not ownership. Some are not even officially
registered as bargadars. They would not get anything when the land is
sold, unless the government specifically devises a compensation package
for them.

Next are the landless labourers who worked on the land as daily wage
earners. They would lose their wage income when the land is diverted
from agriculture. Most of these people cannot and will not be absorbed
in a modern car factory. They do not have the skills. It is not easy to
train them either. At best, they can be provided priority as labourers
in the construction work that will take place or in setting up petty
shops, etc (but that needs capital or bank finance) in the township that
will develop.

Some are even suggesting that as a part of the compensation package the
losers may be provided some shares in the company to make them
stakeholders in the project. These people do not realise that to sell
shares, one needs to have a demat account which in turn requires a PAN
number. It is ridiculous to expect the ordinary village folk to go
through such a rigmarole. Indeed, when a villager gets a windfall,
unscrupulous "well-wishers" may lure him to invest this money in
apparently lucrative, but high-risk, options. The government
administration, with help from local banks, NGOs and social workers,
would have to provide proper investment advice to these people.


Though it was not the case in Singur, in many of the large SEZs
involving tens of thousands of acres, a large number would also lose
their houses besides the farmland; losing the roof over one's head is
not so easily compensated. There is bound to be huge resentment and
opposition among the villagers, unless they are resettled with better
housing facilities in an alternative site before their land is acquired
and they are forced out of their homes. It is clear that all the State
governments are hurriedly going for the large SEZs without any proper
planning for the rehabilitation of the displaced people.

Choice of land

Finally, should multi-crop land be used for industrialisation? Everyone
will agree that fertile land should be avoided, as far as possible.
However, the fact is that any big industrial project needs a large
parcels of contiguous land. So, despite all efforts, it may be very
difficult not to use multi-crop land in a country with highly adverse
man-land ratio.

Clearly, the loss would be more if the factory is sited on fertile land.
But if the project would not come up otherwise or if the cost of
additional resources needed (to develop access roads, power lines, etc)
to set up the factory at another location is more than the value of
additional crop lost when it is on multi-crop land, then it may be
socially worthwhile having the unit on such land. However, ascertaining
that requires a careful cost-benefit analysis.

(The author is a former Professor of Economics, IIM Calcutta. He can be
reached at


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