Rent and reward

True wealth to the nation is generated only when the land is put to productive use. Long-term land lease over land acquisition can accelerate the investment cycle in India.

India has a total land area of 32,87,590 sq km, which is 2.4 per cent of the world´s surface area, making it the seventh largest country in the world. Forty-six per cent of the land is under agriculture and 50 per cent is inhospitable; two per cent of the land is urban and one per cent under industry. The government has the largest land bank under its supervision and ownership. At present, Coal India has a land bank of around seven lakh acre whereas the Railways has around 47,336 hectare, making them the owners of the largest land bank available, followed by major ports at 2.64 lakh acre and PSUs at 2.5 lakh acre.

Putting land to work
Land needs to be made productive to add to national wealth. Historically, too, land has been offered for development of industry. The Bombay Spinning and Weaving Company was the first cotton mill to be set up in Tardeo, Mumbai, in 1856. A boom in the textile industry followed, with 10 cotton mills set up in Mumbai by 1865, and then, a total of 136 mills being set up by 1900. The textile industry was offered added government incentives in the form of long-term leases (some of 999 years), as mills stimulated economic growth and employment. These mills were owned by former traders like the Tatas, Petits, Wadias, Currimbhoys, Thakerseys, Sassoons, Khataus, Goculdas, and Greaves. Most of the mill workers came from areas around Mumbai; the Kolis were particularly represented. The mill owners housed their workers in chawls built in the areas of Tardeo, Byculla, Mazgaon, Reay Road, Lalbaug, Parel, Naigaum, Sewri, Worli, and Prabhadevi. Gradually, these areas collectively came to be known as Girangaon.

Land was put to use once it was handed over on lease. The investors sought to make gains through the productive use of land. It did not matter that the land was not in their ownership as long as they had the right to develop revenues on it for a fixed period of time for rent. Although the rent was a paltry sum, it was reflective of the demands of the times. Even now, countries like Ethiopia and Sudan offer land on very low rent to Indian entrepreneurs to help develop their economies. The cost of missed opportunity owing to loss of productivity of land can be mindboggling, especially in a country like India that is starved of infrastructure on all fronts.

Delays and derailment
To illustrate the sheer cost of delay in putting a project to work, let alone the cost of leaving land idle, here are some details:

In December 2014, 127 out of 251 projects were delayed with respect to original schedule. The delay is in the range of one to 96 months with respect of projects relating to the railway, power, steel, road, and petroleum sectors. Out of the 127 delayed projects, 32 projects have an overall delay in the range of one to 12 months, 25 projects in the range of 13 to 24 months, 37 projects in the range of 25 to 60 months, and 33 projects of 61 months and above.

The total original estimated cost of these 251 projects was Rs 788,629.01 crore and anticipated completion cost is likely to be Rs 970,972.78 crore, which reflects an overall cost overrun of Rs 1,82,343.77 crore (23.10 per cent of original cost). The expenditure incurred on these projects till December 2014 is Rs 411,545.86 crore, which is 42.40 per cent of the anticipated cost of the projects. Out of the 251 projects, three projects are ahead of schedule as per the original timeline, while 52 projects are on schedule, and 127 projects are delayed. Brief reasons for time overruns as reported by various project implementing agencies are delay in land acquisition, forest clearance, delay in supply of equipment, fund constraints, geological surprises, equipment erection, geo-mining condition, shortage of labour, inadequate mobilisation by the contractor, contractual issue, ROU/ROW problems, and law-and-order situation.

The railway sector has witnessed maximum project delays owing to land acquisition. Out of the 83 projects that have been reported, 21 projects are delayed. In the road sector, 23 out of 37 projects are delayed. Last year, delays in land acquisition and statutory approvals cost road projects heavily. Against the target of 6,300 km of road construction works under various schemes of the Ministry of Road Transport and Highways during the current year, only 3,038 km was constructed till January 31, 2015.

Non-issue for private sector
Private players like Nikhil Gandhi, GMR, GVK, Hiranandani, Lodha, Raheja, etc., have all successfully amassed land banks for their projects. Even industrialists like Sajjan Jindal, Anil Agarwal, and Anand Mahindra have all successfully bought large land parcels for their projects with no cause for delay. So, land acquisition is only hurting big-ticket public projects where vested interests are either interested in derailing the success of the government or those who want to leverage this opportunity for their own selfish agenda.

Act now
The Land Acquisition Act has been constantly running into rough political weather. And if the government caves into the demands of the opposition, many infrastructure projects (including smart cities, rural electrification programmes, and industrial corridors, to list a few) will be stuck in limbo. However, the solution lies in turning the idea on its head. Land for such projects need not be bought but taken on a 99-year lease. Apart from the rent that would accrue to the landowner, some token compensation should be made such that the landowner can buy a piece of land elsewhere for agriculture activity and would also be given a share in the super-profits on the project. This solution can ensure that the capex for such projects is contained and that the landowner who continues to get rent for subsistence, does not end up destroying his wealth and capital and can continue to be an agriculturist with another piece of land. (Recently CIDCO, a state-run undertaking in Maharashtra, acquired 671 hectares of land owned by 1,200 villagers in ten villages of Navi Mumbai for the airport project. In lieu of the surrendered land, the Maharashtra government, in a unique compensation model, offered the owners developed land measuring 22.5 per cent of the acquired land, including 15.75 per cent of buildable plots, and 6.75 per cent development amenities in Pushpak Nagar township which is being develeped by CIDCO).

Renting land for infra projects is a viable and practical solution. It will help save capital by not requiring a large amount of capital to be locked up, saving time in purchase and the entire process of land acquisition, thereby fast-tracking projects ( as per recent estimates the capex for land for road projects alone is Rs 1,85,000 crore). Some industries already follow the model of leasing land instead of acquiring it. Oil and gas extraction usually follows the land-lease model. And renewable energy projects often lease the land from owners instead of trying to acquire it, which could make the projects prohibitively expensive.

Leasing land can ease the pressure on demands for capital expenditure that does not add any wealth to the nation. True wealth to the nation is generated only when the land is put to productive use. Land on rent will result in accelerating the cycle of investment in projects by at least three to five years for each project and consequently, accelerating the return on investment. This will also defuse the social upheaval caused by these injections of wealth in the lower economic strata of society, while enhancing lives owing to a consistent flow of rental income. This debate on land acquisition is as unproductive as the land sitting idle with no investments to enable its productivity.

This article has been authored by Pratap Padode. The author is Founder & Director of Smart Cities Council India.