Read the first post in the series here.
If you’re a major international corporation interested in investing in India, you’ll first have to contend with its onerous and confusing labor regulations. But if you get past that, you might still find yourself stymied by a very basic impediment: not getting the land you need to build your factory.
India has a dire reputation for being hard to find spare land in. To a certain extent, that’s a consequence of its geography and demographics: it’s extremely densely populated. India has almost 1.3 billion people, and even though that’s fewer than China, India has less land. It’s also unusual in that people are fairly evenly distributed; most countries have big population centers and big wilderness, but in India people live almost everywhere. Sure, the Ganga valley in the north and the far south are especially crowded, but in between there’s very little available land. Finally, a lot of it is farmland, and most Indians are farmers. The only part of the country without many people is the Thar Desert in the far west by Pakistan, and who wants to build there?
But India is also politically biased in favor of farmers. Mohandas Gandhi and Jawaharlal Nehru, its founding fathers, loved villages and farmland and saw the “true India” as a patchwork of small farms supported by tight-knit villages. A socialist and Communist tradition in a few states makes governments hostile to big business. More generally, since most Indians are farmers, they hold big power at the ballot box; politicians that don’t care about them, or seem like they don’t, usually have to pay dearly.
The tale of Tata Motors is often used as an example. In 2006, India’s flagship car company chose the state of West Bengal as the site for its latest factory after being wooed by the local government (lots of land, discounted electricity, a ₹2 billion loan). But the farmers at the proposed site protested, claiming they hadn’t been compensated enough. A local politician and later chief minister, Mamata Banerjee, went on hunger strike. Negotiations grew acrimonious; neither side trusted the other, and compromise solutions were rejected. (It didn’t help that Tata wanted to make the Nano, a super-super-cheap car, so it couldn’t pay the farmers too much.) Finally, in 2008, Tata gave up and relocated to Gujarat, its CEO complaining about a “state consumed by a destructive political environment of confrontation, agitation, violence, and lawlessness.”
A similar story concerns POSCO, the Korean steel giant. In 2005, it signed a ₹500 billion deal with the state of Orissa for a steel plant — the largest foreign investment in India yet. But there would have been environmental side-effects (air and water pollution and coastal erosion). Locals again complained that POSCO wasn’t compensating them enough. Many farmers refused to give up their livelihoods. They protested and police and hired thugs attacked them. Even though 90% of affected villagers supported the project, opposition lawmakers joined the protests for political gain. In 2015, a law was passed forcing POSCO to buy a mining license in an auction, contradicting its initial agreement. This year POSCO gave up on the project entirely.
Obviously, getting farmers to give up their land isn’t easy. Some politicians claim that farmers are deeply attached to their land and love farming for its own sake. More likely, farmers want a good deal. In both the Tata and POSCO fiascoes, they were convinced that the corporations were ripping them off, since land value (usually) goes way up when it’s used for industry instead of agriculture. They haggle hard, knowing that if they don’t get enough, they’re now homeless, landless and jobless. Even if the farmers are more compliant, corporations have to deal with competing ownership claims and patchy or non-existent records.
Politically, Congress tends to support landowners while the Bharatiya Janata Party (BJP) favors big business (although they will switch sides for opportunistic reasons, of course). Congress’s traditional support base is farmers and the poor in general, so to placate them, it updated India’s 122-year-old (!) land acquisition law in 2013 with more stringent requirements. The industrial or infrastructure project has to pass a strict social impact test, get approval from 80% of the landowners (70% for a government project), and pay compensation equal to 4x the market value of the land (or double in an urban area). It also required government intervention in any sale of farmland to industry. Business groaned, worried that it would cause a massive logjam in investment. It was right: 43% of India’s projects are now stalled over land acquisition hassles — that’s ₹530 billion in limbo.
Mindful of how much this red tape was strangling his ambition to Make in India, India’s reformist prime minister, Narendra Modi, introduced some amendments to the land acquisition law when he took office. For certain “critical projects” — anything involving defense or national security, affordable housing, industrial corridors, rural infrastructure — the social impact test would be done away with, as well as the consent clauses. But opposition in the Rajya Sabha, the unelected upper house of India’s parliament, howled with rage. Congress came out against it, but so did parties like Aam Aadmi (a Dilli-based party which speaks for the common man), Shiv Sena (a Hindu nationalist party like the BJP but based in Mumbai) and Anna Hazare (an independent political agitator mostly concerned with India’s notorious corruption). Even some of Modi’s own BJP were against it. Finally, in August 2015, the amendments were passed, but they were so watered-down that little has changed from the original law. Modi was worried enough about the upcoming election in Bihar, a very rural state, that he didn’t want to jeopardize the results. Of course, those who read that blog post know that he lost, which makes things look grim for his land reforms.
Instead, Modi has suggested that the states deal with land acquisition in a way they see fit. This is one of his pet projects in general, since he made his political career out of sponsoring business and infrastructure in Gujarat (he was the guy who invited Tata there). Gujarat in particular has a reputation for being business-friendly, and sure enough, it announced this year that it is adopting the reforms that failed at the national level. Rajasthan, Tamil Nadu, Karnataka, Maharashtra and Assam are also forging ahead with exemptions for the social impact and consent clauses similar to what Modi had pushed for. Andhra Pradesh, which is building a capital out of scratch after half the state broke away in 2014, is placating the local landowners by giving them a stake in the new city’s development — they’ll get 30% of their land back when the city is built, and in the meantime, they get a stipend and job training.
As you might have gathered by now, it’s not exactly a simple issue. Farmers and their advocates have real concerns. Not everyone wants to or can move to the big city and start a new career. Companies will try to squeeze landowners as much as they can. States like Gujarat and Maharashtra with business-friendly governments can be horribly biased, which leads them to ignore landowners’ concerns and crush protests. Mysterious thugs can be deployed by businessmen to rough up farmers and destroy their crops, intimidating them into relenting. Native Indians with tribal societies in states like Odisha depend on the forest for their livelihoods, and iron mining would probably ravage the ecosystem. China’s disgusting pollution is partly the result of unrestricted development, and factories and power plants aren’t what most people want in their backyards.
But as the previous post in this series says, manufacturing is the next step in economic development India is “supposed” to reach to move out of poverty. Farmers don’t always resist industrialization — in another (ultimately failed) POSCO project in Karnataka, farmers lobbied the government not to drive POSCO out since they wanted the money. Schemes like Andhra Pradesh’s can keep farmers interested and involved in their land’s development. Food security (which is sometimes whined about) isn’t really an issue — India still has plenty of farms and farmers.
Most of all, foreign companies won’t want to invest in India if their projects get strangled by red tape and political bickering. They definitely won’t want to deal with a decade of stalling and uncertainty. They can always take their business elsewhere. Chinese ambassador Le Yucheng called land acquisition a “major impediment” for investing in India. Although it’s unlikely that messy, democratic India will have the same unrestricted land-grabbing China can get away with, the process will have to get easier for foreigners to get interested in Making in India.