Bumps in the Road: India's Industrial Growth Seeks Solid GroundPublished: October 30, 2008 in India Knowledge@Wharton
For a small car, the Nano has traveled quite a bit. Just in October it has moved from Singur, in West Bengal -- where Tata Motors abandoned a production facility two years in the making and gearing for start-up -- to Sanand, in Gujarat. En route, Tata surveyed other sites for the production of its Rs100,000 ($2,000) automobile.
It hasn't been an easy ride. In Andhra Pradesh, the villagers of Seetarampuram, one of the sites offered by the state government, staged a protest, blockading the Bangalore-Mumbai highway for several hours. Like the farmers of Singur whose tactics eventually forced out the Nano, they resisted the industrial project. In Maharashtra, a senior politician publicly declared that the Nano was not wanted because the state was facing an electricity crisis.
The going has been smoother at Sanand, although bumps in the road still exist. The state government thought it was playing safe by allotting the Tatas 1,100 acres belonging to the Anand Agricultural University. But farmers have already petitioned the Gujarat High Court to stop the deal. They say that the British government acquired the land from them in 1902 on a 90-year lease, and that it should have been returned in 1992, but was not. Now that the land's value has risen sharply, they are demanding compensation. Land prices in neighboring areas have gone up from around Rs400,000 (US$8,000) per bigha (an Indian land unit equivalent to about 25,000 square feet) to Rs1.2 million (US$24,000) per bigha.
The Congress opposition in Gujarat, a state ruled by the rightist Bharatiya Janata Party, has hinted at a Singur-style agitation. But the agitation's purpose would not be to drive out the Tatas. It would aim to secure compensation for farmers deprived of their land a century ago.
The farmers, meanwhile, are organizing themselves under banners such as the Rashtriya Kisan Dal. Maharana JaiShiv Sinh Vaghela, the scion of the royal family of Sanand, an erstwhile princely state, has led a delegation of farmers to the state chief minister, Narendra Modi, to demand their share. Meanwhile, Anand Agricultural University has asked for equivalent land in other districts of Gujarat as compensation for the 1,100 acres it has surrendered for the Nano.
"The real debate is about the correct compensation price," says Rajesh Chakrabarti, assistant professor of finance at the Hyderabad-based Indian School of Business (ISB). "Once land is acquired, the value of the entire area goes up several times and the people who benefit the most are those who own land just outside the area of the acquired lands." Those initially dispossessed -- no matter how handsomely they may have been compensated -- are invariably left feeling they have been given a raw deal.
Soaring Land Prices
According to estimates by the business magazine Business Today, land prices in Singur rose from US$24,000 per acre to US$120,000 per acre. (They have dropped sharply since the Tata pullout.) Land prices associated with other projects and special economic zones (SEZs) have shown similar increases. Among them: the Reliance Haryana SEZ (from US$45,000 to US$200,000 per acre); the Reliance Mumbai SEZ (US$20,000 to US$100,000); the Reliance Maha Mumbai SEZ (US$10,000 to US$100,000); Tata Steel's Kalinganagar project in Orissa (US$6,500 to US$10,000); and the Renault Nissan plant at Oragadam in Tamil Nadu (US$40,000 to US$160,000).
"We follow an 1890s act for land acquisition," Chakrabarti explains. The huge projects that change neighboring lands' value by such huge multiples didn't exist back then. "So there is definitely need to change the laws in such a way that the people who are being evicted get compensated in a fair manner," Chakrabarti says.
The Nano's woes may have grabbed headlines, but land acquisition problems spread across sectors and the entire nation. The government of Uttar Pradesh, led by Bahujan Samaj Party president Kumari Mayawati, recently canceled a deal allotting 190 acres for a railway coach factory in Sonia Gandhi's parliamentary constituency Rai Bareli. Gandhi is the powerful chairwoman of the ruling United Progressive Alliance in Delhi. Mayawati gave in after Gandhi threatened to stage a protest and court arrest. But land has clearly become the currency of political vendetta, too.
Here's a rundown of some other projects running into acquisition problems, for a variety of reasons:
- Sterlite Industries, the Indian arm of the London-based metals and natural resources conglomerate Vedanta, has the go-ahead from the Supreme Court to mine bauxite in the Niyamgiri hills in the Kalahandi district of Orissa. But the indigenous tribal community treats the area as a shrine. Kumuti Majhi, a tribal leader, has visited London to explain to Vedanta shareholders that digging up Niyamgiri would be equivalent to demolishing St. Paul's Cathedral.
- Navi Mumbai airport, the much-needed lifeline for India's business capital, has stayed on the drawing board for years. The latest objection is from a government department. The Union environment ministry has refused to clear the project because mangrove forests occupy part of the area. The public-sector agency overseeing the project has offered to replant the mangroves -- which occupy just 7.3% of the total area -- elsewhere. But the Delhi bureaucrats are unmoved.
- Close to the proposed Navi Mumbai airport, at the Raigad SEZ, villagers and farmers have voted in a symbolic referendum. Activists claim that the referendum has produced a 95% vote against the project being set up by India's richest industrialist, Reliance Industries chief Mukesh Ambani. The farmers in Raigad, in Maharashtra, simply want a better deal. The project is being delayed while its promoters consider their next steps. Reliance, meanwhile, had appealed to the Bombay High Court opposing the Maharashtra government's decision to hold the referendum. While that judgment is pending, the Maharashtra government has announced that the Raigad referendum was unique and will not be repeated elsewhere in the state.
- In Jharkhand, the world's largest steel company, ArcelorMittal, is facing tribal opposition against a proposed 12-million-ton steel plant. The project needs 11,000 acres, including 2,400 acres for a township. The protests have been building since mid-October, when ArcelorMittal met villagers to hard-sell the plan. (The 700MW Koel-Karo hydroelectric project, which was proposed some 35 years ago in the same areas, battled opposition from villagers for decades before it was abandoned.)
- In West Bengal, the locals of the Chakchaka area in Cooch Behar district have launched an agitation against expansion of the local airport. The airport is critical because Chakchaka (part of a designated backward district) is being projected as a growth center by the West Bengal Industrial Infrastructure Development Corp. The Trinamool Congress, which spearheaded the Singur agitation, has been active here too, accusing the government of forcible land acquisition. (Meanwhile, things are moving smoothly at the Madurai airport in Tamil Nadu, where 614 acres are required for expansion.)
All projects can pose problems. But the SEZ arena is likely to witness the most controversy because the zones need large amounts of land. The Raigad SEZ, for instance, proposes to cover 25,000 acres; the Nano production facility needs just 1,100. Before the passage of the SEZ Act of 2005, just 19 SEZs functioned in the country. Many of them were barely limping along. Since the act's passage, some 260 new SEZs have been established. Prior to the act, state and central governments and private companies had invested some Rs7,745 crore (US$1.56 billion) in SEZs. From February 2006 to June 2008, an additional Rs73,348 crore (US$14.74 billion) was pumped in, according to Union Ministry of Commerce and Industry data. Some 100,000 jobs have been created. But land issues still bog down many of the zones.
This is proving expensive. According to a recent estimate by the Centre for Monitoring Indian Economy (CMIE), a Mumbai-based data agglomerator and think tank, projects worth a whopping Rs250,000 crore (US$50.23 billion) are encountering hurdles in acquiring land.
"We should not expect the government to allot us land," says Irfan Razack, chairman and managing director of the Bangalore-based Prestige Group, which has interests in real estate and infrastructure. "That's where the controversy comes in. Either the government must auction the land at market prices or the developer must have the capacity to buy the land and then go to the government for approvals. The heartburn comes when the government buys land at a subsidized price and allots it to the developer who then goes on to make big money."
Razack is talking principally about SEZs. But what he says applies to large industrial projects as well. An additional catch is that the government may well subsidize the land it gives to a project like the Nano because such projects are expected to act as catalysts for further investment in the region or state. Tata Motors was supposed to pay US$200,000 a year for the first five years for the Singur land. This was to rise to US$2 million a year in the next 10 years, and $4 million a year after that. The government, meanwhile, paid US$24 million to the farmers as compensation. In the short term, the Tatas were required to pay peanuts. This lends itself to accusations of corporate houses profiteering.
Industry appears to be able to pay more. CMIE data show that in the five years ended March 2008, large-market-cap companies spent US$3.33 billion in land acquisition costs. These companies' total fixed capital expenditures were $113.97 billion. Land is just 2.9% of that total, leaving room for growth in what the companies can pay for land. Industrialists privately confess that they are prepared to pay more for land acquisition. But it has the danger of becoming a never-ending spiral.
No model has proved problem-free. Where the state has acquired land, farmers have cried foul over the rates. Where the private sector has tried to go it alone, accusations of intimidation have arisen. Landowners have realized the advantages of holding out. It often boils down to who blinks first. Says Chakrabarti of ISB: "There is the issue of sorting out 'hold-up' lands," where the landowner has asked for an exorbitant price because he knows that the project cannot proceed without his land.
Chakrabarti has a suggestion. "The government should definitely not do the entire acquisition on its own because, as soon as the government gets into the act, a lot of political forces come into play. On the other hand, the private sector cannot do it completely on its own because of the hold-up problem. One model is that the private partner acquires around 70%-80% of the total land required by paying a fair compensation. The remaining [including the hold-ups] can be acquired by the government by paying the same rate as what the private party has paid.
"There are other ways. Let us say the SEZ needs 1,000 acres. But the consortium [of private players and the government] can acquire 1,500 acres and then ration out the extra 500 on a pro-rata basis to those from whom the land has been acquired. That will mean that instead of giving just cash compensation, everyone will have some real estate holding in the developed area, which will enable them to get the appreciation benefits of that land. This, of course, requires multiparty negotiations, and I don't think it is in practice in India." And Chakrabarti points out a catch. "Being agriculturists, the landowners are not trained for anything else," he says. "They need to be provided with training so that their future is protected."
Comprehensive Ground Rules
What is needed is a comprehensive set of ground rules. They may be in the works, albeit belatedly. The government has been working on a replacement for the Land Acquisition Act of 1894 for a couple of years now. The prime minister's office has written to the Ministry of Parliamentary Affairs asking that the processing of bills related to land acquisition be expedited. Three bills are involved: the Rehabilitation and Resettlement Bill, 2007; the Compensatory Afforestation Fund Bill, 2008; and the Land Acquisition (Amendment) Bill, 2007.
The Land Acquisition Bill has just been vetted by the parliamentary standing committee concerned. The prime minister's office wants all this speeded up to get these bills on the statute books before it demits office next year. Sonia Gandhi told a farmers' rally at the end of September that the bills would be piloted through parliament soon.
The standing committee on the Land Acquisition Bill, which submitted its report on October 21, recommended that:
- States should be allowed to acquire 100% of the land required.
- The definition of "public purpose," which allows the state to take over land, should be expanded.
- States should be given more power to decide on use of agricultural land.
- The compensation benchmark should be the highest price paid in the last three years plus 50%.
The report's submission doesn't necessarily mean that the Land Acquisition Act is on the fast track. "We have to examine the report," Raghuvansh Prasad Singh, the Union minister for rural development, told the Delhi-headquartered business daily Business Standard. "But it is not necessary that all the recommendations of the standing committee have to be accepted."
Political analysts in Delhi say the bills may not be passed this parliamentary session. Compensation is a contentious issue. The definition of "public purpose" is another. In Singapore, "public purpose" can mean residential buildings. Not so in India. The Nanos of the future may have some distance to travel to find a home.