Last month I had written about the similarity between the Singur land acquisition case and something that happened in the US more than 20 years before the West Bengal fiasco (“Whose land is it anyway?” June 25). In the US, the court finally took a stand; in India, a spate of recent judgments by the Supreme Court has forced a reversal of ownership rights to the original owners of the land acquired by the state of Uttar Pradesh. The Supreme Court disallowed the acquisition on the grounds that the state had used the “emergency clause” to summarily acquire land for a specific purpose but is using the land for an entirely different purpose. This has created a mess that can become as big as the one in Singur. The government has paid the farmers for the land, developers have paid the government to get this land and an unsuspecting group of people has paid the developers to book residential plots and premises. Now all this has to be unravelled and investments already made will be lost. In addition, the land has to be made fit for cultivation again; otherwise, farmers will never get back their true asset.
The real question is whether we need a third party – like the government – to effect land transfers between private parties. In Singur, land was transferred from private owners to Tata; in Noida, land was similarly transferred from private farmers to private developers. People are spending countless hours discussing how to get current workers a “fair” price, but no one is questioning why the government should get involved at all. Everybody is happy with the claim that such land transfers are for “public purpose”; they will create employment and improve the quality of life for all concerned. I find this argument strange because any private economic activity creates value for the owners of the activity, their employees, suppliers, as well as the users of the activity. If this was not true for any one of the groups, the activity would not be feasible. In other words, if public purpose was to be defined the way we are going about it then every private activity satisfies “public purpose”. Even after 20 years of market-based reforms, we do not seem to have understood what markets do and what a society based on free enterprise is all about.
An important aspect of the disputed land transactions is that there is usually a large number of small sellers (farmers in Singur or Noida extension) and a small number of users of the aggregated land (Tata in Singur and developers in Noida). Another major characteristic of such property transfers is that little additional value is generated if all current owners do not voluntarily sell their land. In other words, there is a certain degree of lumpiness — half the land has a value that is much less than half of what all the land could generate. So, to extract full value, the buyers must get the land from all the potential suppliers.
There are at least three reasons why the market may not provide the desirable outcome. Remember that when the market operates, only voluntary transactions are allowed. So, since the transactions have to be voluntary and this is a one-off sale (in the sense that parcels of these lands are not routinely bought and sold), the buyer has to negotiate the price for the land with each landowner. Such “transaction costs” can become prohibitively high and discourage buyers.
Second, the negotiations are usually between small owners with limited resources and a big company with vast resources. This translates into wide disparities in bargaining strength between suppliers and buyers. Sellers are liable to get a lower price than what they could get if the buyer had resources similar to that of the sellers.
The third problem is neither that immediate nor too complicated. This is a variant of the “hold-up” problem — the last seller always has a great advantage in voluntary transactions. Since there is no reason to believe any farmer is less smart than the other, each will want to be the last seller to extract the maximum value. So, no one will want to be the first seller and the transaction will not get off the ground!
Interestingly enough, these three problems – high transaction costs, disparate bargaining strength and the possibility of a hold up – are not unique to such land transfers. Similar issues arise when a publicly traded company is being acquired to generate additional value by the acquirer. When an acquirer wants to take over a company, she needs to buy up at least 50 per cent of the outstanding shares; anything less than that creates no additional value. The hold-up problem is slightly different here because not surrendering the shares to the acquirer is the best strategy for the small shareholder. Importantly, in both cases transactions may not happen. In the takeover of publicly traded companies, markets and institutions that govern them (the stock exchanges and corporate governance laws) have addressed and solved the problems through the mechanism of the “takeover code”. Imagine how we would react to the government forcefully acquiring public corporations to sell to an acquirer because of these problems. Would we accept a “fair price” definition for our shares worked out by some “experts”? Quibbling about the circle rate and the black-white ratio is silly.
An enabling market society allows the best price to be obtained; it does not ask experts to define the best price. We have followed this principle for takeovers. Why can’t we develop similar procedures, sanctioned by the law, to enable transactions in land?
The author is research director, India Development Foundation
