Business Today (Edition June 22, 2014) : Days before the Narendra Modi-led National Democratic Alliance (NDA) won the general elections, Ravi Uppal, Group Chief Executive Officer and Managing Director of Delhi-based Jindal Steel and Power Ltd (JSPL), heaved a sigh of relief. But this had nothing to do with Modi’s imminent victory. Uppal was relieved because JSPL’s Rs 30,000 crore project at Angul district in Odisha – a six million tonne steel plant – could now finally be fully commissioned. The project had been ready for the past two years but some of the units could not be commissioned because JSPL was unable to get access to a three km stretch to connect a 25 km pipeline to the nearby Brahmani river. The remaining 22 km of the pipeline had long been laid. The company planned to draw water for the project from the Brahmani river through the pipeline. But landowners had refused to give their land for the last mile connectivity. “They would do dharnas. Our requests to state authorities were neglected. We were left helpless,” says Uppal. Finally, he managed to convince the local authorities to act. The police kept protesters at bay while the final stretch of pipeline was laid. Uppal managed to resolve his problem, but another 106 projects have not been that lucky. They have been stalled over the past two years because of land acquisition problems. According to the Centre for Monitoring Indian Economy, 70 of those were worth Rs 3,52,480 crore. About 30 per cent of these were government projects, while the rest was in private hands, both Indian and foreign. In the last year of the Congress-led United Progressive Alliance government, projects worth Rs 1,81,126 crore got stalled, shelved or abandoned. That’s not all. Work on planned 69 national highways – stretching across 8,000 km – was yet to start as of January, according to rating agency ICRA. Again, the delays were mostly due to land acquisition problems. “Many of these were awarded two years back,” wrote Aditi Nayar, Principal Economist at ICRA, in a recent report. In an attempt to solve land acquisition problems, the UPA government brought in the Right to Fair Compensation and Transparency in Rehabilitation and Resettlement Act 2013, commonly called the new land Acquisition , early this year. The intention was to make land acquisition more transparent and farmer friendly. But many economists and industrialists hold that the new act is as much a deterrent to growth as the old one was. Arvind Panagariya, economist and Professor at Columbia University, says that the Act is “damaging” for both the seller and the acquirer. “With the cost in terms of time as well as money multiplied manifold by the Act, no new land acquisition has taken place since January,” he says. He maintains the Act will adversely affect both urbanisation and development. Many now expect Modi to come to rescue of the industry with amendments to the Act. But the BJP supported the new Act in Parliament.
The Price Tangle
The previous Land Acquisition Act was framed in 1894, when India was under British rule. The rules for acquisition were simple. The state governments – land is a state subject – just had to notify to landowners that their land was being acquired. They would be paid the nominal circle rate (minimum rate of land in a particular area decided by the government) or the ready reckoner rate (the prices of land for any given area published by the government each year). This was way lower than the prevailing market rate, at times even one-tenth of it, and the land owners suffered.
In the new Act, not only have the rates been corrected, but the land buyer has to pay twice the market value of the land in urban areas and four times in rural areas. There is also an additional compensation to be paid to the affected families to ensure their rehabilitation and resettlement (R&R). Companies are expected to employ those from the displaced families. “We have now swung the Act to the other extreme. We have made land so expensive that it is unaffordable for industry,” says B. Muthuraman, Vice Chairman of Tata Steel. Muthuraman, in partnership with industry lobby Confederation of Indian Industry (CII), has estimated that a 1,000 megawatt power plant – at a project cost of Rs 6,000 crore – would require 1,000 acres of land. The cost of acquiring the land alone will be close to one-third of the total cost. The R&R cost too will be prohibitive, rising from an earlier Rs 150 crore to Rs 450 crore. “In such a situation, the project will simply be unaffordable,” says Muthuraman. There are two mega infrastructure projects currently on in India – the Delhi Mumbai Industrial Corridor (DMIC) and the Mumbai Chennai Industrial Corridor. They aim to develop new industrial cities as “Smart Cities” and converge next generation technologies across infrastructure sectors. Both the projects are delayed because of land acquisition issues. DMIC is assisting state governments in acquiring land in Haryana, Rajasthan, Madhya Pradesh, Gujarat and Maharashtra. “While acquiring land in Aurangabad, land prices went up to 5.5 times the market rates simply because landowners were not willing to sell at a lower price. Everything is becoming unviable,” says Amitabh Kant, Director, DMIC. Consider the Navi Mumbai International Airport project. Only 10 per cent of total land required – about 270 acres – remains to be acquired but the process has hit a roadblock as villagers are not vacating land needed for the project. City and Industrial Development Corporation (CIDCO), the nodal agency for the airport, will start acquisition afresh as per the provisions of the new Act. According to market estimates, the cost of the land will go up eight to nine times, making the remaining 10 per cent as expensive as the 90 per cent of the land already acquired.
Real estate companies, which have seen a big boom in the past one and a half decade, are worried too. Navin Raheja, Chairman and Managing Director of Raheja Developers, says that at least 50 acres of land are needed to build a township. Land acquisition at this scale would require rehabilitation of the affected families, a process that could go on for several years. “I cannot leave such a burden for my successors. It is better that I don’t work at all. We don’t have plans to make any new townships unless this law is repealed,” he says. A separate department to take care of R&R activities might be needed soon, he adds.
It is not Raheja alone. Mumbai-based real estate veteran Niranjan Hiranandani, Managing Director of Hiranandani Group, echoes the same concern. “If someone is already paying a premium, then why should he pay solatium, and look at R&R and employment. We will not look at large sized projects that will affect us because of the Land Acquisition Act,” he concludes. Solatium, a word with Latin roots, stands for compensation given as a solace to acquire a piece of land where the landowner is emotionally connected to the land. Given the escalating cost of land, Modi’s mission of building 100 smart cities – a project he committed himself to in his election campaign – looks like a distant dream, according to Raheja. Indeed, without real estate companies promoting the newer cities, the project might be a non-starter. But pricing is just one of the many problems with the new Land Acquisition Act.
The 1894 Act enabled the state government to acquire land on behalf of a company. But lately the states have found it tough to acquire large swathes of land for big projects. Consider the examples of Posco’s steel plant project in Odisha and Tata Motors’ Nano plant in Singur, West Bengal. Both the projects were stalled when villagers decided not to allow industrialisation, resulting in huge losses to the companies. Posco is still stuck in Odisha, and Tata Motors moved its plant to Gujarat in 2008, when Modi was the chief minister. The new Act mandates that the land acquirer – either the state government or private entities – will have to take consent of the displaced. If land is acquired for public-private partnership projects, consent of 70 per cent of the affected parties will be required, while for private projects 80 per cent consent is mandatory. This is in addition to doing a social impact assessment and R&R. Given the complete process, which is deemed complex by many, the time to acquire land is estimated to be around 56 months by industry bodies and consultants. But the complete procedural rules, based on the provisions of the Act, are yet to be laid down. The states will play an important role in making the rules and procedures, like the time period for taking consent, doing a social impact study and creating processes for R&R, and other such rules. “One does not know the rules. They are yet to be notified. The present legislation will neither help the farmers nor the industries,” says Anil Swarup, Chairman of Prime Minister’s Project Monitoring Group (PMG), a body that works with various ministries to facilitate large project clearances.
Nobody would acquire land for projects if the process takes inordinately long, say industry sources. Ramesh Menon, Director, Global Initiative for Restructuring Environment and Management, further points out that all projects which did their viability reports before August 2011, when the new Act was conceptualised, have to necessarily revisit their numbers if the land hasnt been acquired yet.”Earlier, the acquisition process used to take three years but with the new policy it may take up to five years. It should not be more than 18 months,” says L. Madhusudan Rao, Executive Chairman, Lanco. The company’s 1,320 megawatt power plant project in Dhenkanal district in Odisha got delayed because of land acquisition woes.
Institutional investors are no less worried even though they agree that the earlier law shortchanged landowners. “There are various aspects that are unclear, rendering greater uncertainty on the feasibility for such land acquisitions. The primary debate is whether the larger government intervention and lengthy process of acquisition will make projects unviable,” says Archana Hingorani, Chief Executive Officer of IL&FS Investment Managers. But there are some who do not agree that the Act has severe shortcomings. “I don’t see there is a problem,” says Vinayak Chatterjee, Chairman of consultancy firm Feedback Infra. Chatterjee argues that the “law” is a policy framework which translates into rules and procedures. “Many of them can be collapsed and the time period can be reduced to one and a half years,” he comments. One way possible is taking consent and doing the social impact study simultaneously, instead of doing them separately, he adds.
The Other Parties
There are other sets of stakeholders, besides the buyer and the seller, who might use the law for their own benefit. Whenever a large group wants to acquire land, or when a township is created, apart from local politicians, there are many more who want to reap the benefit. For example, Gurgaon, the satellite township of Delhi, which has grown manifold in the last decade, has more than 1,000 real estate brokers. They play an important role in jacking up land prices. “In India, it is very difficult to buy land from people if you tell them that Reliance or Jindal is setting up a plant in their area. Land is purchased secretly through brokers,” says a chief executive of one of the large infrastructure companies.
The new Act provides no way of controlling this growing menace. “Often the villagers are not against land acquisition, it is the middlemen. The process of consent should be devoid of unruly elements,” says Muthuraman. Some suggest that the adoption of technology on a large scale will make the land acquisition process transparent. This will help in keeping politically motivated people away. PMG’s Swarup suggests that the entire process of acquisition should be digitised and be publicly available on the Internet. He had done so with projects stuck because of lack of environment and forest ministry clearances. Digitisation has partly helped Swarup clear projects over Rs 500,000 crore. From submission to the clearance of the project, the entire process was digitised. Earlier, no one knew where the project was stuck. After digitisation, anyone could know the status of the project and communicate with the respective departments. In India, industry occupies only three per cent of the country’s land. In more developed countries like Japan and the US, industries take up to seven per cent. India has a long way to go, but there is little land available. One-third of the land is under reserved forest, which cannot be touched. Then, there are water bodies, and a huge part of the remaining land is for multi-crop irrigation, which cannot be put to commercial use as over 60 per cent of the population feeds on income from agriculture. DMIC’s Kant is in favour of urbanisation as the agri-economy is growing at a dismal two to three per cent. “If the country has to grow faster, the manufacturing sector has to play an important role and for that more land is required,” he says. India will need to build 700 to 900 million square metres of commercial and residential space, 350 to 400 km of metros and subways and 19,000 to 25,000 km of road lanes every year to support its growing urbanisation consultancy firm McKinsey estimated in 2010. The requirements would have only gone up now. “Coping with the enhanced project costs resulting from the new Act might be a severe setback for infrastructural development and urbanisation attempts,” says Anuj Nangpal, Managing Director, Investor Services at consultancy firm DTZ. The new Act needs to go, or be overhauled, says the industry. “The challenge for the next government is how to grow India’s manufacturing capabilities and create more jobs. The Land Acquisition Act in its present form needs to be scrapped and rewritten if the new government seriously wants to do development,” says Sunil Kanoria, Vice Chairman of Srei Infrastructure Finance. He also adds some companies would also pay a higher price if they are convinced that the land can be acquired quicker, but even that does not happen. Kant is optimistic. He believes that the central government can modify the Act as per requirements. But then there is a widespread belief that the entire act needs to changed. “If it is believed that the new government can improve this act just by modifying it, then it is a misguided belief. The entire act itself is flawed,” says S.V. Goyal, CEO, Reliance Haryana SEZ, a subsidiary of Reliance Industries.
An amendment to the Act, if attempted, will require it to be cleared by both houses – the Lok Sabha and the Rajya Sabha. Even though the ruling NDA has a clear majority in the Lok Sabha, it is in a minority in the Rajya Sabha. To bring in any changes in the new Act, the government will have to evolve a consensus with the opposition parties and that may prove elusive. “However, there’s still chance of holding a joint parliament session to find a way out,” says Upasna Bhardwaj, Economist at ING Vysya Bank. Panagariya suggests abandoning the new Act and bringing back the earlier law after amending it to address the genuine grievances of those whose land was acquired without due compensation. However, it doesn’t seem that the Modi government has any intention to amend or overhaul the new Act. Just after getting sworn in as the Minister of Rural Development, *late Gopinath Munde told The Financial Express that the Act was a “very good” legislation, which the BJP had supported. “Now it is my responsibility that this law should be implemented. I will do this rigorously. For last 20 years, people were demanding this new legislation,” he said. All eyes will be on Prime Minister Modi and his team to see whether they persist with this stance in future or heed the calls of the Indian industry and change course.
Source: Business Today