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Political Economy of Land and Development in India

Land has emerged as one of the bigger constraints on development in recent years. Particularly contentious is access to "appropriate land", which the non-agricultural sector requires for its expansion, and which is scarce because the State is not creating conditions conducive for farmers to sell their land. This article discusses the different phases in land acquisition since Independence, issues of adequate compensation, and the space this has created for different kinds of activism by members of civil society.


Political Economy of Land and Development in India

Dhanmanjiri Sathe

  • (2) There is an unlimited supply of labour and the surplus labour can be shifted from agriculture to the industrial sector, without any fall in the agricultural output, and without any rise in the agricultural wage rate.
  • (3) In general, land has not received as much attention in development literature
  • Land has emerged as one of the bigger constraints on development in recent years. Particularly contentious is access to “appropriate land”, which the non-agricultural sector requires for its expansion, and which is scarce because the State is not creating conditions conducive for farmers to sell their land. This article discusses the different phases in land acquisition since Independence, issues of adequate compensation, and the space this has created for different kinds of activism by members of civil society.

    Dhanmanjiri Sathe ( teaches at the Department of Economics, University of Pune.

    evelopment economics has experienced many highs and lows; however, all along it has basically focused on removing the constraints on the process of development. One can observe three strands in development economics which have tried to address this issue in different ways. The first is the strand of “high development theory” starting from the mid-1940s and going on till the late 1950s. Some of the themes that were dealt with were vicious circle, balanced vs unbalanced growth, backward-forward linkages, big push, unlimited supply of labour, savings and foreign exchange gap, etc. The work done under this strand was highly insightful, but methodologically non-rigorous in nature as it did not depend on formal models. The second strand, spanning the same time period, consisted of the Harrod-Domar models and the neoclassical response (the Solow model). These models were metho dologically very tight and they developed an explicit relationship between capital and the rate of growth of an economy. This received wisdom was then followed by the third strand with the evolution of the endogenous theories of growth in the 1980s, where the focus shifted to i ncreasing returns which arose out of h uman capital, i e, role of education and health. Under this, the quality of the population, in terms of their skills, become central to the process of development.

    The three underpinnings of this development discourse are:

    (1) Capital is scarce because of the low savings rate in a developing economy and it can be augmented only up to a certain extent by taking the route of foreign aid and/or by keeping exports higher than imports. From the proposition of scarcity of capital, it followed that capital should be used in a judicious manner, i e, in a manner that maximises the rate of growth of the economy.

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    as have labour and capital. Land was usually discussed in the context of agricultural land and it was stated that as development occurs, population would rise and there would be a decline in the arable land- population ratio, which could pose problems (Lewis model). In the classical literature, it was believed that economic growth would continue till natural resources became a constraint and once that happened the economy would reach a “stationary state”. However, almost no attention has been given to the land required for nonagricultural purposes. In this article, we focus on the political economy of land r equired by the non-agricultural sector for its expansion in the Indian economy.

    1 Rising Importance of Non-Agricultural Land

    The last couple of decades have seen some salient changes in the defining features of developing economies. The first change is that in a large number of developing economies, capital is now no longer as scarce as it used to be, as savings rates have become among the highest in the world. A nother contributing factor has been the considerable loosening of the foreign exchange constraint, which has made more capital available. This has been possible due to many developing economies having a current account surplus. Additionally, there has been a loosening of capital controls so that international finance is flowing into the developing economies in the form of foreign direct investment (FDI) and portfolio investment, again making more capital available.

    Second, most developing economies are facing a constraint in the form of lack of skilled labour. Though in the “high development theory” sense, many developing economies especially the Asian ones still have surplus labour, it is now recognised that this may not be enough for the development process to continue unabated. The question


    haunting these economies is: how can the skilled labour constraint be overcome? The third important change that has

  • o ccurred, especially in the Asian economies (like India and China which have high population densities) is that land has become very scarce. By land, we specifically mean the land required by the non-agricultural sector (the industrial and the service sectors including the government sector) for its expansion. We call such land “appropriate land”. This needs to meet several demand s of the non-agricultural sector, and thus cannot be substituted by any othe r land. Such land can be of three kinds. The first is what we can call the “metro- adjacent land”, which is adjacent to the existing urban centres, i e, land on the periphery of metropolitan cities, medium-level cities and even smaller towns. Some of the features of this land are (1) it is physically contiguous to the urban centres, (2) the infrastructure in these areas is somewhat better than in the relatively far-off areas, not to talk of the far-flung areas, and
  • (3) manpower residing in these areas is somewhat better versed with the urban lifestyle and working ways. That is, though most of them in these areas are dependent on agriculture, others regularly go to the urban centres either to work, or for medical services, governmental work and persona l jobs. Thus the labour that is available in this “metro-adjacent land” is exposed to the process of urbanisation and in fact, wants to partake in the benefits of urbanisation.
  • The non-agricultural sector wants this land for its expansion because it has better existing infrastructure (as compared to the remote areas), possibility of improving this infrastructure relatively faster, and better quality of labour. Further, to attract a competent managerial class, who would prefer to stay in big cities, it becomes neces sary that the factory is located in the outskirts of such cities. There is a whole body of literature on the importance of “geography” in the process of development. The centreperiphery theories show us how development occurs in already d eveloped areas; and the vicious-virtuous circle theory also presents some insights in this field. Therefore, in such cases, there is hardly any choice with respect to the land that is required, and as experience has shown, in spite of many incentives given by the state, the non-agricultural sector is quite reluctant to move to the backward areas.

    The second type of land is what we call “infrastructural land”, which the nonagricultural sector requires for building highways, roads, dams and electricity pro jects. Here perhaps there is some choice with respect to the agricultural land that is required. For example, one can plan in such a way that in building a dam, “xyz” villages will be submerged in water but not “abc”. But this choice is not much. Third, the non-agricultural sector requires land from agriculture for mining purposes. Mines have to be located in area s where the natural deposits are found and there cannot be much negotiation with respect to where they are positioned.

    In all these three cases the location of land is extremely important. Thus, though India has a huge amount of land, the land required by the non-agricultural sector for its development process is fairly specific, and hence limited. Consequently, we are now in a situation where the land market has got segmented into agricultural land, non-agricultural land (i e, land where factories, IT offices, cities, towns, etc, exist) and appropriate land(i e, land that the agricultural sector possesses but which the non-agricultural sector wants for its development). Thus at a point in time, appropriate land belongs to the agricultural sector, but is liable to shift to non-agricultural land.

    Much of the appropriate land belongs to the farmers or to the tribals (henceforth we will call them farmers) who have inherited it. Land is one of the most important assets and sometimes the only asset that they have. They derive their livelihood, identity and their sense of security from land. Further, with an increase in population, and lack of other employment avenues, the stress on land has increased in India. This brings us to a situation wherein the nonagricultural sector wants this appropriate land and the farmers are unwilling to part with it (due to various reasons discussed below), leading to some of the most violent disputes the country has seen (and the same is true about C hina where riots due to land disputes are very frequent).

    2 The Role of the State

    Theoretically speaking, an increase in the need for appropriate land by the non-agricultural sector should lead to an

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    increase in the price of this land. However, in the real world the problem lies in the domain of political economy. The problem unfolds itself within the broad parameters of the interests of the state; the political power of each of the economic agents, the farmers and the capitalists, their ability to manipulate the state; the institutional framework and how it changes; and finally the vision of development held by the elite in the country.

    It is our argument that access to appropriate land is a contested issue, and it is scarce in supply precisely because the State is not creating conditions which are conducive for the farmers to sell their land.

    Looking at the other factor inputs, we find that the labour market in India is segmented in two ways – the skilled and the unskilled; and the organised and the unorganised. While the skilled labour is largely organised labour, the latter does consist of unskilled labour too. Generally, the returns to skilled and organised labour are higher than those of their unskilled and unorganised counterparts. The capital market is also segmented into organised and unorganised segments. The interest rate is lower in the organised sector mainly due to governmental intervention.

    In the context of the appropriate land, as far as the legal framework is concerned, there has been no discernible change since Independence. The Land Acquisition Act (1894) was amended in 1984 but the farmland can be and has been acquired without adequate compensation to the farmers (Gonsalves 2010). However, there has undoubtedly been a change in the milieu, though one cannot think of a particular year or an event with which to associate the shift. Nevertheless, since the change in the milieu is in some ways related to the heightened economic activity, we can think of two phases. The first is the “traditional phase” starting from the First Plan till the opening up of the economy in 1991. The second is the “civil society phase” which was characterised by increased activism and cons ciousness about the importance of land.

    In the post-Independence period, the first wave of the need for appropriate land came with the commencement of the planning process. The development projects, mostly in the public sector, were commissioned, and the requirement for

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    appropriate land arose in a big way. In this “traditional phase” the pressure on the land was low (in any case compared to the next phase); there was little activism on the part of the farmers, with hardly any non-governmental organisations (NGOs)/ civil society supporting them; and, as mentioned before, the legal framework was quite conducive for the taking over of appropriate land. Both the public and the private sector acquired land in plenty. Thus, land was acquired for building the Bhakra-Nangal dam, the Bokaro plant, the Telco and Tisco factories, Bajaj scooters, etc. It is now well known that people were evacuated from all such areas and hardly any compensation was paid to them. What was, de facto, demanded was a sacrifice from the displaced for the larger good. Whatever agitations took place were extremely local in nature and were ruthlessly crushed.

    In the second phase, i e, the civil society phase, though the legal framework remained the same, the following changes occurred. First, the pressure on agricultural land is much more as landholdings have become smaller. Second, the mobilisation of the farmers is much greater. Farmers who stand to lose their land are much more vociferous, organised, aware of their rights and willing to take up the fight. In this, they have been assisted by the NGOs, civil society organisations, the media and the opposition parties. On the other hand, in the “real economy” sense, higher rates of economic growth since 1991 and the expectations of higher rates have led to a steep rise in the demand for appropriate land. Thus, with an increase in demand, farmers’ consciousness has also increased. Consequently, the taking over of appropriate land has become one of the most contentious issues facing the economy now. If in the first phase it was easy to displace the farmers, in this second phase land acquisition has become an acrimonious issue with a range of outcomes possible – sometimes easy, other times quite difficult, and at times, as the examples of Nandigram and Singur show, quite impossible to acquire the land. The farmers have become more aware of their economic power and are willing to bargain/agitate for better returns to their land. The question they are asking is: Why should a certain section of the population suffer so that others benefit? Besides the important ethical question involved in such a sacrifice, in realistic terms the “golden future” may never emerge.

    As compared to the traditional phase, some improvement seems to have occurred with respect to the compensation/ price paid to the farmers. It seems that some effort is being made to look into what the farmers want, but is it adequate?

    3 Concerns of the Farmers

    The widespread agitations by the farmers across the country reveal their dissatisfaction with the package being offered to them. But does that mean that the farmers are not willing to sell the land at all, ever in the future? Or does it mean that they will be willing to sell it at the right price? How will this right price be arrived at? What should this right price consist of? Are agitations one way of increasing the right price? Like any other economic agent, the farmers too would be within their rights to negotiate and get the best possible price/ compensation. The apparent unwillingness of the farmers to part with their land needs to be understood in the context of the revelation that 40% of the farmers in any case do not want to e ngage in farming. All in all, the farmers need to be adequately compensated befor e they give up their land in a peaceful manner. To understand what this satisfactory compensation would be we need to understand the relationship of the farmer with his land.

    While an emotional bonding between the farmer and the land does exist, one should be wary of overdoing it. As we will discuss a little later, land means certain things to the farmers. Before that, some insights from Chayanov (Thorner et al 1966) arrived at under different conditions may be extremely useful. Paraphrasing him, we could say that the farmers’ family looks at their own viability in the short run and in the long run. Thus, they are primarily focused on their survival and the survival of their future generations. The farmers in India, even those growing commercial crops, are not capitalist farmers in any sense of the term. They are basically working within the framework of viability of current and f uture generations.

    Land is a source of employment and livelihood to the farmer. In reality, in most cases, the land does not give him a very high quality of life, but it helps him to eke out a living and be somewhat “food assured”. This is the income function of land.

    Further, land is also “something” he can fall back on, even though it may not be anything much. This is the insurance function of land. Ownership of land does not make him “jobless”, the way a person can be jobless in the urban areas in the industrial system (under the dominant capitalist system). Not only is he not “jobless”, but he also has some assured capital. Thus, shifting from his land means shifting to an entirely new kind of existence, with new kinds of uncertainties and risks.

    We observe two kinds of reactions to the loss of land. Farmers from the more developed states of Haryana, Gujarat and Maharashtra are found to be more willing to sell their land, while asking for substantial compensation and ready to agitate to get what they think is their due. This is a consequence of their better integration with the economic system and their increased/increasing bargaining power. On the other hand, in backward areas such as Orissa, farmers have been found to be more reluctant to give up their land (as they suffer from “aspiration deficit”); but it has been easier to bulldoze them into giving up their land at much lower compensation packages given their weaker mobilisation. Second, the manner in which farmers n egotiate to get a better package is also different in the developed and the backward areas. In the former, farmers are agitating in a relatively less violent manner (though the recent agitations in Bhatta and Parsaul villages in Greater Noida showed increased violence) and even while agitating they will nevertheless stay within the system and look for a solution within the available systemic parameters. In the backward areas, farmers resort to more violent outbursts and instead of staying within the framework they hope for a revolutionary solution to their problems. Up till now, such outbursts were less severe and the state could successfully crush them. Only in recent periods (as the Maoist movements show) have they become a real threat to the establishment. However, it can be expected that as “progress” occurs, the farmers from backward areas would also be willing to negotiate.

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    4 Adequate Compensation

    At one level, no compensation can be adequate, as displacement means the loss of a particular way of living. But people do change their lifestyle, especially if it is for the better. In this case, the farmers are expected to shift from low income cer tainty to low/high income uncertainty. We are calling it “high income” because in the last few years, a seemingly substantial financial amount is being offered to the farmers, running into lakhs and sometimes into crores of rupees (for example, in Haryana and Punjab). However, in most cases the amount offered is low. There is also a problem at the farmers’ end. Studies have found that when they receive the money, farmers spend it on building a house, daughter’s wedding,1 etc. Without deriding the importance of these claims on the finan cial resources suddenly gotten, it is clear that such behaviour does not result in any future income streams. It is here that the NGOs can play a pivotal role. Most NGOs are opposed to any conversion of the appropriate land into non-agricultural land. But as discussed below, such a newly unfolding scenario calls for and creates the space for other kinds of activism.

    In any case, the question of a compensation package (i e, a lump sum amount for land, annuity, ownership in the developed land, jobs, etc) becomes crucial and we need to examine it in some detail. As a first step, if one were to look at the eminent domain principle applicable in the United States (US), it states that fair compensation has occurred when “the property owner is put in as good a position pecuniarily [sic] as if his/her property had not been taken”. The property’s highest and best use is to be considered for c ompensation. However, the conditions in the US (or any other developed economy) and India are not quite the same, beginning with the huge demand for “appropriate” land in India. Hence the compensation package in India should go much beyond putting the owner in “as good a position”, and to pay him the equivalent of what he is getting from farming would be quite unjust, as this would be a small amount.

    Even a cursory look at the system of compensation in India shows that it is extre mely faulty and in need of a complete overhaul. The compensation package should increase the farmers’ income and insurance both. The first step would be, of course, to change the law (i e, the passing of the Land Acquisition (Amendment) Bill of 2007). But that alone will not be enough. To bring together the farmers and the buyers of their land (let us call them the investors, which would include the public and the private sector investors), new institutions need to develop.

    New kinds of NGOs/civil society groups, who believe that conver ting appropriate land into non-agricultural land, if done in a proper manner, can help the farmers come out of their subsistence existence, can play an essential role here. Given the variety of conditions in the ownership patterns of land, this is a monumental task. Such NGOs (which could consist of non-farmers and the farmers themselves) will have to take up the case of each farmer, assess how he is affected by the loss of land, to what use his land is going to be put, how he needs to be compensated and then accordingly negotiate it with the investors. (Ironically, one is reminded of the CPM cadre which undertook a similar task in the 1970s when land reforms were implemented in West Bengal. In each and every village, land records – both oral and written – had to be looked into, and a decision taken on who should become the new owner of the land. However, after 30 years, the same cadre failed woefully when the issue of Singur and Nandigram came up.) This would be much like the trade unions negotiating on behalf of the workers, along with the concomitant agency problem. Further, the farmers will also have to be counselled with respect to using the money they receive as compensation, so that they do not spend it on u nproductive purposes (some socially progressive steps could also be taken like making the wife the joint owner of the new assets, bank account, etc).

    Types of Compensation

    As of now, the compensation paid to the farmer is dependent on many factors and there is a certain amount of vagueness associated with it. States across the country have developed different modes through which land can be acquired. For example, there can be the special economic zone (SEZ) mode; the government acquiring the land and handing it over to the private d eveloper; a partnership (a joint

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    venture) between the government and the private industry, etc. Further, based on the recent transaction in the area, the government offers the price. But a high stamp duty may result in the true value of the land being understated. Broadly speaking, the attributes of land which are considered in fixing the price are (1) fertility, (2) proximity of the land to developed/urban areas or its l ocation, (3) the use to which the land is going to be put and the profitability of that industry, and (4) the nature of the buyer. Under the current law, the Supreme Court has upheld the right of the government to acquire land for public purposes, (Mehta 2010) and lower amounts can be paid for such land. However, fairness demands that the compensation to the farmers should be the same irrespective of whether the buyer is public or a private sector entity.

    Even then, ultimately, what the farmers can be given would most likely be dependent on what is going to come up on the acquired land, the profitability of the industries/ mines on that land, and the accessibility of the land to urban centres. All acquired land may not be equally profitable; there would be differences between two private acquisitions also. Thus, though fairness demands that all land-losers be paid an equal compensation, it may not happen in the real world. A parallel can be drawn to other sectors, e g, the payment to a security guard in an IT company, a chemical factory and in a textile factory is quite disparate; though the work done is quite similar.

    Further, other complex issues might arise; for instance, the package may consist of giving a job to one person from the displaced family. If this family had not been displaced, all the sons would have got equal share in the land and would have had some source of livelihood. If only one son gets the job, what happens to the others? This son who has now shifted into the non-agricultural sector, which puts its own demands on him, may not be able to look after all his siblings.

    The government on its part is trying to come up with some new ideas. On 17 September 2010, the Group of Ministers approved the new Mining Bill, which has a provision for sharing 26% of profits with the displaced in addition to providing employment. Such proposals for mining (and

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    also possibly for non-mining activities) would have to be looked into carefully. Not surprisingly, this step has not gone down well with the mining industry for its own reasons. But even from the point of view of the displaced, would this mean sharing of losses when they occur? As of now the bill states that if a mine is non-functional or generating losses, the firm should compensate the affected people with an amount equal to the royalty given to the state government. But this would bring in more uncertainty into the package. What happens if there is non-compliance on the part of the company in the future? It would be almost possible for the earlier-displaced to run to the court then. It may be better if an inflation-indexed annuity for say 33 or 50 years is paid to the affected. These are the kinds of issues that future compensation packages will have to work out.

    At this stage one could look at some of the success stories in land acquisition. There are some cases where the farmers seem to have been given a fair deal, e g, the now famous model developed in Haryana by the Chief Minister B S Hooda wherein the farmers are paid a compensation for land, given residential plots and annuity for 33 years. Phase I of the Bharat Forge-MIDC SEZ in Pune is taken to be a success, as the farmers were paid a lump sum amount, employment was offered to one person from every project-affected family, there was a buyback option of up to 15% of the developed land at a particular rate, and every landless labourer was paid Rs 65 for 600 days. However, both the Hooda model and the SEZ are facing problems now as the farmers in this area want higher compensation in Phase II. The same is true of the Greater Noida Phase II (the Yamuna Expressway), where the farmers reneged on the earlier contract and demanded more. It seems that as a project gets into the Phase II, the farmers start asking for more. This makes us ask the question: Can the farmers be unreasonable?2

    5 Is There a Resolution?

    There is a critical problem at the other end of the spectrum too. Many investors have used their political power to get land free or at a negligible price (e g, land acquired by Reliance Energy Generation in the Hapur subdivision of Ghaziabad) (Pai 2010). An element of speculation has also entered the whole business. Consequently, this has become a breeding ground for the land mafia and speculators who are often supported by the political classes themselves. This implies a steep increase in the costs of the genuine investors. Not surprisingly, they would rather collude with the politician and avoid paying the amount. The delay in passing the Land Acquisition (Amendment) Bill 2007 could be attributed to this factor. Further, almost all political parties have been opportunistic in facing this challenge. Their response has been to oppose acquisitions when in opposition and to support it when in power. One can even interpret it as “consensus-of-a-hidden-kind” (reminding one of “globalisation by stealth”). Political parties have the capacity and the responsibility to educate the public and help in developing a consensus on the issue, but they seem to have avoided both. Thus while NGOs have become a major opposing force in line with their ideology, the political parties seem to be avoiding taking a clear position. It is also interesting to see that in some cases, politicians have almost threatened the agitating farmers with declaring those areas which the farmers do not want to give up as “green belts”, thereby foreclosing any opportunity for the farmers to sell their land for non-agricultural purposes in the future (announcements made by Sharad Pawar and B S Hooda at different times)!

    On the other hand, the farmers may themselves come up with solutions to the problem of land acquisition. For example, farmers in the village Avasari Khurd (close to Nashik) came up with some “out of the box” solutions (Sathe 2007). In this case, around 1,500 farmers from this village decided to form a company which would float a SEZ, so that the benefits accrue to the farmers and not to the developer. Each family was expected to contribute Rs one lakh, making them shareholders in the company and a loan was to be raised against the land itself. They planned to set up the SEZ on half the land, and retain the other half in the village for agriculture. It is important to note that they admitted being uncomfortable with the idea of giving up all their land for the SEZ. They were happy to continue with some amount of farming and this gave them a sense of security. It is also interesting to note that they thought of forming a “company” and not a “cooperative” – a movement that has been historically strong in this part of India.

    The issue before the state and the investors is to acquire land in a peaceful manner so that the process of capital accumulation and growth continues. The land factor has the potential to not just disrupt the economic story but also the political story of India. In the case of organised labour, peace has been bought by giving high wages and perks. The unorganised sector, on the other hand, has been left to fend for itself and by definition it is difficult for them to get into a protesting mode. Would the state support the farmers and go against the investors? The problem is confounded as the state itself is an investor in very many cases.

    The passing of the Land Acquisition (Amendment) Bill 2007 is only a first step towards resolution, as the actual compensation package would have to be worked out through negotiations between the farmers and the investors. The devil lies in the details. This opens the door to parleys which can be quite murky and exploitative of the farmers, as the investors will continue to have the economic and political upper hand. While the negotiating capacities and posturing by the farmers is also on the rise, one can expect that the implementation of the Act, when passed, will vary across India. The pressure of the “developmental juggernaut” is immense. In crude terms, if the investor can afford to give a fair package, it is good for the farmer; if not, the land will be grabbed in any case.


    1 Author’s fieldwork in Hingewadi Phase II, close to Pune; along with other reports.

    2 On the other hand, very high demands by the farmers may have unintended consequences and it may achieve what government policy could not. That is, wherever possible, the investor may try to shift to backward areas where the compensation that she has to pay is more affordable.


    Gonsalves, Colin (2010): “Judicial Failure on Land Acquisition for Corporations”, Economic & Political Weekly, 7-13 August, Vol XLV, No 32: 37-42.

    Mehta, Pratap Bhanu (2010): “It’s Land, Stupid”, The Indian Express, 19 August.

    Pai, Sudha (2010): “Landing a Better Deal”, The Indian Express, 28 August.

    Sathe, D (2007): “When Farmers Form a Company”, The Economic Times, 17 October.

    Thorner, D, B Kerblay and R E F Smith, ed. (1966): A V Chayanov on the Theory of Peasant Economy (Illinois: The American Economic Association).

    Economic & Political Weekly

    july 16, 2011 vol xlvi no 29

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