Creation of land banks can go a long way in preventing state-level politics from hampering large projects 

Throughout the sixties and seventies, we were told that India is a capital scarce country and so, savings rates should be improved. Those days, it was fashionable to talk about the vicious cycle of development citing India’s example. According to that theory, countries such as India have low income and low savings rate which means low investment giving rise to a low-income situation.

This ‘vicious cycle’ can be broken only by some external injection of funds-maybe from abroad-either as loans or grants. That is how, World Bank assisted developments became the norm. But as usual, India proved western experts wrong. Its savings rate zoomed to 20% in the 1990s and reached 30% recently. Now, the same experts feel consumption needs to increase. Rather, they are encouraging consumerism!

The development model of the sixties needed capital for big projects to be made available to industries at a reasonable cost. That’s when the government started pioneer term-lending institutions such as IDBI and ICICI.

Somewhere in the early eighties, industries began to access reasonably large funds from the market. These became an avalanche in the nineties. Boosting the trend were large players like Reliance and partial disinvestments by some large public undertakings through the capital market route.

The nineties also saw the introduction of many innovative instruments such as commercial paper, convertible bonds and warrants. Indian firms began to access foreign markets both for bonds and shares. Indian shares began to be listed and quoted in global exchanges. No one could have imagined in the seventies that our industrial front picture will change so dramatically. ICICI and IDBI have been converted into regular commercial banks from term-lending institutions.

At that time, industrialists used to try to get an audience with the chairmen of lending institutions. Now, the chairmen of these banks are trying to catch the attention of industry honchos with good projects. Availability of funds is no longer an issue. Most of the primary market offerings are oversubscribed and sometimes, unscrupulous promoters exploit gullible investors in the primary market.

But what is interesting is that land as a factor of production has become scarce. State governments control this important factor of production and in the sixties and seventies, acquiring land for large scale projects was easy. State governments would announce such acquisitions at nominal prices and displaced farmers would get class-four jobs in many of these industries.

The tide turned sometime in the late nineties and it is becoming increasingly difficult for state governments to acquire land at nominal prices and even at the so-called market prices. Land acquisition procedures are cumbersome. In many cases, the earning potential of the land is not fully integrated into the pricing mechanism as the law does not facilitate it.

The entrepreneur cannot do the acquisition directly because heshe has to acquire thousands of small units and then consolidate them. That’s not an easy task. Even if one or two owners at strategic locations refuse to sell, the issue of non-contiguous plots crops up. Auctions may not be the best method since they may not fully reflect the future potential of the land.

Convertible bonds can be one way to ease land acquisition pains. Land owners can be given convertible bonds as part of the sale proceeds. They may exercise these if the industry is successful or redeem them with the state and the industry if it isn’t.

The creation of ‘land banks’ could help too. These banks could acquire small plots of land, consolidate them slowly and later sell them for a bigger price. Agriculture is not a paying proposition for small and marginal farmers. So they might like to sell off their plots for the right price. Land banks can buy these plots and hold them in stock. Later, they can release these plots as and when needed for projects.

Since land is a state subject, regional politics plays a major role in its dynamics. We find state-level politics increasingly being controlled by land mafia due to the absence of rational policies. Going forward, regional parties will use this clout to their advantage. Control of land and its allotment will become a business.

Since regional parties understand this business in their state well, they will flourish. But sub-regional parties, which are coming into their own, just might play spoilsport by further fragmenting the business and available land. So in the next decade, land wars might become more common than water wars.

Politics may also enter the surplus land available with defence forces, Indian Railways, public sector undertakings and temples, churches and Christian colleges.

Before land wars take the face of street violence, it’s imperative to make land a Central subject. But this may be difficult given the clout of caste-based regional parties controlled by powerful families.

Land banks can go a long way in preventing such problems. By consolidating land in an organised manner and selling it later, they can prevent land wars. Through these, we can develop futures in land prices-in short, a model that could benefit farmers and reduce the role of land mafia at the state level.

The author is professor of finance at Indian Institute of Management-Bangalore and can be contacted at vaidya@iimb.ernet.in. The views expressed here are personal and do not reflect those of his organisation.

http://www.dnaindia.com/report.asp?newsid=1171642

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