Displacement and Industrialisation

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DISPLACEMENT AND INDUSTRIALISATION


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Introduction:

i) Lewis (1954) envisaged economic development as a process of translating labour

from low productivity agriculture and other traditional occupations to modern industry;

ii) Lewis framework of dualism subsequently emphasized the importance of raising

agricultural productivity, along with industrial growth, to maintain stable terms of tradebetween agriculture and industry;

iii) The above has been essential for unhindered capital accumulation in the industrial

sector;

iv) The emphasis of physical accumulation of capital has shifted in mid 1980s in the

following way:

(a) Pioneering work of Romer (1981 and 1990);

(b) Emergence of endogenous model;

v) The argument had been:

(a) Investment in education and human capital formation crucially determines the long-

tern growth and development of an economy;

vi) According to Lucas, the huge difference in per capita incomes of nations can be

explained by differences in human capital formation;


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vii) Both the schools of thought:

(a) One emphasising physical capital as main constraint;

(b) The other emphasising human capital as the constraint.

viii) Both these schools had visualised that land could become a serious constrainingfactorto the process of development;

ix) Both these schools of thought had assumed that land requirement for industries and had

ignored their requirement;

x) Total requirement of land for non-agricultural purpose may not be large in comparison to

agricultural land;xi) History has been full of examples;

xii) Among the old ones 17th Century of England:

(a) The growing population had been creating pressure on land;

(b) Maritime trade had opened new possibilities

(c) Manufactured woollen cloth had been expanding at a greater pace;

(d) This increased the demand of land for sheep grazing;

xiii) The emerging wool trade led to deep-rooted social and economic changes;


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xiii) Up to 15th & 16th Century rents for land had been low and wages had been higher;

xiv) The scenario got reversed from the middle of the 16th Century as evident by:

(a) Shortage of land;

(b) Labour surplus;(c) High rents;

(d) Declining wages;

xv) The consequences had been as follows:

(a) Land lords who had been facing shortage


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Industrialisation and food security in West Bengal:

i) Two problems of agriculture has been:

(a) An extremely adverse land man ratio (on the higher side);

(b) Lack of market accessibility of the farmers leading to unhealthy dependence onmiddlemen;

ii) Perhaps both these problems could be partly solved by inviting big capital including

multinationals into agricultural sector;

iii) This can break the feudal chain in West Bengal agriculture;

iv) Contract farming has been one of the options, where big corporations could help thefarmers not only by providing them certain and wider markets but also make them

aware about new technology, new products and, in general, helping the economy to

develop agriculture-based industries;

v) At the same time if direct links could be established between the farmers and big retail

outlets, that could also help them break their dependence on the feudal traders;

Problems of corporatising agriculture:

i) Rehabilitation of farmers who would become jobless once agriculture production has

been organised efficiently;


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ii) For employment of these people job opportunities would have to be created outside

agriculture for the simple reason that pressure on population has been increasing;

iii) If alternative employment opportunities cannot be created, the condition of the people

dependent on agriculture sector would keep on deteriorating;

iv) In other words, any long-term scheme of development of the state must involve

industrialisation;

Problems of industrialisation in West Bengal:

i) According to Human Development Report a large part (63%) of the land in the State

has been cultivated;

ii) Thus industrialisation involves not only building up of factories but also of infrastructure,

of roads, bridges, scrapers and airports, and also townships, shopping malls and

entertainment centres for emerging professional class;

iii) No investor would invest in the State if basic infrastructure is not available;

iv) Thus for any large-scale transformation of the economy requiring land has to be drawn

from the agriculture sector;

v) Some quarters have been extremely worried that large-scale use of agricultural land for

industrial purposes and for the purpose of building infrastructure might impose a

serious threat to food security in the State;


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vi) Another alternative has been that the new industries should be located in the space that

was occupied by old industries which have now been closed;

vii) Such land has been lying vacant and so using it for new industries would not have an

adverse effect on agricultural output leading to food shortage;

viii) It has been further asserted that once this vacant land is all used up, one mightconsider acquiring agricultural land, but the choice must be restricted to least

productive soil;

ix) The above argument can be countered in two ways:

(a) Choice of land does not always lie with the Government;

(b) The investor, who has been investing a lump sum and taking a risk, would typicallywant to make sure that the land where he is planning to build up his plant has the basic

infrastructural facilities;

(c) Since the investor usually has options to set up the same plant elsewhere in the

country;

(d) The investor would not hesitate to shift his plant if right choice of land has beengiven;

x) The investor who has been choosing land for his industry has no guarantee that the

choice of land would coincide with his stipulations;

xi) Further, the investor is unlikely to choose the land of closed factory because


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often the workers who were working in that factory and are presently unemployed would put

pressure on the new factory owner to employ them;

The Case of Singur:

i) The Tatas has been building an automobile factory at Singur in Hooghly district of West

Bengal;

ii) The land of Singur has been very fertile, growing on average three crops a year;

iii) Activities and political parties opposing the Government acquiring land in Singur for the

Tatas has been the automobile factory should be shifted to less fertile areas where crop

output would be much less;

Reasons for selecting Singur:

There has been three important reasons for selecting Singur:

i) Singur has been right next to Durgapur Express Highway, the only proper highway of the

State by International Standards, which has been built with Central Government funds as

a part of Golden Quadrangle Project;

ii) Singur has not been far from Calcutta;

iii) Singur land has been endowed with lot of groundwater, which is needed for a automobile

factory;

iv) If the Tatas had been denied land they would have shifted elsewhere;


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Food security argument baseless:

i) According to West Bengal Human Development Report 2004, total land in the State

has been 88,75,000 ha. out of which 63 per cent has been cultivated;

ii) So in the State about 5,59,12,50,000 ha. has been cultivated;

iii) The Tatas want about 1000 acres or 400 ha. which has been much less that what WestBengal requires for full fledged industrialisation;

iv) For full fledged industrialisation the State requires about 1,00,000 acres or 40,000 ha of

land for building infrastructure, industries and modern services sector;

v) This area would be less than 0.7 per cent of the total agricultural land;

vi) It is highly unlikely that if this amount of land goes out of agricultural sector, total food

grain production would be reduced;

vii) Another argument, industrialisation is likely to have a favourable effect on agricultural

productivity;

viii)With industrialisation, more people would shift to the industrial and services sector,

pressure on land would fall and average landholding size may increase;

ix) An increase in land holding may help to consolidate the pieces of fragmented land and

would also make possible use of modern technology;


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Coase theorem

i) In law and economics, the Coase theorem, attributed to Ronald

Coase, describes the economic efficiency of an economic

allocation or outcome in the presence ofexternalities;

ii) The theorem states that when trade in an externality is possible

and there are no transaction costs, bargaining will lead to anefficient outcome regardless of the initial allocation of property

rights;

iii) In practice, obstacles to bargaining or poorly defined property

rights can prevent Coasian bargaining;

iv) This theorem, along with his 1937 paper on the nature of the

firm (which also emphasizes the role of transaction costs), earned

Coase the 1991 Nobel Prize in Economics.
http://en.wikipedia.org/wiki/Law_and_economicshttp://en.wikipedia.org/wiki/Ronald_Coasehttp://en.wikipedia.org/wiki/Ronald_Coasehttp://en.wikipedia.org/wiki/Efficiency_(economics)http://en.wikipedia.org/wiki/Allocationhttp://en.wikipedia.org/wiki/Externalitieshttp://en.wikipedia.org/wiki/Transaction_costshttp://en.wikipedia.org/wiki/Nobel_Prize_in_Economicshttp://en.wikipedia.org/wiki/Nobel_Prize_in_Economicshttp://en.wikipedia.org/wiki/Transaction_costshttp://en.wikipedia.org/wiki/Transaction_costshttp://en.wikipedia.org/wiki/Transaction_costshttp://en.wikipedia.org/wiki/Externalitieshttp://en.wikipedia.org/wiki/Allocationhttp://en.wikipedia.org/wiki/Efficiency_(economics)http://en.wikipedia.org/wiki/Ronald_Coasehttp://en.wikipedia.org/wiki/Ronald_Coasehttp://en.wikipedia.org/wiki/Law_and_economics


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v) The Coase theorem is an important basis for most modern

economic analyses of government regulation, especially in the

case ofexternalities;

vi) George Stigler summarized the resolution of the externality

problem in the absence of transaction costs in a 1966 economics

textbook in terms of private and social cost, and for the first time

called it a "theorem;

vii) Since the 1960s, a voluminous literature on the Coase theorem

and its various interpretations, proofs, and criticism has developed

and continues to grow.

The theory:

Coase developed his theory when considering the regulation of

radio frequencies.
http://en.wikipedia.org/wiki/Regulationhttp://en.wikipedia.org/wiki/Externalityhttp://en.wikipedia.org/wiki/George_Stiglerhttp://en.wikipedia.org/wiki/Textbookhttp://en.wikipedia.org/wiki/Radio_frequencieshttp://en.wikipedia.org/wiki/Radio_frequencieshttp://en.wikipedia.org/wiki/Radio_frequencieshttp://en.wikipedia.org/wiki/Radio_frequencieshttp://en.wikipedia.org/wiki/Textbookhttp://en.wikipedia.org/wiki/George_Stiglerhttp://en.wikipedia.org/wiki/George_Stiglerhttp://en.wikipedia.org/wiki/George_Stiglerhttp://en.wikipedia.org/wiki/George_Stiglerhttp://en.wikipedia.org/wiki/George_Stiglerhttp://en.wikipedia.org/wiki/George_Stiglerhttp://en.wikipedia.org/wiki/Externalityhttp://en.wikipedia.org/wiki/Regulation


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ii) Competing radio stations could use the same frequencies and

would therefore interfere with each others' broadcasts.

iii) The problem faced by regulators was how to eliminateinterference and allocate frequencies to radio stations efficiently;

iii) What Coase proposed in 1959 was that as long as property

rights in these frequencies were well defined, it ultimately did not

matter if adjacent radio stations interfered with each other bybroadcasting in the same frequency band;

iv) Furthermore, it did not matter to whom the property rights were

granted. His reasoning was that the station able to reap the higher

economic gain from broadcasting would have an incentive to pay

the other station not to interfere.

v) In the absence of transaction costs, both stations would strike a
http://en.wikipedia.org/wiki/Property_rightshttp://en.wikipedia.org/wiki/Property_rightshttp://en.wikipedia.org/wiki/Radio_stationhttp://en.wikipedia.org/wiki/Incentivehttp://en.wikipedia.org/wiki/Incentivehttp://en.wikipedia.org/wiki/Radio_stationhttp://en.wikipedia.org/wiki/Radio_stationhttp://en.wikipedia.org/wiki/Radio_stationhttp://en.wikipedia.org/wiki/Property_rightshttp://en.wikipedia.org/wiki/Property_rightshttp://en.wikipedia.org/wiki/Property_rights


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v)In the absence of transaction costs, both stations would strike a

mutually advantageous deal. It would not matter whether one or the

other station had the initial right to broadcast; eventually, the right to

broadcast would end up with the party that was able to put it to themost highly valued use.

vi) Of course, the parties themselves would care who was granted

the rights initially because this allocation would impact their wealth,

but the end result of who broadcasts would not change because theparties would trade to the outcome that was overall most efficient.

vii)This counterintuitive insight that the initial imposition of legal

entitlement is irrelevant because the parties will eventually reach

the same result is Coases invariance thesis.


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x) Third argument, it has been not clear why West Bengal which has been a part of a

larger nation, should need food security or self-sufficiency in food production;

xi) Food security for a nation is desirable because of many uncertainties in

International food market;;

xii) For West Bengal there is no compelling reason for food security;

xiii) If necessary, the State can import food grains from rest of the country;

Land acquisition, Coase Theorem and Property Rights:

Who will acquire the land for industrialisation:

i) Broadly, land could be acquired in two ways:(a) The investor can go out in the market and acquire it from the owner by directly

negotiating a price with him;

(b) Alternatively, Government can acquire land on behalf of the investor and transfer it

to him in exchange for some pre-arranged price;

ii) An ideal arrangement is certainly the one where the investor acquires land directly fromthe seller simply because the transaction is voluntary;

iii) If on the other hand, the Government has been acquiring land for the industry or

infrastructure and element of coercion is often involved


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v) While in many Indian States the practice has been largely direct purchase of land by

the investors;

vi) While in West Bengal the Government has indulged in a big way in acquiring land from

the farmers;

vii) This has been the root of political tussles;So the questions arises

i) Why the Government has been trying to acquire land from the farmers?

ii) Why the investor has been asked to go out in the market and acquire land?

Coase theorem:

i) The practice ofacquiring land by the investors directly from the sellers has some

theoretical support;

ii) The celebrated Coase theorem, named after its originator Ronald Coase of the

University of Chicago asserts:

(a) The initial distribution of property rights does not matter as long as free buying and

selling of assets are possible without transaction costs;

(b) Indeed in the absence of transaction costs, an asset will be ultimately owned by

that agent who has highest valuation of the asset and hence can pay the highest price;


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(c) This allocation would of course be efficient;

iii) The Coase theorem rests on a number of assumptions:

(a) High transaction costs and involvement of multiple agents in the transaction can

invalidate the theorem;

(b) Indeed the socio-economic situation in West Bengal raises doubts as to whether

the idealised conditions required for the validity of the Coase theorem really valid in the

State;

(c) This in turn gives a theoretical justification of Government justification.

iii) In West Bengal due to high fragmentation of land the buyer (industrialist) has to

negotiate with a large number of landowners; and this itself can be extremely costly;

iv) The concept of zero or negligible transaction costs does not hold good for West Bengal;

v) The problem becomes more pronounced because unless the buyer can purchase the

land or a very large portion of it, it cannot start a project;

vi) Moreover, multiple ownership of land gives rise to the possibility of speculative hold out;

vii) Suppose the buyer has to acquire a piece of land, which has been fragmented and held

by a number of owners, all of them would not be equally eager to sell their


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land and typically some would sell and others would wait;

viii) Some could have sentimental values attached to land, some might hesitate to sell

because of lack of alternative means of livelihood;

ix) So the buyer would acquire the land sequentially rather than in one go;

x) The price of acquiring land would go up gradually due to speculation and the investor

would have to invest a major amount;

xi) In other words, when land has been fragmented and owned by a large number of

people, an investor would hesitate to take up a project if he has been told to acquire land

by himself;

xii) The possible delay in completing transactions, which arises out of speculative hold out

violated the Coase theorem;

xiii) All this, taken together has led the Government of West Bengal to indulge itself in the

unpleasant task of land acquisition;

xiv) But when Government buys land for the industries it often does so by using its special

powers, by force if you may, which in turn becomes a violation of property rights;

xv) The question arises as to how seriously should one take property rights in the present

context?


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xvi) The left in West Bengal is now thinking of undertaking market oriented reforms and one

of the most important cornerstones of the philosophy of free markets is preservation of

property rights;

xvii) Recent experience of China suggests that secured investors property rights coupled

with loosely defined property rights of land owning farmers gave rise to environments mostsuitable for long term industrial growth;

xviii) But during last 30 years, the Government of West Bengal has at least once violated

the property rights;

Xix) By taking away land from the land lords and distributing them to the poor;

xx) This of course had mass support;

xxi) The trouble is that now the Government has been venturing to traverse in the opposite

direction by taking away land from the poor farmers and then distributing them to rich

industrialists;

xxii) This would require mass support, specially because unlike the Chinese government

the Government of West Bengal has to get the mandate of the people every five years;


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Compensation and Rehabilitation:

i) The Government of West Bengal had acquired land on the basis of Land Acquisition

Act 1894;

ii) The Act empowers the Government the following:

(a) Government can acquire any land for a public purpose ot for purpose of use of a

company by prior notification;

(b) Paying compensation to the owner

iii) Compensation must be based on current value of similar land in similar use;

iv) Apart from payment of compensation for land acquired and payment of certain types ofdamages the Government has not made any provision for settlement and rehabilitation

of displaced persons;

Problem of valuation of land:

i) The market for agricultural land for West Bengal and rest of the country has been thin, as

transactions have not been very frequent;

ii) Under such circumstances, it often becomes difficult to get a proper estimate of the

market value of land;

iii) The common practice has been to look at average price at which similar land has been

transacted over last few years;


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iv) But if prices have been increasing, as is always the case with land, an average price

over the last few years is always going to be less than current price;

v) In other words, the current practice of fixing the market price of land by averaging over

past prices is likely to be an undervaluation;

vi) The market price should roughly reflect discounted sum of the expected value of outputproduced by land in near future (net of the material and labour costs);

vii) To an owner farmer, however ownership of land gives him an opportunity to work;

viii) Given widespread under employment in the rural sector, if the farmer did not have any

land of his own, probably he would have remained unemployed for a longer part of the year

than he is now;ix) The particularadvantage the land is giving him will not be reflected in the market price;

x) Thus the land owner would not be willing to sell his land at the market price;

xi) For a small farmer, the value of land has been much higher than what has been

determined by the market;

xii) The small farmer owning a piece of land usually markets a very small part of theproduce and keeps the larger part for self consumption;


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xiii) Due to existence of large number of middlemen in the market the farmer receives less

price than what price prevails in the market;

xiv) Thus the higher price of commodities cannot compensate him by selling his land and

buying the food items from the market.

Value of land if increases due to alternative use:

i) If land has been used for industrial purpose, then it value would also likely to increase;

ii) This increased value of land can be compared with that of agricultural land;

iii) Thus social justice requires that the present owner must get the share of the increased

value of land;

iv) Land Acquisition Act, 1894 in spite of all its amendments has failed to guarantee this;

v) Thus in proper bargaining framework, on the other hand, the present and future

owners should share the surplus arising from new use;

Benefits from alternative uses of land:

i) Surplus thus arising out of land should be shared by the society in terms ofincreased employment opportunities;

ii) Farmers are the least likely people who would be benefited immediately from

I d t i li ti


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Industrialisation

iii) People with education, training and finance are the ones who will be able to take

immediate advantage from the emerging industries and the services sector;

iv) But the farmers would not be immediately benefited as most of them do not have proper

education and training;

v) Thus the farmers needs to directly compensated for the loss of their land and livelihood;

Value of land at Singur and its future income:

i) The mono crop land has been offered a price of Rs 8.70 lakhs/acre;

ii) The multi-crop land has been offered a prices of Rs 12.76 lakhs/acre;

Is the compensation enough?

i) If Rs 12.76 lakhs has been put to fixed deposit at the rate of 9% then it would earn an

annual return of Rs 9,570.00 per month;

ii) This indeed a comfortable sum of money, almost thrice the income from an acre of multi-

crop land can currently yield;iii) So why to disagree to sell land ?


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Effect of inflation:

i) The real worth of the income earned from the interest rate may decay due to inflation;

ii) Therefore, if the owner holds on his land then he can hope to maintain standard of

living in future;

iii) The rate of inflation should be subtracted from the nominal rate of interest;

iv) Thus if the current rate of inflation has been 6 per cent then the monthly return would

work out to only Rs 3000.00;

v) The monthly income of Rs 3000.00 is unlikely to exceed the current income from an

acre of multi-cropping land;

vi) Therefore, the compensation is inadequate.

Effect on sharecroppers:

i) The registered Bargadars gets 75% of the produce if he provides the cost of

cultivation;

ii) But the present compensation only 25% of the sales proceeds;

iii) In case of unregistered Bargadars nothing has been promised as compensation or

rehabilitation;


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Perceptions, credibility and development:

i) The differences of development driven displacement in England, China and West

Bengal has been as follows:

(a) There were no universal voting rights in England (17th Century) and presently in

China;

(b) This gave the Governments of England and China adequate power to suppress

voices of protests;

(c) This not certainly in India and not even in West Bengal where left front has been in

power for 30 years;

(d) So in West Bengal perceptions of the people regarding development has beenmore important;

West Bengals endeavour for industrialisation:

i) For industrialisation apart from wooing investors, the Government has gone to the

extent of raising money from the market at the going rate of interest to finance these

huge industrial subsidies (in the form subsidies, incentives, tax breaks and low interestrates loans)

ii) All these things have been done with the expectation that economic activities in the

state would go up so that some tax revenue would yield and from which debt can be

easily repaid;

iii) The other part of endeavour (apart from industrialisation) had been acquiring of land;


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iii) The other part of endeavour (apart from industrialisation) had been acquiring of land;

iv) Unfortunately, very little thought, energy and effort went into the planning of this part;

v) Compensation and rehabilitation questions have largely be ignored;

vi) Perhaps it had been decided the political party would take care of the resentment

arising out of eviction and if persuasion fails, brute force would be applied;

vii) The Government of West Bengal has been trying to apply East Asian model of

development for the economic betterment of West Bengal;

viii) As per the Asian model, the investor is the king as long as he performs;

ix) The investor gets all possible benefits, subsidies and incentives from the Government

on the condition that he has to deliver.

x) If the investor fails to do so he is kicked out of the market because subsidies are time-

bound and short-lived;

xi) The Asian model has certainly done miracles in East Asia, in terms of growth, though

always not in terms of human development;

xii) But this model can hardly work for West Bengal due to:

(a) West Bengal has to compete with other States to attract investment;

(b) If the state indulges in such expensive game by bidding up subsidies, we cannot punish


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(b) If the state indulges in such expensive game by bidding up subsidies, we cannot punish

non-performer;

(c) If subsidies have been withdrawn the investor can threaten to pack up and move to

some other region;

xiii) A slower but much surer way is to build up good infrastructure and ensure labour

harmony market;

xiv)In this case, market forces can take care of the non-performance and inefficiency;

Crux of the matter:

i) The basic puzzle remains unsolved;

ii) Barring a few exceptional cases, it is certainly true that a piece of land employed inindustrial sector creates more value than it does when employed in the agricultural

sector;

iii) Theoretically, it would be possible to transform land into industrial use and from the

increased value the people who have lost their land and livelihood can be

compensated;

iv) But this is not supposed to happen;

v) In agricultural sector, two classes of people (land owners and labourers) needs to be

compensated if land acquisition takes place;

i) A th i lt l l b t b t d th h d h b


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vi) As the agricultural labour cannot be compensated, the hue and cry has been more;

vii) But it can be argued that, agricultural labourers can find similar jobs elsewhere;

viii) But this argument does not also hold good because they have some skill and if they

are ousted then they may not find any job;

Unhealthy and inefficient effort for Industrialisation:

Payment from Tatas side:

i) The Tatas has been handed over the land on 90 years lease from the Government;

ii) There has been no down payment of land;

iii) For the 1st five years the Tatas would pay a rent of Rs 1 crore and the yearly paymentwould increase by 25% for each five year interval for 25 years;

iv) Again for next 30 years the payment will increase 33 per cent at a five year interval and

for the final 20 years the rent would be 20 crore a year;

Payment from Government side:

i) The Government would give Rs 200 crore as loan at 1% interest;

ii) The VAT proceeds accrued from sales of cars would again be handed back to

to the Tatas as loan bearing 1 per cent loan for first 10 years;


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to the Tata s as loan bearing 1 per cent loan for first 10 years;

iii) Apart from the above, the Government would be paying Rs 130 crore as compensation

to the land owners;

iv) The yearly interest rate for Rs 130 crore would be Rs 13 crore;

v) So there has been a straight forward subsidy of Rs12 crore subsidy a year on thepurchase of land;

vi) Lastly, if the debt ridden Government spends so much money on wooing investors, how

can it can afford to pay proper compensation to those who have been loosing their land

and livelihood?

Displacement and Industrialisation

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