A lesson on land acquisition

The parliamentary stand off over the Indian government’s effort to ease procedures to acquire land for “public purposes” continues, with the government deciding to re-promulgate the ordinance amending the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013. Besides concern about the impact that this would have on the farming community and those dependent on it, another cause for the controversy is the apprehension that the relaxed procedures can be exploited by profit-seeking players interested in the diverting land acquired to uses other than the public purpose.

Evidence from the experience with the creation of Special Economic Zones, governed by a different law, suggests that the apprehension of the opposition is indeed warranted. Replying to a question in the Rajya Sabha on 18 March 2015, the Minister of State in the Ministry of Commerce and Industry revealed that across 20 states only 43 per cent of the land acquired (with or without the assistance of the state governments) for the purpose of creating SEZs had been utilised. The utilisation rate varied hugely from zero in the case of Goa, Jharkhand, Manipur and Nagaland to 96 per cent in the regions now constituting the state of Telangana and 81 per cent in West Bengal.

But the utilisation rate relative to the area notified for the purpose tells only a part of the story. What is striking is that the more industrialised states that warmed to the scheme formalised through the Special Economic Zones Act 2005 and put in a large number of proposals, leading to large areas in those states being notified as SEZs, have also shown a poor utilisation record. In terms of area notified as special zones, Gujarat, Andhra Pradesh, Maharashtra and Tamil Nadu were way ahead of the rest. But even in these states the area utilised out of that notified varied from just 27 per cent to a maximum of 55 per cent (Chart 1).

It can be argued that these figures say nothing about the land acquisition issue per se. What the figures seem to point to is the failure of the SEZ scheme, not in terms of the willingness of developers to establish such zones, but in terms of their ability to attract units interested in exploiting the features of the scheme and the infrastructure of the zone for profitable activity. That is, the low level of land utilisation can be attributed to the misplaced expectations and wrong investment decisions of developers who overestimated the demand for facilities that helped take advantage of the special concessions being provided to dominantly exporting firms by the government.

There is reason to believe that the facilities created were indeed far in excess of the demand for them. As Chart 2 shows, in the states where the scheme received the best responses, the extent of area lying vacant within the processing area, where export production actually takes place, was large. A performance audit of the SEZs conducted by the Comptroller and Auditor General during April 2013 to January 2014 and tabled in Parliament in December last year, sought to assess the degree to which the scheme had delivered in terms of its three objectives — generating employment, stimulating domestic and foreign investment and raising India’s share in global exports. It concluded that relative to targets set in the proposals, the degree of non-performance varied between 66 and 97 per cent in the case of employment, 24 and 75 per cent in the case of investment recorded and 46 to 94 per cent in the case of exports. If the performance of the units was as bad as that, it is not surprising that investor interest was limited.

But approaching the issue from this angle may result in some exaggeration of the imprudence of the developers. A benefit that developers willing to promote SEZs derived was the support provided by state governments in acquiring the large and contiguous land areas needed to obtain Board approval for the creation of an SEZ. State governments justified their pro-active role in land acquisition for the SEZs as being necessary to attract investment away from other states to their own.

Access to such land is an obvious asset. While 50 per cent of the area notified as an SEZ had to be designated as the processing area in which only specified activities can be undertaken, the non-processing areas could be used to create business, residential and recreational facilities either by the developer himself or through a joint venture in which the developer had 26 per cent equity holding. Such social infrastructure could be used to earn additional revenues. The attraction of SEZ projects was to a substantial degree driven by the benefits that could be derived from such township areas.

In fact, on this issue, the CAG audit referred to earlier concluded as follows: “Land appeared to be the most crucial and attractive component of the scheme. Out of 45635.63 ha of land notified in the country for SEZ purposes, operations commenced in only 28488.49 ha (62.42 per cent) of land. In addition, we noted a trend wherein developers approached the government for allotment/purchase of vast areas of land in the name of SEZ. However, only a fraction of the land so acquired was notified for SEZ and later de-notification was also resorted to within a few years to benefit from price appreciation. In terms of area of land, out of 39245.56 ha of land notified in the six States, 5402.22 ha (14 per cent) of land was de-notified and diverted for commercial purposes in several cases. Many tracts of these lands were acquired invoking the ‘public purpose’ clause. Thus land acquired was not serving the objectives of the SEZ Act.”

The CAG’s conclusion was based on evidence from the six states of Andhra Pradesh, Gujarat, Karnataka, Maharashtra, Odisha and West Bengal. Some of these are among the more industrialised states in which land acquisition for SEZ creation was the highest. This does suggest that speculation in land was an important motive for the interest shown in the SEZ scheme. Perhaps under pressure from these interests and in an effort to revive the flagging SEZs project, the government seems to have succumbed to pressure from the land interests.

On January 2, 2015, the Modi government issued a notification amending the SEZ Rules 2006, allowing dual use of social and institutional infrastructure including schools, colleges, hospitals, socio-cultural centres, training institutes and banks within the non-processing area. These can be set up by both Special Economic Zone and Domestic Tariff Area entities, or those who were not part of and had no interest in the original SEZ project. The non-processing area will be divided into two separate zones — one where the social or commercial infrastructure and other facilities can be used by both the SEZ and the domestic tariff area entities, and the other that will be exclusively used by the SEZ units. According to reports, while 45 per cent of the non-processing area has to be kept open, housing and commercial facilities for dual use can occupy 25 per cent and 10 per cent respectively of that area and social and institutional infrastructure can be built in the remaining 20 per cent.

This offers a huge opportunity for profit, especially since as the CAG had noted, “the growth curve of SEZs had indicated preference for urban agglomeration.” Through a complex process, what began as a scheme to promote exports and earn foreign exchange (which was its “public purpose”), is being transformed into one where profits are being derived from exploiting the commercial potential of urban property. That could happen with projects facilitated by the new ordinance and the Bill that may substitute it as well.

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Printable version | Jan 22, 2022 7:05:04 AM |

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