FLASHPOINTS: LAND

Business, Government and Society

Session 7
 BASICS OF THE CLASSICAL MODEL
• Classical Production model: It is basic model
• When dynamized --neoclassical growth model.
• Factor markets: Capital and Labor inputs ( K and L)
• One sector of output (Y)
• Aggregate production function (for real GDP, Y)
• What is a production function? Recipe for combining
inputs into outputs for given technology.
• Y=F(K,L)
• Standard assumptions: positive marginal product,
diminishing returns and constant returns to scale.
• Land as a factor of production. Differences?
LAND
 What are Special Economic Zones (SEZs)?

“Delineated duty-free enclaves that were deemed

foreign territory for the purposes of trade
operations, duties, and tariffs.”

Background:
– First set up in Argentina and Uruguay in the 1920s.
– Rapid development started in 1960s-1970s.
 India’s Experiments SEZs

• They are like small open economies within the

restrictions of the Indian economy.
• India set up Asia’s first Export Processing Zone
(EPZ) in 1965 in Kandla, followed by one in Mumbai
• SEZs evolved from EPZs, but major differences in
the structure of the two policies.
– Both aim to create industrial zones but SEZ Act catered to a
larger industrial base with more relaxed rules.
 India’s SEZs

• The government aimed to promote:

– Exports of goods and services
– Increase in investments – domestic and foreign
– Create additional jobs
– Develop India’s infrastructure
• India wanted to use the 45.5% of the uncultivable
land area optimally
• Specialised SEZs catered to sectors such as IT, gems
and jewelry and biotechnology.
• Debate: Are SEZs successful? Or do they create few
benefits and drain the government’s resources?
 Salient Features of the SEZ Act of 2005

• The SEZ Act of 2005 was widely accepted by all

political parties.
• Firms within SEZs did not have to pay import duties
on their raw materials.
• Firms were exempt from income tax on exports for
first 5 years and allowed 50% exemption for next 10
years.
• Some states even provided additional incentives to
attract investments.
 Salient Features of the SEZ Act of 2005

• The center and state governments take a hit on revenue to

support industry.
• Companies wanting to shift to a SEZ provided a ‘single
window clearance’ reducing red-tape.
• Most labour laws applied to SEZs.
– Except labourers had to give 30 days notice before going on strike.
 The Mahindra World City Experience
India’s first multi-
sector operational Successfully reduced the regulatory
Located 45Kms from Chennai SEZ infrastructural burdens

Mahindra
World City

Difficulties in hiring Managing customs and

talent due to 90 minute congestion delays at
commute Complying with Chennai airport.
detailed paperwork
requirements on
Indian labour laws
 The Mahindra World City Experience

• Mahindra was successful in acquiring land because:

– It already had land prior to SEZ Act for its auto-ancillary
– Long term view taken by the firm towards developing SEZ
• Mahindra set up another multi-purpose SEZ near
Jaipur.
• Acquiring land for the Jaipur SEZ was successful due
to cooperation of state government and acquisition of
extra 1000 acres to relocate displaced people.
 Private Property in India
• Land is a state subject, differ on ‘stamp duty’.
• SEZ developers face hurdles in acquiring land privately:
– Owners don’t want to sell
– Owners hold out for higher price
• A major concern for SEZs:
– SEZ developers misuse the SEZ policy to increase real estate portfolio.
– Middlemen purchasing land at throw-away prices in anticipation.
• “As far as we understand, the government and the company are one. We
have no faith that anyone will protect our rights.”
- Jenna Bai
 Implementing Eminent Domain
• The Land Acquisition Act of 1894 says, land could be acquired
by the government for ‘public purpose’ on payment of ‘just
compensation’.
• The act specifically stated that ‘public purpose’ does not
include land acquisition for companies.
• An amendment in 1984 broadened the term and gave
government flexibility in deeming projects.
• Historically in India, the actual transaction price of the land
bought was never revealed.
 What is the ‘right’ price?
• Government determined the value at the time of acquisition
based on official documentation.

• Thus, the average rate determined was often lower than the
actual market price.

• Price increasing as land is bought

• Farmers faced additional problems in trying to obtain full

value of their land.
– The legal rights are not well established in India.
 Reforming Land Acquisition in India
• In 2007, the land acquisition bill was amended to broaden the
term ‘public purpose’ to include – strategic, naval, military, or
air force purposes, public infrastructure projects.
• Land acquired: 30% by the government and 70% by the
private parties.
• Some significant changes by the reform:
– Provisions to compensate not only land owners, but also dependents on
the land, such as tribals, landless labourers, etc.
– Payment must be made within one year from the date of declaration of
intent to acquire land.
– Required social impact assessment
 The Aftermath of Nandigram: Tata
Motors in Singur
• Ratan Tata in an open letter to the people of W.Bengal asked:
– If they wanted a modern, infrastructural developed state?
– Or a state consumed by bad political environment?
• Question relevant for entire industrialization policy.
• How would Tata’s decision affect prospects of attracting
investment in manufacturing?
• Would passing the Land Acquisition Amendment Act resolve
disputes over property rights?
• How would India’s economic growth and reform process
evolve in view of these changes?
 Tata Motors in Singur
• $40 million loan at discounted rates, reduced
electricity charges and 997 acres of fertile agricultural
land was allocated to Tata
• The government acquired the land under the eminent
domain provisions stating land would be used for
public purposes.
• Some viewed this as a ‘forcible acquisition’ and the
protest began after the announcement of the Nano
Project.
 Tata Motors in Singur

• Once the Tata project began the price of the industrial

land in Singur rose to as high as $80,000 and many
farmers felt under compensated.
• The demand to return the 400 acres was problematic
to both – Tata Motors and the farmers:
– Even if Tata could retain enough land for its own plant, its
suppliers who had invested $110 million would have to
forcibly relocate.
– For the farmers, the disputed holdings were scattered across
the plant site, making repatriation even more challenging.
 Tata Motors in Singur

• In September 2008, the state government offered

additional compensation and agreed to return 70 acres
of land within the Tata plant.
• The opposition rejected this offer saying they did not
trust the government to keep its word.
• Anticipating a gridlock between the farmers and
government in Singur the other states began inviting
Tata to relocate within their borders.
 Tata Motors in Singur

• In October 2008, Tata Motors announced the closing

of the operations of the Nano project in Singur due to
“an environment of confrontation, agitation and
violence.”
• The incident left Tata Motors wondering if it would
face similar fate of opposition in Gujarat.
Thank You!