Land acquisition mess: Will the real Narendra Modi please stand up?

narendra_modiVivek Kaul

The Narendra Modi government seems to have agreed to drop the politically unpopular clauses in the Bhartiya Janata Party’s version of the land acquisition bill. This is not a move in the right direction.

One of the key planks of Narendra Modi’s electoral campaign for the 2014 Lok Sabha elections was economic development and job creation. In a country where most electoral rhetoric has been based around “garibi hatao”, this was like a breath of fresh air.

And given that 13 million Indians are entering the job market every year, creation of new jobs should be one of the top priorities of any government.
What also needs to kept in mind is the fact that the average holding size of agricultural land has come down over the years.  As per Agriculture Census 2010-11, small and marginal holdings of less than 2 hectare account for 85 per cent of the total operational holdings and 44 per cent of the total operated area. This could have only gotten worse since 2010-11. And what this means people need to be moved away from agriculture into other areas where they can make a living.
How does a country like India create jobs? As Cambridge University economist Ha-Joon Chang writes in Bad Samaritans—The Guilty Secrets of Rich Nations & the Threat to Global Prosperity: “History has repeatedly shown that the single most important thing that distinguishes rich countries from poor ones is basically their higher capabilities in manufacturing, where productivity is generally higher, and more importantly, where productivity tends to grow faster than agriculture and services.”

An important part of building a vibrant manufacturing sector is the ease with which land can be acquired. Over and above this, the quality of physical infrastructure (roads, railways, ports etc.) in India remain abysmal. If this infrastructure has to improve, the ease of land acquisition remains very important.
Narendra Modi became the prime minister of India on May 26, 2014. One of the things he did at the very beginning was to try and figure out what were the factors holding back investment in India. The answer that he got was the Land Acquisition Act of 2013 was one of the key reasons holding back investment.

In fact, the latest economic survey released in February earlier this year pointed out that “land acquisition” was a top reason for 161 stalled government projects. The Survey also pointed out: “India’s recent PPP [public-private partnership] experience has demonstrated that given weak institutions, the private sector taking on project implementation risks involves costs (delays in land acquisition, environmental clearances, and variability of input supplies, etc.).”

Arvind Panagarya the vice-chairman of the NITI Aayog in a recent speech said: “The Land Act, 2013 is an onerous Act under which by all calculations it will take up to five years for acquiring land assuming that all steps progress smoothly,” Panagariya said.

The question is what led to the Land Acquisition Act 2013? Before 2013, the process of land acquisition in India was governed by the Land Acquisition Act 1894. This was a law introduced during the time when the British ruled India and it managed to survive for more than 65 years after India attained independence from the British in 1947.

Given that the law was passed during British times it essentially ensured that the government could acquire land for almost any purpose and pay a pittance for it. As Jairam Ramesh and Muhammed Ali Khan write in Legislating for Justice—The Making of the 2013 Land Acquisition Law: “The 1894 Act was a comparatively short legislation that left much to the discretion of the acquiring authorities.”

The government basically acquires land from the public for what it calls “public purpose”. Given this, it is very important to define the term public purpose properly. But as Ramesh and Khan write: “‘Public Purpose’ which was the raison d’etre for any acquisition initiated was drafted in such wide terms that essentially any activity could be constituted as public purpose, as long as the Collector [of the district where the land was being acquired] felt it did…’Public

Purpose’ became what ever the Government or acquiring authority defined it to include.”
And if this wasn’t enough, a 1984 amendment to the 1894 Act allowed the government to “acquire lands for a public purpose ‘or for a private company’”. So, as per the 1894 Act the government could acquire land even for a private company. This clause was at the heart of the nexus that evolved between builders and politicians, over the years.

Given this, such a law had to be done away with it. This finally happened in 2013. The land acquisition law that was brought in was towards the other extreme, and seems to have made land acquisition almost next to impossible. (For those interested in the entire procedure, they should read Ramesh and Khan’s book, to realise how complicated and time taking the 2013 law is).

The 2013 law calls for consent from 70% of families in case of public private partnership projects and 80% if the land is being acquired for a private company. A social impact assessment also needs to be carried out. This assessment needs to answer questions like whether the “proposed acquisition serves public purpose” and “whether land acquisition at an alternate place has been considered and found not feasible”.

As mentioned earlier, after coming to power, the Modi government figured out that land acquisition law of 2013 was acting as a substantially barrier to investment. It brought in The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (Amendment) Ordinance, 2014, which made a few changes to the 2013 Act. The ordinance was signed by President Pranab Mukherjee on December 31, 2014.

In the ordinance the requirement of getting prior consent from those affected has been done away in certain cases. As Swaminathan Aiyar writes in a column in The Economic Times: “It substantially diluted the clauses relating to a social impact assessment and consent of 70-80% of people affected. It provided exemptions for 1 km on either side of railway and industrial corridors, rural infrastructure, affordable housing, and PPP infrastructure projects.”

This was a step in the right direction to get investment going again. Land required for the defence, electrification, affordable housing, and industrial corridors etc., also needed to be made available as soon as possible. Also, Ramesh and Khan write: “The law was drafted with the intention to discourage land acquisition.

It was drafted so that land acquisition would become a route of last resort.” Ramesh was a key player behind the Act.
A land acquisition Act which discourages land acquisition cannot be of much help to an economy which needs to create jobs for 13 million individuals entering the work force every year.

Now with the government planning to go back to the 2013 law the status quo will return. If Arvind Panagariya is right in estimating that it will take five years to acquire land then there is no way that the Narendra Modi government is going to get around to delivering its promise on creating jobs and economic development.

Also, Modi’s pet “Make in India” programme is unlikely to get anywhere. You can’t make in India without being able to get land to set up the necessary infrastructure.

Aiyar summarised it the best when he said: “[Modi] seems happier coining slogans than in implementing tough decisions.” Tough decisions on the economic front is what this country needed. Alas, it is not going to get them even under Modi, who for a while flattered to deceive. And by the time the 2019 Lok Sabha election is here, “garibi hatao” might be the order of the day again.

It is worth asking here, if the plank of economic development and jobs, was also an electoral jumla? From how things are going right now, that is how it seems like.

To conclude, the Narendra Modi that we saw in the run-up to the 2014 Lok Sabha elections was a different man, from the Narendra Modi we are seeing now. Will the real Narendra Modi please stand up?

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)
The column originally appeared on Firstpost on Aug 5, 2015

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Learn from 2014: How the Modi govt can tame food prices

foodVivek Kaul

Earlier this month, the the India Meteorological Department(IMD) forecast that the monsoon will be deficient this year. It said that the monsoon will be 88% of the long-term average. This number is lower than the 93% of the long-term average number, the IMD had forecast in April, earlier this year.
The IMD also said that the probability of a deficient monsoon was as high as 66%. The nation’s weather forecaster uses rainfall data for the last 50 years to define what is normal. If the rainfall forecast for the year is between 96% and 104% of the 50 year average, then it is categorised as normal. A forecast of between 90% and 96% of the 50 year average is categorised as below-normal. And anything below 90% is categorised as deficient.
Hence, a forecast of 88% of the long-term average means that the monsoon will be deficient this year. Further, with the rainfall being forecast as likely to be deficient, the fear is that food prices will start to go up during the months to come.
Data from the World Bank suggests that only around 35.2% of agricultural land in India was irrigated in 2010. The bank defines irrigated land as “
areas purposely provided with water, including land irrigated by controlled flooding.” This number is a little dated but does tell us that a major part of Indian agriculture continues to remain dependent on rainfalls.
And if rainfalls turn out to be deficient chances are there will be an impact on agricultural production and in the process push up food prices. At least that is how things look theoretically. Nevertheless, things may not be as bad as they are being made out to be.
During 2014 monsoon season, the country as a whole received rainfall which was 88% of the long-term average. Hence, the rainfall last year was deficient. In fact, if we look at the numbers region-wise, the rainfall was around 79% of the long-term average in north-western India. States like Punjab, Haryana and Uttar Pradesh which produce a major part of food grains produced in India, come under this region.
Despite this, the impact on production was limited because these states have access to irrigation. As a recent report by Crisil Research titled
A washout monsoon forecast, we cut GDP growth by 50 bps points out: “Given their reasonably high irrigation levels, agricultural production in Punjab (98% of total area cultivated has irrigation), Haryana (85%) and Uttar Pradesh (76%) were less affected by deficient rainfall last year.”
The question is how effective will the irrigation systems be the second time around.
“Even with good irrigation cover in these states, two consecutive years of weak rainfall would bring down the effectiveness of irrigation systems…Ground water is recharged mainly through rainfall. As per IMD, rainfall deficiency in Punjab was 50% and Haryana at 56% last year. As a result, with agriculture relying more on ground water, two consecutive years of weak monsoon will have a significant impact on kharif crops. Plus reservoir storage levels in some states are alarmingly low,” Crisil Research points out. Given this, there will be some impact on agricultural production.
Hence, the government needs to act decisively and quickly to ensure that food prices do not go. As
economists Taimur Baig and Kaushik Das of Deutsche Bank Research point out in a recent research note titled RBI signals no more cut; we still see room: “In 2002 and 2004, cumulative rainfall was down 19 % and 14% respectively, but thanks to an effective undertaking by the government that saw large scale disbursement from the government’s food stocks, inflation remained under control.”
In fact, the Narendra Modi government did the same thing when it came to power in May last year.
One of the first decisions made by the government was to release 5 million tonnes of rice into the open market from the stocks maintained by the Food Corporation of India. News reports suggest that eventually only around 2 million tonnes was sold. But just the news that the government was selling was enough to contain inflation.
As Baig and Das point out: “Last year, a late start of the monsoon rains resulted in a sharp spike in food prices during July (+3.6% month on month). Food prices generally tend to be high in July, but the spike in 2014 was striking. The newly elected government responded with a number of administrative measures (open market sale of key foodgrains, crackdown on hoarders, imposing restriction on stocking limits of key vegetables etc.), which helped food prices to eventually ease from September onward.”
Also, imports will help, given that global food prices are at a six year low. As Crisil Reearch points out: “I
mporting some commodities will be useful, especially because global food prices have slumped to a six-year low following a bounteous output – international prices of oil seed prices for instance are down 24% year-on-year.”
While prices of food grains can be contained by releasing government stock into the open market, such a thing is not possible in case of vegetables, given their short shelf life. Hence, it is important that the government cracks down on hoarders, like it did last year.
As Ashok Gulati, former Chairman of the Agricultural Costs and Prices, wrote in a column inThe Financial Express: “A slew of measures were announced by the government to contain the damage from surging food inflation. It not only restricted exports of onions but also imported onions and dumped them in major onion markets at prices below import cost. It also used the stick and raided many onion traders/hoarders.”
While onions can be stored, this may not be true for most other vegetables. Also, a lot of vegetable produce goes bad before it reaches the market, hence, “lowering transportation losses will be crucial”.
Further, there will be great pressure on the government to increase the minimum support prices on agricultural crops. That is one sure fire way of pushing up food inflation.
It is worth remembering here that not many farmers benefit from the minimum support price system. The government announces the minimum support price of 24 agricultural crops, but largely buys, only two, wheat and rice, through the Food Corporation of India and other state procurement agencies.
The Shanta Kumar committee report points out that the total number of agricultural households who were able to sell rice paddy and wheat to the procurement agencies was 5.21 million. “The number of households comes to just 5.21 million (2.55 million paddy households during July-Dec 2012; 0.55 million paddy households during Jan-June, 2013; and 2.11 million wheat households during Jan-June 2013),” the report points out.
The figure of 5.21 million forms 5.8% of the total number of agricultural households of 90.2 million. In fact, this number is also on the higher side once one takes into account the fact that there are households that sell both paddy and wheat to the procurement agencies. Further, not all wheat and paddy is sold to procurement agencies at the minimum support price.
Once these factors are taken into account the minimum support price system doesn’t benefit many farmers and causes food inflation. Hence, it is important that the government stays away from the temptation of increasing minimum support prices by a big amount, something that it did last year as well.
To conclude, in order to control food inflation, it is important that the government do same things that it did last year.


(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Firstpost on June 11, 2015

How the Congress party got corporates addicted to govts buying land for them


One of the main questions that has been asked in the current controversy surrounding the issue of land acquisition is—why does the government need to buy land? Jairam Ramesh and Muhammad Ali Khan try and answer this question in their new book Legislating for Justice—The Making of the 2013 Land Acquisition Law. 

As they write: “Acquisition of property is founded upon the universally recognized principle of ‘Eminent Domain’.” And what is Eminent Domain? “[It] is the power of the Government…to take over resources for the greater national good. At its most basic Eminent Domain refers to the inherent authority of the Government to acquire private property on the payment of fair compensation for a use that benefits public at large,” explain the authors.

Further, a lot of public infrastructure gets built because of Eminent Domain. As Ramesh and Khan write: “Without the power of Eminent Domain, the Government could not establish the infrastructure that we rely on—roads, hospitals, airports, public schools, common facilities such as warehouses for farmers, playgrounds for children all are made possible through the use of Eminent Domain.”

So far so good. But why does the government have to acquire land for private companies? Before I get to answering this question, it is important to realize that the land acquisitions carried out by the government in India can essentially be divided into two eras—those carried out before 1991, the year of the economic reforms, and those carried out after.

As Michael Levien of the Johns Hopkins University writes in a recent research paper titled From Primitive Accumulation to Regimes of Dispossession: Six Theses on India’s Land Question: “Since 1991, India has passed from a regime that dispossessed land for state-led industrial and infrastructural expansion to one that dispossesses land for private—and increasingly financial—capital. Between 1947 and 1991, the Indian state largely dispossessed land for public-sector projects to expand the industrial and agricultural productivity of the country. The main forms of this dispossession were public sector dams, steel towns, industrial areas, and mining.”

But that changed after the economic reforms of 1991, when the private sector began to play a more active and larger role in the Indian economy. The economic reforms unleashed the Indian IT and BPO industry. These sectors had an unending appetite for land and the government helped them by acquiring land for them.

Gradually, public-private partnerships became the preferred method for building physical infrastructure. And this led to the government acquiring more land for private firms. In fact, as Levien points out: “Crucially, compensating private infrastructure investors with excess land and/or development rights became an increasingly popular method of cost recovery in these arrangements—whether for roads, airports, or affordable housing (Ahluwalia 1998; IDFC 2008, 2009). Infrastructure investment thus became a vehicle for private real estate accumulation, culminating with Special Economic Zones in the mid-2000s.”

Hence, land became a sort of a currency for the government. Also, given that the government could acquire land for private firms, it is obvious that a lot of politicians must have made a lot of money as well.

Nevertheless, the question is how did the government get around to acquiring land for the private sector? Before the 2013 land acquisition law was passed, land acquisition in India was governed by the Land Acquisition Act 1894—a law from the time when the British ruled India.

In fact, an amendment made in 1984 to the 1894 Act expanded the government’s ability to “acquire lands for a public purpose ‘or for a private company’”. This amendment allowed the government to acquire land for private companies. And it is worth reminding the readers, those were the days when the Congress party ruled the country.
It was this amendment which was abused by the various state governments around the country to acquire land for private companies. This amendment allowed the government to acquire land from farmers at cheap rates and then sell it on to private companies at a significantly higher price.

The ‘Yamuna Expressway’ is a very good example of this, where the land was acquired by the Uttar Pradesh from farmers and then sold on to private parties at multiple times the price the farmers had been paid for it.

As Ramesh and Khan point out: “In 2009, the Uttar Pradesh Government had indeed acquired land as part of a concession agreement and then resold it to Jaypee associates group as part of a bundling project for the construction of the Yamuna Expressway. There was no legal bar on doing so under the old law [i.e. the 1894 Act].” Further, the purpose for which the land was acquired could be changed as well.

The corporates preferred the government acquiring land for them and then selling it to them at a higher price because of several reasons. Land records in India are poorly maintained and purchase of land can easily be challenged in court at a later date.

As Nitin Desai writes in a recent column in Business Standard: “Many companies want the government to acquire land for them…as to have the assurance that their right of ownership cannot be challenged by some new claimant.”

Further, as Ramesh and Khan point out: “After the initial round of consultations in July-August 2011, it was also acknowledged that land values are, on an average, a sixth of their represented or book value as drawn out in the circle rate. As one moved away from urban centres the disparity became more striking with land records not having been updated for decades in some parts of the country.”

As per the 1894 Land Acquisition Act the government had to compensate the owner of the land at market value. But given that the government land records were infrequently updated, the government on many occasions got away with paying a pittance in comparison to the ‘real’ market value.

Even if the government were to then sell on the land to a corporate firm at a higher price, the firm would still get a good deal because of the huge differential between the price as per the government land record and the real market price.

Another reason corporates liked to outsource the land acquisition process to the government lay in the fact that the 1894 Act had an ‘urgency’ clause. As Ramesh and Khan write: “Section 17 of the Land Acquisition Act, 1894 was used to forcibly disposes people of their land in a frequent and brutal fashion by suspending the requirement for due process…Section 5A…allowed for a hearing of objections to be made but put no responsibility on the Collector to take those claims into consideration.”

So people could complain, but it was up to the Collector whether he wanted to listen to them or not. Further, the definition of urgency was also left “to the authority carrying out the acquisition.”  This clause allowed the collector to “take possession of the land within fifteen days of giving notice”. He could take possession of a building within 48 hours of giving notice. No private company could hope to acquire land at such a quick pace.

The irony is that the 1894 Land Acquisition Act was allowed to run for almost 66 years after independence. The Congress party ruled the country in each of the decade after independence and chose to do nothing about it. Under the 1894 Act the government could acquire land in a jiffy, without adequately compensating the land-holder. When the Act was finally replaced, what came in its place has made it next to impossible to acquire land.

In fact, Ramesh and Khan,rather ironically admit to that in their book, when they write: “The law was drafted with the intention to discourage land acquisition. It was drafted so that land acquisition would become a route of last resort.”

To conclude, as far as the land acquisition process is concerned, it is safe to say that we have jumped from the frying pan into fire.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Firstpost on May 28,2015 

Arvind Subramanian: when economists start talking like politicians, we have a problem


During the course of the last financial year, the finance minister Arun Jaitley, repeatedly kept asking the Reserve Bank of India (RBI) to start cutting the repo rate. Repo rate is the rate at which RBI lends to banks and acts as a sort of a benchmark to the interest rates that banks pay for their deposits and in turn charge on their loans.

The RBI finally cut the repo rate twice between January and March 2015. But this hasn’t been enough to get bank lending to start growing at a much faster pace. As of the end of October 2014, lending by banks over a one year period had grown by 11.2%. As of March 20, 2015, lending by banks over a one year period had grown by 8.6%. This, despite the fact that the RBI cut the repo rate twice between January and March by a total of 50 basis points (one basis point is one hundredth of a percentage) to 7.5%.

As I have often explained in the past, a fall in interest rate does not always spur consumption or lead to increased borrowing by corporate firms. As John Kenneth Galbraith points out in The Economics of Innocent Fraud: “If in recession the interest rate is lowered by the central bank, the member banks are counted on to pass the lower rate along to their customers, thus encouraging them to borrow. Producers will thus produce goods and services, buy the plant and machinery they can afford now and from which they can make money, and consumption paid for by cheaper loans will expand.”

But things play out a little differently in the real world. “The difficulty is that this highly plausible, wholly agreeable process exists only in well-established economic belief and not in real life. The belief depends on the seemingly persuasive theory and on neither reality nor practical experience. Business firms borrow when they can make money and not because interest rates are low, Galbraith points out.

Also, by taking about the RBI needing to cut the repo rate, over and over again, the impression that the finance ministry tries to send out is that the RBI is holding back economic growth. And that is really not true. If India has to grow at a much faster rate, then interest rates are just a very small part of the overall puzzle.
There is a lot that needs to be set right at the level of the government—from reforming labours laws to improving the ease of doing business to ensuring that the subsidies offered by the government reach the right people and are not stolen as they go down the system.

Over and above this, there are many projects stalled due to land acquisition issues, lack of environmental clearance or simply the fact that the firm carrying out the project is highly indebted. There is nothing that the RBI can do about these things. It can just hope to set interest rates.

Subramanian also went on to say that: “China is now cutting the interest rate quite aggressively in response to its growth slowing down…We need to respond accordingly.” This is a convenient use of facts as they are.

The People’s Bank of China has cut interest rates thrice since November 2014. In November last year, the Chinese central bank cut the one year benchmark deposit and lending rates by 25 basis points and 40 basis points to 2.75% and 5.6% respectively. There was another small change it carried out, which Subramanian did not talk about in the general statement that he made.

As Wei Yao of Societe Generale points out in a research note she wrote in November: “Along with the rate cut, the People’s Bank of China also lifted the upper limit that commercial banks can offer above the benchmark deposit rates to 1.2 times from 1.1 times. That is, the maximum permitted rate for 1-year deposits was 3.3% (3%*1.1) and is still 3.3% (2.75%*1.2). Given that commercial banks have been losing deposits recently, they will probably choose to stick to the upper bound.”

And what about lending rates? “As for lending rates, the lower bound to the benchmark lending rates was removed more than a year ago. In theory, there is no hard restriction stopping commercial banks from lowering loan rates anytime or by any amount. Therefore, the benchmark lending rate cut is also nothing more than a suggestion,” wrote Wao.

In end February 2015, the People’s Bank cut interest rates again. This time the one year benchmark deposit rate was cut to 2.5% from the earlier 2.75%. Further, the Chinese central bank increased the upper band of bank deposit rates from 1.2 to 1.3 times of the benchmark rates. What did this mean? “As a result, the maximum one year deposit rate that commercial banks can offer is now 3.25% (2.5%*1.3), only 5 basis points lower than the previous level of 3.3% (2.75%*1.2),” wrote Wao.

Earlier this month (May 2015), the People’s Bank cut the one year benchmark deposit rate again by 25 basis points to 2.25%. Nevertheless as Wao writes: “After the cut, the benchmark one-year deposit rate is now at 2.25%, but the ceiling is lifted to 1.5 times of the benchmark, up from 1.3 times previously. Hence, the maximum rate that banks can offer has actually increased from 3.25% (=2.5%*1.3) to 3.375% (=2.25%*1.5), which is even higher than the level (3.3%) at the beginning of this easing cycle.”

Hence, even though the People’s Bank of China has cut the one year benchmark deposit rate by 75 basis points since November 2014, the maximum rate that a bank can pay on its deposits has actually marginally gone up to 3.375% from 3.3% in November. In that sense, there has been no real cut in interest rates.

Now contrast this with India, where the RBI has cut the repo rate by 50 basis points since January to 7.5%. A 50 basis point cut is not very different from a 75 basis point cut. Further, deposit rates in India unlike China are not controlled by the central bank and many banks in India have reduced fixed deposit rates.

Though the cut in deposit rates has not been followed by a cut in interest rate on loans. In late April, the minister of state for finance, Jayant Sinha, had pointed out that, only 21 out of the 91 scheduled commercial banks in the country had cut their lending rates, after the RBI cut its repo rate twice.

To conclude, what this tells us is that Subramanian’s statement was too general to have been made of an economist of his stature. I wouldn’t have been surprised if Jaitley or Sinha would have made such a statement. But coming from an economist of Subramanian’s calibre, this is unacceptable. Also, the ministry of finance needs to realize that people who run the RBI know their job well and it is best if they are left to themselves to do it properly.


The column originally appeared on The Daily Reckoning on May 28, 2015  

Why Jairam Ramesh’s new book on land acquisition is a must read for Rahul Gandhi

Jairam_ramesh

Jairam Ramesh was the minister of rural development between July 2011 and May 2014. He was instrumental in getting the new land acquisition law drafted and passed in 2013. And now he has written a book documenting this experience.
The book is titled
Legislating for Justice—The Making of the 2013 Land Acquisition Law. Ramesh has co-authored this book along with Muhammad Ali Khan, who worked with Ramesh as an officer on special duty in the rural development ministry.
The book goes into great detail on why India needed a new land acquisition law. And given this, it is a must read for Rahul Gandhi, the vice-president of the Congress party, who has recently been ranting against the changes that the Narendra Modi government is trying to bring to the land acquisition law passed in 2013.
Before the 2013 land acquisition law was passed, land acquisition in India was governed by the Land Acquisition Act 1894—a law from the time when the British ruled India. And rather surprisingly it survived for close to 66 years after India achieved independence from the British in 1947.
The 1894 Act was loaded totally in favour of the government and made it very easy for the government to acquire land as and when it wanted to. This wasn’t surprising given that it was drafted in 1894, when the British ruled India and the rights of Indians were not really top of the British agenda. As Ramesh and Khan write: “The 1894 Act was a comparatively short legislation that left much to the discretion of the acquiring authorities.”
Take the case of the phrase “public purpose,” which is the basic reason why any government acquires (or at least should acquire) land from its citizens. It is very important to define the term properly. Nevertheless, as Ramesh and Khan write: “’Public Purpose’ which was the raison d’etre for any acquisition initiated was drafted in such wide terms that essentially any activity could be constituted as public purpose, as long as the Collector [of the district where the land was being acquired] felt it did…’Public Purpose’ became what ever the Government or acquiring authority defined it to include.”
In fact, in a 1984 amendment expanded the government’s ability to “acquire lands for a public purpose ‘or for a private company’”. Yes, you read that right. And which party was in power in 1984? The Congress party. This amendment allowed the government to acquire land from farmers at cheap rates and then sell it on to private companies at a significantly higher price.
The ‘Yamuna Expressway’ is a very good example of this, where the land was acquired by the Uttar Pradesh from farmers and then sold on to private parties at multiple times the price the farmers had been paid for it.
The 1894 Act also had an ‘urgency’ clause. As Ramesh and Khan write: “Section 17 of the Land Acquisition Act, 1894 was used to forcibly disposes people of their land in a frequent and brutal fashion by suspending the requirement for due process…Section 5A…allowed for a hearing of objections to be made but put no responsibility on the Collector to take those claims into consideration.”
So people could complain, but it was up to the Collector whether he wanted to listen to them or not. Further, like was the case with the definition of public purpose, the definition of urgency was also left “to the authority carrying out the acquisition.”
This clause allowed the collector to “take possession of the land within fifteen days of giving notice”. He could take possession of a building within 48 hours of giving notice. “The Outer Ring Road Project of Hyderabad and the Expressway in Uttar Pradesh are both striking(and recent) examples of acquisitions where large tracts fell pray to the urgency clause,” write Ramesh and Khan.
Further, land acquisition displaced many people over the decades and most of them were not resettled and left to fend for themselves. “While there is no comprehensive record of how many individuals have actually been displaced by land acquisition post-independence, estimates put forth by credible studies find that close to 60 million individuals have been displaced since independence. Worse still, only about a third of these have actually seen some measure of resettlement and rehabilitation,” write Ramesh and Khan. Further, the studies that Ramesh and Khan refer to are more than a decade old. Hence, the number of displaced is likely to be higher than 60 million.
The question is who is to be blamed for this? The Congress party, which ruled the country in every decade after independence. Why did it take them more than 60 years to wake up to this and do something about it. The only possible explanation is that the Congress politicians ‘privately’ gained from the law as it was.
And given this, Rahul Gandhi’s recent holier than thou attitude on “land acquisition,” doesn’t cut any ice. The Congress party is responsible for the land acquisition mess that prevails in this country as of today.
Getting back to the land acquisition law of 2013, it is only fair to say that India needed a proper land acquisition law which wasn’t loaded totally in favour of the government. The trouble is now we have a law which makes land acquisition extremely complicated and next to impossible. A reading of Ramesh and Khan’s book makes that extremely clear.
In fact, the authors even write: “The law was drafted with the intention to discourage land acquisition. It was drafted so that land acquisition would become a route of last resort.”
For a country which has nearly 13 million people entering the workforce every year and which has aspirations of “making things,” a law which discourages acquisition of land really cannot hold. No country has
gone from being developing to being developed without the expansion and success of its manufacturing sector.
As Cambridge University economist Ha-Joon Chang writes in 
Bad Samaritans—The Guilty Secrets of Rich Nations & the Threat to Global Prosperity: History has repeatedly shown that the single most important thing that distinguishes rich countries from poor ones is basically their higher capabilities in manufacturing, where productivity is generally higher, and more importantly, where productivity tends to grow faster than agriculture and services.”
And in the long run the ease of land acquisition remains an important input for the manufacturing sector to take off. It also remains a very important area if the physical infrastructure in this country needs to improve. Having said that, it does not mean that land should be taken over on a platter.
In fact, as the Economic Survey points out “land acquisition” was a top reason for 161 stalled government projects. The Survey also pointed out: “
India’s recent PPP[public-private partnership] experience has demonstrated that given weak institutions, the private sector taking on project implementation risks involves costs (delays in land acquisition, environmental clearances, and variability of input supplies, etc.).”
Hence, we need to take a middle path on land acquisition.

(The column appeared originally on Firstpost on May 26, 2015)

One year later: A mixed bag of acche din for the aam aadmi

narendra_modiMost communication that works is essentially so simplistic that even a school going child can understand it. Narendra Modi’s pitch in the 2014 Lok Sabha elections: “acche din aane waale hain, hum Modi ji ko laane waale hain,” was one such example.
It was so good that one year later, people still remember it and given half an opportunity ask: “
kahan hain acche din?(where are the happy days?)” That’s the thing with communication which is dumbed down to a level of a school child—it works, but it also leads to people asking questions in the days to come.
On May 26, 2015, the Narendra Modi government will complete one year and it is time to ask that proverbial question: “have the good days come?” In this column I will try answering that question from the point of view of the
aam aadmi or the common man.
Inflation as measured by the consumer price index averaged a very high 10.2% between 2007 and 2013. In April 2014, before Narendra Modi was sworn in as the prime minister, the consumer price index inflation was at 8.59%. By April 2015, this number had fallen to 4.87%.
More often than not, the credit for this tends to go to the Reserve Bank of India. But what one needs to keep in mind is the fact that food products constitute nearly half of the consumer price index. And there is no way that the RBI can influence food prices.
Several steps taken by the Modi government helped on this front. One of the first decisions made by the government was to release 5 million tonnes of rice into the open market from the stocks maintained by the Food Corporation of India. News reports suggest that eventually only around 2 million tonnes was sold. But just the news that the government was selling was enough to contain inflation.
Active steps were taken by the government to contain rapidly rising onion prices as well. As Ashok Gulati, former Chairman of the Agricultural Costs and Prices,
wrote in a recent column in The Financial Express: “A slew of measures were announced by the government to contain the damage from surging food inflation. It not only restricted exports of onions but also imported onions and dumped them in major onion markets at prices below import cost. It also used the stick and raided many onion traders/hoarders.” And that clearly helped.
Over and above this, the minimum support price(MSP) of rice was raised by only Rs 50 per quintal or 3.8% to Rs 1360. The MSP is the price at which the government buys rice from the farmers, through the Food Corporation of India(FCI) and other state government agencies. This increase of 3.8% was much lower than the average increase of 9% per year in the MSP of rice since 2007-2008.
These measures helped to control food inflation. Food inflation hurts the poor the most. Half of the expenditure of an average Indian family is on food. In case of the poor it is 60% (NSSO 2011).
Further, Rahul Gandhi said in a farmer’s rally recently that the Congress government had raised the MSP of rice and wheat, the Modi government hadn’t. What Rahul and the Congress party need to understand is that everyone associated with agriculture does not own land. As per the draft national land reforms policy which was released in July 2013, nearly 31% of all households in India were supposed to be landless. The NSSO defines landlessness as a situation where the area of the land owned is less than 0.002 hectares. Any price rise, particularly a rise in food prices which is what an increase in MSP leads to, hurts this section of the population the most.
Hence, on the food inflation front, the Modi government has been able to deliver
acche din for the aam aadmi.
What are the other benefits that the aam aadmi has got over the last one year? In the two budgets that the finance minister Arun Jaitley has presented, the total deductions allowed under some of the most important sections of the Income Tax Act have been increased. The deduction under Section 80C has been increased from Rs 1 lakh to Rs 1.5 lakh. The deduction allowed on a home loan on a self-occupied property has been increased to Rs 2 lakh from Rs 1.5 lakh earlier. The deductions allowed for the payment of medical insurance premium has been increased from Rs 15,000 to Rs 25,000.
The Modi government has also been very aggressive on the financial inclusion front with the Jan Dhana Yojana. The government claims to have opened 15 crore bank accounts which allow account holders an overdraft of Rs 5000. This is a near saturation coverage. Nevertheless, 70% of these accounts remain dormant. What this tells us is that the communication around the Jan Dhana Yojana still remains weak.
While this is a good move at the individual level, the scheme clearly isn’t financially viable and the government hasn’t made it clear as to who will bear the cost of servicing all these accounts. As Diwakar Gupta, former Managing Director of the State Bank of India,
told Sreenivasan Jain of NDTV, no-frills banking “will never be profitable for banks. SBI has opened 3.6 crore accounts and the balance in them is Rs1,400 crore. So, it’s an average of Rs 400 per account. The bank on Rs 400 a year will make Rs 12. The cost of just putting it (the account ) on the core banking system, answering few questions, depositing, withdrawing, paying, reconciling all are significantly higher.”
Further, interest rates and EMIs have fallen a little over the last one year, but not significantly enough to get people to borrow and spendi at the same rate as they were in the past. Also, affordable housing in cities and town continues to remain a dream. The Economic Survey estimates that the shortage of urban homes stands at 1.88 crore units.
There has been no improvement on this front in the last one year. While, no one expects the government to solve the housing problem in one year, no concrete plan has been put forward either. Also, while the government keeps talking about a crackdown on black money that has left the shores of the country, but there is no talk about a crackdown on the massive amount of black money that lies within the country and a massive amount that continues to be generated.
A large part of this money gets invested into real estate, thus driving up prices.
A FICCI report on black money published in February 2015 points out: “The Real Estate sector in India constitutes for about 11 % of the GDP15 of Indian Economy, as these transactions involve high transaction value. In the year 2012-13, Real Estate sector has been considered as the highest parking space for black money.”
Only, once this nexus is broken down will affordable housing become the order of the day. Further, while corruption at the top-echelons of the government may have fallen, at lower-levels it is business as usual. Also, one of the main things promised in Modi’s campaign was the creation of jobs. Things are yet to move on that front.
Long story short—Narendra Modi has managed to deliver on some of the “
acche din” hype that it had managed to build in the run up to the 2014 Lok Sabha elections. It has fallen short on many fronts as well. But given the hype was so simplistic that was inevitable.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Firstpost on May 21, 2015

When US can’t get its black money back, does India have a chance?

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Over the week, the Parliament passed the Undisclosed Foreign Income and Assets (Imposition of New Tax) Bill, 2015, which up until now has been better know as the foreign black money Bill. Now it has become an Act. The ministry of finance 2012 white paper on black money defines black money as: “any income on which the taxes imposed by government or public authorities have not been paid.”
In my past columns on
DailyO I have maintained that while chasing black money that has left the shores of the country might seem possible it is not feasible. The reason for this is fairly simple. The money could be absolutely anywhere in the world.
In India, we like to believe that the money is stashed away in Swiss Banks. But that isn’t the case.
Data released by the Swiss National Bank, the central bank of Switzerland, suggests that Indian money in Swiss banks was at around Rs 14,000 crore in 2013. In 2006, the total amount had stood at Rs 41,000 crore.
There are around 70 tax havens all over the world and the black money that has left the shores of this country could be stashed almost anywhere. An estimate made by the International Monetary Fund suggests that around $18 trillion of wealth lies in international tax havens other than Switzerland, beyond the reach of any tax authorities.
A 2013 estimate in The Economist pointed out: “Nobody really knows how much money is stashed away: estimates vary from way below to way above $20 trillion.” Some of this money definitely originated in India.
And given that the black money that has left India could be absolutely anywhere, chasing it isn’t the best way of going about things. There would be more bang for the buck by concentrating on black money that is still in the country.
This, in short is the argument I have made against trying to get the black money that has left the Indian shores, back to India. A standard response to this on the social media is that if the United States can do it why can’t we. So here is the answer.
The foreign black money Act passed by the Parliament this week is inspired by the Foreign Account Tax Compliance Act (FATCA) of the United States. This Act was passed in 2010. The Act was brought in after it was revealed that Swiss banks were helping American citizens hide their earnings.
As per the Act, American taxpayers are required to file a new form (Form 8938) declaring their foreign financial assets with a value greater than $50,000. This form needs to be filled up along with the annual tax return. If the taxpayer does not file the Form 8938 , he can face a fine of $10,000, which can go up to $50,000 for subsequent offences. Any tax payer who pays lower tax because he does not disclose foreign financial assets could be subject to a penalty of 40%.
The provisions of the foreign black money Act passed by the Parliament are along similar lines. One of the provisions of the Act allows undisclosed foreign income as well as assets to be taxed at the rate of 30%, without allowing for any exemptions or deductions which are allowed under the Income-Tax Act, 1961. This will be accompanied by a penalty equal to three times the amount of tax.
Getting back to FATCA—as per the Act, every financial institution outside the United States needs to figure out whether it has American citizens as clients. Having done that it needs to report the information to the Internal Revenue Service of the United States
.
Due to this, the conventional view now seems to be coming around to the idea that tax havens are now cooperating with the United States and handing over information regarding their clients to the United States.
Hence, the question is, if the United States can do it, why can’t India? And the answer lies in the fact that the United States is a global superpower. In 2013, the military expenditure of the United States amounted to $640 billion. This was nearly 36.5 percent of the global military expenditure of $1.75 trillion. In comparison, the total budget for the Indian defence services in 2015-2016 is around $2.5 billion.
With so much money being spent by the United States, the military apparatus of the United States can drop bombs anywhere in the world at a few hours’ notice. As David Graeber writes in
Debt: The First 5000 Years: “The U.S. Military … maintains a doctrine of global power projection: that it should have the ability, through roughly 800 overseas military bases, to intervene with deadly force absolutely anywhere on the planet.” It is this military might of the United States that has led to the tax havens cooperating with it.
Nevertheless, as the Americans like saying: “show me the money”. Or to put it simply, how much revenue has the Internal Revenue Service of the United States managed to collect because of FATCA? Jane G. Gravelle writing in a research paper titled
Tax Havens: International Tax Avoidance and Evasion for the Congressional Research Service estimates that FATCA is expected to “have a relatively small effect, $8.7 billion over 10 years, when compared with estimated costs of international evasion of around $40 billion a year.” So on an average the United States expects to recover $870 million per year, when the international tax evasion by Americans is around $ 40 billion per year. Hence, the recover rate for FATCA is 2.2%.
What this clearly tells us is that even the United States does not expect much out of FATCA, initially. This, despite being the only global superpower. In this scenario, how much chance does India have of recovering the black money that has left its shores?
As Bob Dylan once said(or should I say sang): “
The answer my friend is blowin’ in the wind”.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column appeared on DailyO on May 14, 2015