Friday, September 5, 2008

A stutter in India ...

Recently, there has been much talk about how India is going to become dominant in the world. This report on the issues facing Tata Nano production in West Bengal is an example of why that growth will not be easy. Quick summary, strikes and protests have stopped the construction of the Nano production facility in West Bengal.

Knowing West Bengal, they would have protested the construction no matter how much cause they had. A gut reaction would be to blame the intransigence of undereducated farmers, the hold of the communists and pandering by politicians. However, a closer look reveals that it may not be as simple as that. Government heavy handedness and a willingness by Indian companies to use government influence to strong arm people and not be fair were also to blame.

In this case, the West Bengal government literally took away hundreds of acres of farmland to give to the Tatas and paid the farmers "adequate compensation". Since there was no auction, the compensation is the government's estimate of the land's value, and not the market value it might have fetched. So, financially, its unclear how fair the deal is.

Also, imagine being a farmer and then having the only thing you know how to do being taken away from you, without your consent. It would be like someone giving me a packet of money and saying you can never work in a company again.

The Chinese by contrast do this relatively easily, for example in the relocation of 2 MM people during the construction of the 3 Gorges Dam. The question is, should India emulate the Chinese? Are the pains of the few less relevant than the gains of the many?


diga said...

I think the Govt. should be allowed to acquire land provided the land owners are appropriately compensated. Land owners should be compensated at the registration value set by the revenue department for the property. This is the going rate at which registration fees is assessed when property is bought by a private party.

Land acquisition used to be a big racquet in Bangalore. However, there is now a law that compensation should be at the same rate as the registration value. After this act was passed, the arbitrage to acquire at low price and then allot it to companies at lower than market price by taking bribe disappeared.

Now farmers don’t mind it if their land is acquired. And the government has little incentive to acquire unless there is true economic value for the city in doing so.

Grain of sand said...

The other side of the coin (for the sake of argument) -

1. Land was acquired at 5x the prevailing market price (WSJ, Sep 6 - - needs online access). This was incorporating the projected value rise due to economic activity. This was the primary reason why so many farmers SOLD their land to the project in the first place. One could argue whether the price is adequate (despite the higher than then current prices paid by Tatas). On principle, should the fair price be the post-project price or pre-project value of the land acquired?

2. The larger than required land bank for the project - the factory needs to expand sometime in the future. why give up the option? I am glad the Tatas are rightly thinking big.

BTW - is it a land value arbitrage for the Tatas? (read in conjunction with previous point).

3. Singur's development - What was the economic condition in Singur before the project was announced? What is it today? Does it address spirit of eminent domain?

4. Is this truly a fairness issue or a country's development being hijacked by political forces?

Domino said...

:) Grain of sand, to answer your point (4) it is a political issue.

However, allow me to play Devil's advocate for a moment. There is a difference between value when you have a choice and value when you don't.

I'll give you an example. A laborer got run over by a car in the late 1980s in India. He lost his legs. His family went to court and the court awarded him his annual income multiplied by his expected working life adjusted for inflation plus all his medical costs. They didn't discount it. How much did it amount to? Less than Rs. 500,000.

On the one hand, the amount the family received was much more than he could possibly have expected to earn in his life, based on what they knew at the time. On the other hand, if you now consider it in hindsight, it was nowhere close to enough, considering what happened to prices and the fact that he lost his ability to do the only thing he knew how.

But, the point is not really about whether the amount is fair, but whether he had a choice. The unfairness is that the buyer set the price for his legs and the he really had to take it.

The same, in a sense, is true for eminent domain. If you have no choice, it'll seem unfair, not because the compensation is necessarily unfair, but because choice itself has a value, and the deprivation of choice is unfair.

Having said that, in this case, the issues are mostly political gamesmanship.