Peasants also benefit from industrial projects.

Photographer: Prashanth Vishwanathan/Bloomberg

India's Law From Hell

Dhiraj Nayyar is a journalist in New Delhi. Trained as an economist, he has worked at the Financial Express, India Today and Firstpost.com. He is editor of "Surviving the Storm: India and the Global Financial Crisis."
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All of Indian Prime Minister Narendra Modi’s grand plans to transform India could be undone by a single, impressively titled law: the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013. Though proposed by the previous, Congress-led government, the act was supported by Modi’s Bharatiya Janata Party, then in opposition, as a sop to Indian farmers. Now its provisions threaten to stymie any projects that require new land on which to build (which in India, means almost all of them). Among other things, the law demands that buyers pay four times the market price for agricultural land, resettle those displaced and undertake a social- and environmental-impact study before starting any construction.

Abolishing the law would do more than any single measure to unleash a flood of much-needed industrial and infrastructure projects. Yet as he has with other mooted reforms, Modi has chosen to start small. This week Finance Minister Arun Jaitley hinted that the government was thinking about tweaking the law to reduce the number of concerned landowners who need to agree to any deal from 70 percent to 50 percent, and to eliminate the impact assessments, which are little more than invitations to rent-seeking. Even these changes might only be applied to projects that involve public-private partnerships.

A bad law is a bad law: It can’t be fixed by tinkering, only by being rethought and remade. While farmers certainly deserve protection from rapacious developers -- the previous land-acquisition law dated back to 1894, more than half a century before the British left India -- the fact is that new projects benefit the poor as well by creating jobs and crucial infrastructure. The government needs to think strategically instead of framing the conflict as one between peasants and big-bucks tycoons.

There is no economic logic behind setting a fixed pricing formula, for instance. (Buyers must currently pay twice the market price for urban land.) Certainly land becomes more valuable when converted to industrial use. But in some cases -- say, property acquired in order to build a car factory -- the multiple could be even higher. In others, such as land set aside for railroad tracks, it could be lower. There has to be a more transparent method of price discovery -- potentially auctions -- for the system to work properly.

Nor does it make any sense to set 100 acres as the minimum limit above which the law kicks in. (The limit is only 50 acres in cities and towns.) Why not 500 acres? And why should there be a ban, as there is in the law, on buying and developing irrigated farmland on which multiple crops are currently grown? Even in such fertile areas, farming isn’t always the most lucrative profession. If a peasant can sell his land for a good price -- as much as 10 times the assessed value in some cases -- he should be allowed to do so. Demand for such land is naturally high because it often lies near rivers and populated areas -- precisely where manufacturers prefer to set up shop.

Tweaking the law at the margins may rid it of its worst provisions. But enough obstacles will remain to encourage corruption and discourage development. For those concerned that a complete overhaul might be going too far, safeguards can be established. For instance, a new land law could build in provisions for review every five years, so that amendments can be added based on experience. There’s no reason to wait another 119 years to make a bad law better. 

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Dhiraj Nayyar at dhiraj.nayyar@gmail.com

To contact the editor on this story:
Nisid Hajari at nhajari@bloomberg.net