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Towards Reform of Land Acquisition Framework in India

Current land prices are highly distorted owing largely to regulatory constraints and the process of compulsory acquisition. This paper brings out the core elements of the reform - the need to define "public purpose" ex ante for compulsory acquisition of land, the measures that would allow the market price of land to play its correct role, and the approach to valuation. It also argues for an independent valuer when compulsory taking is involved and methods of valuation to ensure that the landowner, including the farmer, gets the correct value for his land in both compulsory acquisition and in voluntary sale. There is a need for a parallel non-compulsory framework for acquisition and for developing key elements of the same.

Towards Reform of Land Acquisition Framework in India


Economic and Political WeeklyJune 2, 20072084violating the rights of citizens by the government of the day.4Indian law neither defines public purpose not allows challengein courts.IIIIndian ContextIn India, high population density and the age of its civilisationimply that it is very difficult to obtain land without displacingpeople in large numbers or having to worry about the loss ofheritage sites.Agricultural Dependence and Surplus LabourEven today, the marginal product of labour in agriculture isclose to zero, and many farms (especially those belonging topeasants and sharecroppers) are loss-making if the total familylabour is valued at marginal market rates in the busy season forsimilar labour. Nevertheless, they are highly efficient in thesocialsense, since in maximising the value added, they use moresurplus labour than capitalist farms maximising profits alonewould do. The increased labour application results in yields perunit of land being generally higher than on capitalist farms ceterisparibus, if such a comparison could be made. And socially, thisis desirable since land is the limiting factor and labour the surplusfactor [Shanin 1971].While in situations without disguised unemployment, it wouldbe right to value land at the net present value of the rental valueof land (or even the NPV (capitalisation) of the profits + rentsarising out of land) when land is the limiting factor and labouris in surplus, i e, the capitalisation of the value added is thecorrectsocial value or price of land. This would mean thatcompensationwould have to be much higher than is generallybelieved. Disguised employment also means that the peopledisplaced by a project even when they are not landowners orworking directly on the land cannot be assumed to be able tofind alternative employment. Compensation would have tobeincome protecting (and enhancing) rather than merelycovering the cost of adjustment friction, displacement andrelocation.IVMarket DistortionsHigh Transaction CostsTransaction taxes in land trade being as high as 15 per centin many states limit the trade in land, and deals would be under-reported in value to avoid payment of high rates. The annual valueof transactions to the total stock of land would be very small,thinning out the market, and interfering with the process ofpricediscovery. Liquidity in the land market would be very lowand the land mortgage market would operate only at a largediscount. Reverse mortgage in land would be infeasible even ifpermitted [Srinivas 1991].Income taxes too affect the recorded price of land. The vari-ability in land prices is large and the large risks in land as anasset mean that the gains in land deals are an overestimate ofthe true gains out of the business of land trading because therisk adjusted return would be much smaller. For neutrality withother assets, it would be necessary to treat profits arising outof land purchase and sales as capital gains with low capitalgainstax.Adverse SelectionThe above problems almost entirely displace the small investorfrom taking positions in the land market with the intention toprofit. He would find it difficult to deal with mere “agreementsto sell or to buy”, which larger players, could hold, to short circuittwo transactions into one and thereby reduce the transactionscost thereby. On the other hand, “mafias” would be drawn in[Sharma 1991].Poor Record of Property ProtectionAnother depressant of the market price of land arises out ofthe poorer protection of landed property. There is considerablevariation in the protection actually realised with regard to landedproperty across the country, arising both out of the law and itspractice. Indeed, land in the urban fringes today, even whenplotted, is most difficult to hold on to unless the land is inoccupation by the owner or his agent. This makes most middleclass people buy flats (rather than land) to make investments inreal estate even if it results in unoccupied flats, or renting outof flats at very low returns.Problems of TitleA related important depressant of land prices is the lack ofclarity to any title to the land unless the land is obtained fromthe state. In India, any purchaser of landed property takes a largerisk since problems with the title are on his account even thoughhe may not have been aware of such problems despite his bestefforts and due diligence at the time of purchase. This arisesbecause land records that are relevant in determining the titlecan go indefinitely backwards, and there is no option for a privateperson to “commutate possible objections to the title” by appro-priate legal action and notification. Thus a holder of land cannotregister his land with a particular notified authority, with theintention of commutating possible objections to his title throughannouncement, and, through due legal process, carry out the sameto establish his title with near absolute clarity. Since this facilityis not there, there is always a risk that a seller does not havea clear unencumbered title to the land. This puts a downwardpressure on the price of land in relation to its true value sincethe “risk of title” is high in India. The lack of proper land records,the difficulty to access them further compounds the problem.“Title arbitrage” implicitly happens in instances of compulsoryacquisition to place large rentsin the hands of the state/thosereceiving lands from the state.VRegulatory Constraints and Land ValuesIn land, more than in other businesses, the value and henceprice is affected in many ways by regulatory restraint and controlover use. Besides zoning, typical regulations include land userestrictions, imposed densities and building bye-laws. Most ofthese arise in the urban context and to some extent are “inevitable”if urban planning has to take place to overcome the large negativeexternalities and value loss than can result from haphazard and
Economic and Political WeeklyJune 2, 20072086Gujarat.5 This does not allow higher prices that buyers otherthan traditional farmers could have paid for the land. Lands usedas orchards, farm land near tourist locations, scenic land, landsuitable for farming and habitation by middle and upper middleclasses, farm land with easy access to central places and areaswith much potential for gentlemen farming or corporate farmingare so affected. It also leads to much under investment in landfor farming and for dual use of land. The urban-rural divide isaccentuated by such restrictions, and clearly the farmers aremosthurt by these restrictions, and builders and other landdevelopers with connections with the decision-making autho-rities, to make regulatory arbitrage work in their favour arethegainers.VIPerversities in Compulsory Acquisition in IndiaUnfair Process of ValuationUnlike in other countries that practice compulsory takings, inIndia the “fair value” is typically decided by the taker (govern-ment). This is akin to “I cut the cake and chose the piece too”,which is clearly unfair to the person whose land is being taken.In many countries (even a novice to democracy like Thailand),the valuation is determined by independent licensed valuers andin other countries the valuation can be determined by both partiesto result in convergence. Since the state is against the use of theeminent domain, there ought to be safeguards to ensure a fairvaluation. This combination of the taking and valuation rolesin the state is a perversity that is antithetical to democracy. Itis the survival of the practice of an imperial government thatdid not see its interest to lie in the country or its people. Thetaking of excessive land, undervaluation, ignoring principlesother than the one officially specified in valuation,6 ignoringthe idiosyncratic value of the land, working with a one shoe fitsall principle, ignoring the particular importance of land in a landscarce labour surplus economy, idiosyncratic undervaluation tounderreport project costs are all not merely possible but verymuch part of the perverse practice today. Indeed the disciplineof valuation of land and real estate is poorly developed in Indiasince the most important land decisions and valuation exerciseswere internal to the government. And equally important, sincethe regulatory overload on the land market is large – NAC,restrictions in land use, restrictions on who can buy, etc – themarket aspect of valuation is poorly developed and so also isthe discipline.Natural Resources and IntangiblesThere are further inequities in the price given to landholdersin compulsory takings. Consider for the moment that semi aridland producing one crop at best is being taken over. The approachof the government is to fix a price based on the recorded priceof the base land and then to cover the cost of assets on the landsuch as a house, well or tree based on a detailed survey andassessment. The natural resource tied to the land is not typicallyvalued. Thus, in an area with scarce aquifers, the governmentcovers the cost of the well but not of the resource (groundwater)where given its scarcity, it is of very large value. Those occupyinglands with aquifers would strongly resist takings while otherswithout such assets may be willing to sell, especially if then isa substantial solatium above the base price. Therefore, going bythe market prices of base land is not adequate in this case.Insteadthe relevant price would be the market price of theendowed land7or it needs to provide due allowance for naturalresources like water. Similarly, intangible assets and resourceslike nearness to markets and central places to roads andhighways,torailway stations and other public facilities are notusually explicitly recognised when the valuation is on a pricefor “base” land.VIIPublic Purpose and Compulsory AcquisitionAny Purpose as Public PurposeThe public purpose in compulsory takings in India today is,in effect, any purpose the government of the day chooses to usethe land for. At least in the British days, even when the publicpurpose was not defined, it was constrained by the ownershipwhich could only be of government or its parastatals post taking.Since the amendment of the act in 1984 [GoI 1985], the constraintof ownership of the land has gone with the incorporation of the“company” in the act. Since the act of acquisition cannot benormally challenged (only the compensation provided can bedebated) there is no recourse from the government of the daychoosing to interpret “public purpose” in an all encompassingmanner that includes every possible economic and non-economicactivity. In all other democratic societies that the author is awareof where there is compulsory taking, the purpose can be chal-lenged in a court of law. Even the inconsistency between thestated purpose and the actual purpose to which the land has beenput to use is being struck down by courts as nullifying compulsorytaking.Dysfunctional Ownership LimitationIn the pre-independence period that the government had to ownthe land, it acquired had limiting compulsory taking.Muchoftheland required for commercial activities was outsidecompulsoryacquisition, since the government limited itself togovernancefunctions, town planning and infrastructure. In thepost-independence period, since the government entered manyareas including commercial activities such as trade and manu-facturing, the scope of compulsory acquisitions increased greatly.Furthermore, the greater pace of growth, and the deep diversi-fication of the economy that took place under planning greatlyincreased compulsory acquisitions and the inequities. And thehurt that was imposed on Indians could only have increaseddramatically since the government was not even constrained topay “market rates”.8Since the amendment to the Land Administration Act (LAA)in compulsory acquisitions in 1984, the discretionary power ofthe government has increased several ways: The period fromannouncement of intent to acquire to possession has been short-ened and most importantly, the government can now acquire landfor companies – ie, even if the land is to be owned and usedby private companies or any party for that matter. But since thepublic purpose is not defined in any case, this has opened thedoor wide for the government to acquire land for all kinds ofreasons. Thus, land has been acquired for housingcolonies,‘ashrams’, manufacturing enterprises, entertainment
Economic and Political WeeklyJune 2, 20072087establishments, service industries, etc. Indeed, the working frame-work is one where all large investors bank upon the governmentto acquire land for them irrespective of the purpose for whichthey require the land. The considerable transfers and rents thatthis results in, both on account of excess land being asked forand acquired,andbecause of the vast depression in prices dueto prior regulatory restraints9and the “title arbitrage” are verylarge. Today, such inequity portends to create large-scale protestsand dissatisfaction and makes an otherwise democratic statesystem oppressive.Public Purpose Requires DefinitionThe law needs to define public purpose and it is possible todo so with a fair degree of coherence. Such prior definition (andthe delimitation that comes with it) would reduce the policy andregulatory risk associated with land acquisition and hence, ininvestments in general. The alternative to leave the public purposeundefined but to allow challenge in a court of law while is better(fairer to the landowner) than is the case in India (where the“public” purpose cannot be challenged) would nevertheless notlead to a substantial reduction in the risk. In the US, a frameworkthat does not attempt to define public purpose but allowschallengein a court of law has created much avoidable litigation aroundthe law. In India, the costs of leaving the public purpose undefinedwould be even more severe. Given that Indian courts can be easilygamed, and they are already overburdened with cases, to notdefine the public purpose would be tantamount to swinging fromone extreme to another and with no reduction in the risk. Typi-cally, public purpose has been allowed to develop especiallywhen tort law and the practice has tended to inform currentdecisions and rulings. As such in these countries – US, UK, NewZealand – there is fair understanding of what would pass musteras public purpose.Public Ownership Does Not Imply Public PurposeDefining public purpose in terms of ownership is neithernecessary nor the right thing to do. If private businesses are toprovide public services and increasingly so in the future, the ideaof public ownership of land as constituting public purpose wouldnot be useful. It would be absurd to not allow a private boardof trade or annuity operator to not have recourse to eminentdomain to acquire land for a dam or a road while the state isfreetodo so. The state acquiring, and owning the land but holdingiton lease to the private party introduces other risks and raisesthe question of the lease value. Besides the price of the lease,therisk emanating from resumption of land by the state isalways there.Requirement of Specific Land Is CrucialPublic purpose has to be just that and an economic con-sideration of public services illuminates the problem. Thus, allprojects that require specific land (dam site, deep water site forport, and road expansion where the land required is adjacentto the existing road, a bridge site, flyovers and elevated highway,rail right of way) would (because alternate lands are quiteunsuitable), be subject to market failure in acquiring the land.Hence, there is meaning in land for such purposes beingacquiredunder eminent domain. Similarly, in the case of mineralsand other natural resources, specific land would berequired.Protection of nature (actions such as creating bio-sphere reserves and nature parks, wildlife preserves) and ofheritage would require land to be taken over. And sometimesland even when not taken over to be subject to regulatoryrestraint(non-use in activities that are injurious to the protection of natureand of heritage) necessitates use of eminent domain.Muchthesame can be said about protection and preservationofhomelands for tribals and such other peoples of aculture andlevel of development that warrant such protection.Physical NetworksThe issues of whether specific land is involved in highway/railway construction, and the identification of the same becomesimportant. Conceptually for any new alignment, the requirementof lowest cost (of construction and operations of traffic, ofdisplacement) and the need to connect so many central placeson the way can be cast in the framework of maximisation of netbenefits of the highway/railway. But such analysis, while feasiblecould give different results and much would depend upon thebasis and assumptions made, and these may not be good enoughto lead to the elimination of a large number of possibilities,especially at the micro level. Therefore, it would be better forthe government to accept the current practice with its assump-tions, concepts of highway/railway engineers ex ante. But thepractice has to specified as a code in the rules associated withthe law, so that due process can be used to justify the identificationof particular lands. With such process safeguards, eminentdomaincan be used even in the case of new alignment of roads,railways, pipelines, canals, waterways, electricity transmissionnetworks, etc.Public Purpose in Urban ContextIn the urban situation, clearly, specific land required forestablishment for intra-city and intercity transport networks whichhave only limited leeway, that the ex ante basis laid out by thedepartments charged with these responsibilities ought to beacceptable. Much the same is true of cable, gas, electricity,sewage, water and other networks. Housing linked to the op-eration and maintenance of these assets is justifiably coveredunder eminent domain only for such employees who are fieldoperatives.Industrial Estates and Market PlacesGovernments would like to acquire land for industrial estatesbut typically much land could have been considered for thepurpose and hence specific land is not required. Much the samecan be said for lands for institutions, housing, industries howeverlarge the land requirements, besides commercial developmentand housing for allotment to favoured groups such as officers,academics and journalists.On the other hand, land for market development (municipalmarkets, vegetable markets, hawkers yards) in a area wheremarket facilities are nearly absent should happen only in centralplaces and as such specific land is required. Market expansionwould obviously require specific lands. Similarly lands for gardens,parks, and parking (in areas of the city that were developed inthe pre-mass automobile era) would require specific land. Since
Economic and Political WeeklyJune 2, 20072088every case of public purpose cannot be anticipated or specifiedex ante, and yet the need to describe public purposes and delimitthe same is large, it would be appropriate to provide a specialwindow in the law for the government to bring in a public purposethat is beyond the specified list. The government can announcethe proposal, invite challenges and overcome the same in a courtof law and then go ahead with the use of eminent domain. Onthe other hand, when the government chooses to acquire landunder public purposes mentioned in the act it should be able togo ahead, with the onus being on the challenger to prove thatpublic purpose is not involved.The use of eminent domain and regulatory restraints (takings),when left unconstrained, would result in a perverse incentive onincumbent governments to use both restraints on land use andland acquisitions to lower the cost/increase the reported netbenefits of projects and investment proposals that they chooseto promote. Governments face a trade off between taxation andpayments for land acquisition. But since taxes are voted andacquisitions (and contingent liabilities) are not, there is a perverseincentive to undervalue land/use regulatory restraint (takings)rather than taxes to support its expenditures and projects. Thisdifference is most crucial and as much as in the case of contingentliabilities and guarantees, there ought to be restraint on thegovernment using the power of eminent domain. Unlike in thecase of contingent liabilities though, a risk weighted cap is notpossible in the case of land. But with fair and independentvaluation enshrined in the law, the perverse incentive to useeminent domain and regulatory takings is reduced considerably.And if public purpose too is specified in the law then the abuseof public purpose is quite unlikely.Additionally (or alternatively to the window of challengealready mentioned) governments must have the option oftakingaproject (a large project of great importance) with itsland acquisition proposals and compensation to the legislaturefor sanction.VIIIFramework for Non-Compuslory AcquisitionIn India today, there is no framework for private acquisitionof land. There have been some instances of private parties thatare in a hurry and do not go through the LAA, even for projectsof significance especially when the government of the daywasnotfriendly towards the group. Nevertheless, the generaltrendhas been that the pressures on the government of the dayto acquire land for investment by private parties, even whennospecific land was involved, has been large especially nowthatstates compete intensely to attract investment byprovidingland.It goes without saying that the first and necessary step toovercome the problem is to allow a well functioning land marketto develop. This would mean removal of all unnecessary restraintsand constraints on land use, sale and purchase described earlier.To further ease the problem of hold-out, the framework of aregister to declare intent to buy land privately along the linesmentioned below can greatly ease the burden of acquisition andensure fair values to those having to part with their land. Suchregisters should work to greatly reduce transaction cost if aspecified threshold of say a 80 per cent land area and 75 percentowner’s agreement implies the agreement of all. Such a limitneedbe specified only when the fragmentation is very large and ofthe order of 30 units or more. Where lesser numbers are involved,the hold-out problem is not severe and the transaction costnotlarge, and deals have a high probability of going through.Hold-out is possible but the promoter has the option to go toother suitable areas at little cost since no specific land is required.Where specific land is required, eminent domain would apply.Appropriate safeguards such as considering all pieces under ausebeing considered as belonging to a “single owner” for determi-nation of threshold would have to be specified in the framework.This would reduce the probability of the hold-out whileleavingthesellers to come together to bargain to obtain forthemselves some of the economies in aggregation and in the newland use.IXAlternatives to Land AcquisitionMuch land currently acquired by the government, especiallymunicipal and town development authorities may be quiteunnecessary. In contrast the “town planning (TP) scheme” ofthe Ahmedabad Urban Development Authority (AUDA) isaneasyway to pursue planned growth of city without acquisi-tion as such and vastly reduced transaction cost. Here ac-quisition is net rather than gross (‘Town Planning Schemes’The system works in the following manner. The AUDAidentifiesa certain large region say on the western outskirts of the cityfor further urban development. Imagine that the current use ofthe land is largely for agriculture and residences. In the masterplan, the same area is demarcated into roads, public parks andgardens, areas for other public utilities and water bodies, etc,and for possession by the AUDA itself. The rest is availablefor private occupation subject to land use restrictions – floorspace indices (FSI), zoning, and building bye-laws. The publicland use plus that desired by the AUDA for future sale and useis typically to about 30 per cent restricted. This means that eachplot is shrunk by 30 per cent to make the pace for 30 per centpublic land use and municipal ownership, leaving the ownerswith their current land which is now shrunken. In the layout,most plots have the same neighbours as before andsubstantialassets like houses generally do not have to be de-molished. The “TP scheme” is then put up for the public tobringtheir individual objections, and accepted in due course.All landowners gain since there is no land transfer – only netpublic land transfer to the government. From the government’spoint of view there is little risk and contest and thegovernmentdoes not have to pay for the land. The value creationis implicit in the act of town planning, which if functionalcreatesvalue.‘Implicit’ Acquisition in Road WideningSimilar approaches, for instance, are possible in highwaywidening. Imagine that a highway with much ribbon developmentalong its length is sought to be widened and made into anexpressway with limited access to allow for fast movementbetween the two cities it connects. The government would facehigh risks and costs to takeover land and build the road, given
Economic and Political WeeklyJune 2, 20072089that much ribbon development has already taken place. Typically,in ribbon development, the plots just adjacent to the highwaywould be highly priced with the prices falling off steeply fromthe first to the interior plots. Often, on the third plot from thehighway with no motorable road access the price can be as lowasone-third or less. This is because unplanned ribbon in restrictingthe access of the interior plots to the road destroys socialvalue,while steeply enhancing the price of the plots havingaccess to the road.In such a situation one option for the government is to developan access (subsidiary road) along with the expressway if thereis sufficient potential for development in the area on either sideof the road, so that fast access from any point in the corridorof the expressway to the centre of both cities is possible. Theland for the expressway, such as the access road and its crossroads (besides for other public amenities) can be identified asconstituting say 10 per cent10 of the land corridor and the samecan be plotted out, to shrink all plots proportionately (or evendisproportionately) leaving their topological relationshipbroadlyunaltered. This would certainly result in value appre-ciation (assuming that the access and subsidiary roads are built)without having to acquire land. Only, some compensation tocover the cost of buildings that would have to be razed to makeway for the road need be provided.Use of Transfer of Development Rights (TDRs)We now consider another approach that can considerably lowertransaction costs of obtaining land for a public purpose thatenhances social value. Thus, in the very same situation of convertingribbon development to corridor development, an alternativepossibility is to lay out the land required for public purposes –the expressway subsidiary and feeder roads and other publicamenities. To take these over through eminent domain and awardcoupons embodying rights to development (TDRs,11 forexample) to such persons whose lands is so taken over. Buildersand developers on land elsewhere in the corridor who are freeto develop in accordance with a plan perforce have to buy upthese TDRs in a market in certain quantities related to the amountof construction or economic activity. A market for TDRs canalso be encouraged and supported. This would ensure that thosegiving up land are automatically rewarded.12 These can be atsufficiently large values to remove fears of value loss in givingup land, when the ratios are correctly determined. TDRs can alsobe used to offset value changes that occur on zoning, and alsoto compensate for regulatory takings to preserve heritage andnatural resources without being unfair to those whose land isso restrained. TDRs can be used most effectively even in themost congested cities to unlock vast amounts of land for publicfacilities, when such projects are accompanied by enhancementof FSI.Rehabilitation IssuesRehabilitation and compensation would not be suitable in allcases as one time measures. Use of TDRs is possible whencatch-ment area farmers are displaced, while command area farmersgainin large subsidised irrigation projects. Similarly, land-for-landis also possible by using “land shrinkage” of now irrigated lands.There is much to be learned from the examples of good landacquisition and rehabilitation such as in the case of the NationalThermal Power Corporation Simhadri project near Vishakha-patnam. They highlight the point that the economics and justiceaspects of acquisition have to be sound. The fact that theseacquisitions and rehabilitations had to go beyond the lawassuch is further evidence that the law is in need of a majoroverhaul.XThe Way ForwardThe following changes in the LAA and in the framework ofland acquisition/rehabilitation would be necessary to removemajor risks and perversities and to ensure a fair process of landacquisition.The public purpose can and should be specified in the law asarising when specific land is required. Thus, sites for dams,harbours, mines, roads and other network industries would bespecific land. Similarly, in urban areas, additionally those ac-tivities that are crucially dependent upon access to central placesand are typically not-appropriable would merit inclusion underpublic purpose. It is important to specify the public purpose exante rather than leave acquisition acts open to challenge as isthe case in the US. The current option of not specifying the publicpurpose and not allowing challenge in India is most undemocraticand gives excessively discretionary powers to the governmentof the day.Nevertheless, options to take particular proposals (when outsidethe purpose specified ex ante) for land acquisition under eminentdomain directly to the courts and or legislature need to beprovided for since not all public purposes can be visualised inadvance.In the use of eminent domain, the valuation of the land oughtnot be carried out by the government but by independent pro-fessional bodies, and differences between such agencies whenlarger than 20 per cent or so should go to arbitrators/courts forresolution.All current restrictions on land use other than those relatedto zoning of planning territories under urban development au-thorities need to go. Most importantly the requirement of NACneeds to go.Transaction taxes need to come down to less than 2 per centto allow smaller players also to use land as an asset. If need be,lower levels of government could be compensated for these taxlosses.The capitalised rental value of the land may be an underestimateof the value even when all current distortions are removed andthe value may be closer to the capitalised value of the value addedin land, given that disguised unemployment and considerablepoverty still exist in large parts of the country. Rehabilitationneeds to be pareto-optimal. Those currently displaced shouldbe compensated to cover the value of land, their currentincomesrising at the planned growth rates of the economyneedto be protected and the costs need to be internalised intothe project.Other innovations in rehabilitation and compensation such asequity stakes in risky projects are possible. Similarly, tribals andother marginalised people displaced due to hydroelectric andirrigation projects could be vested with the residual rights to theassets created such as fishing, and tourism, allowing their co-operatives and corporations to charge rent and provide theseservices directly or on an agency basis. The value addition and

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