Month: April 2015

Reading and writing about the land acquisition bill has made me somewhat gloomy, and question how you can get anything done in a Democracy like India? Congress is intent on blind opposition to whatever the government proposes instead of educated debate, and since the government doesn’t have enough seats in the Rajya Sabha, it can’t pass any bill on its own.

That may just be a good thing too because had they been able to pass any bills on its own they would most likely pass certain bills that are not really in the best interest of everyone but just the vote bank that they cater to.

In this environment then, how do you get anything done?

I was reminded of the US government shutdown in 2013 when I was thinking about this. The US has these constitutional limits on borrowing that they have and once you reach the limit, the government can’t borrow anymore and since the government is financing itself through borrowings, once the limit hits, they aren’t able to pay their bills which most importantly include salaries of government employees.

This is an artificial limit in the sense that the US is not borrowing from another country but from its own Federal Reserve so in a way the amount that it can borrow is unlimited. The shutdown came into effect because the opposition party there – the Republicans vehemently opposed what’s commonly known as Obamacare, and wanted the Democrats to make cuts that would make Obamacare defunded and more or less untenable.

The Democrats and the Republicans went into a standoff and common Americans sufferred. Ultimately a deal was reached, and the limit was raised, but it was not after a lot of damage was done.

At the end of it people viewed the Republican party negatively in this face off and put a big part of the blame on them for the shutdown that took place.

I think Indians can take heart from that situation because ultimately if the Modi government’s efforts are thwarted by the Congress just for the sake of opposition, and the people take note of it and protest, they will have to withdraw such opposition.

The power of the people is what counts and recent examples like Net Neutrality and repealing Section 66 has shown that the voice of people now more than ever is heard and is more powerful than ever in this country.

I wrote about some of the sticking points in the Land Acquisition Amendment yesterday, and a related question to that is of course how important is this act itself? Is it really stopping progress? Don’t state governments already have large land banks that they aren’t able to use?

I think it is important to first accept that even if all states had large tracts of land that were unutilized, you still need a good Land Acquistion Act because private companies and public enterprises will continue to acquire lands in the future, and it is necessary to have a mechanism in place for farmers, and others to be able to protest and stop such acquisitions where they are not satisfied  with the compensation given to them. Otherwise, you end up in a situation where the governments are buying people’s ancestral lands much against their wishes.

At the same time you must ensure a framework that allows private companies to acquire lands in a reasonable fashion because in some cases the current unused land may simply be unattractive. In other words, they will continue to acquire lands because the current ones may not be in a place where infrastructure or labor force is available. These lands may have initially been acquired with a politically motivated intent of ‘development’ of backward classes which is what HT reported to be the case in UP.

Or in the case of Maharashtra, the state has a policy to buy land throughout the state but not all locations are equal and it is inevitable that some areas have land which is unused whereas others have demand for land where no land can be allocated.

O Unused Land, Where Art Thou?

There are two prominent news stories that talk about unused land. The first one is the report by HT that I linked earlier, and the second one by DNA that pretty much talks about the same states, and report that some states have large tracts of unused land. However, they don’t break down the numbers and simply state that according to documents obtained by them 30 – 50 percent land is unused. This is not very tangible information, and while it makes for a good headline it doesn’t do much beyond that.

The HT story goes into numbers and says that there are 21,000 hectares of unused land in MP, 15,000 hectares in Maharashtra, 4,000 in Tamil Nadu and 329 hectares in West Bengal. It doesn’t give a break up on any other states except for Gujarat where it says that most of the land acquired has actually been allotted and there is only 500 hectares of unused land in the state.

It is not hard to see why Gujarat is doing well; because the state is doing well in providing infrastructure and other services that are necessary to set up a business in the land of course.

As far as I can see, the argument that there are vast tracts of unused lands already available does not hold water based on the information we have available right now.

The unfortunate incident of a farmer committing suicide in the AAP rally has polarized the debate on the Land Acquisition Act even more, and it has become virtually impossible to get to know the factual details of the act, and the amendment, and learn for yourself whether it is good or bad.

I spent a few hours last week reading the original bill from 2013, and the recent amendment, and there are three main points that are the sticking points as far as I am concerned.

Consent Clause: The existing act has a consent clause which states that 80% of the “affected families” should give their consent to the land acquisition before any land can be acquired by a private company, and 70% for a project under public private partnership.

Notice that this is not 80% of the landowners but 80% of affected families that include the landowners, the tenants, anyone else who depended on the land for their livelihood in the last 3 years, as well as any scheduled tribes or forest dwellers who may lose the right to access the land because of the acquisition.

The new amendment lists out five categories for which it waives off the consent clause, and these five categories are defence, rural infrastructure, affordable housing, industrial corridors, and infrastructure and social infrastructure.

If you look at these five categories, pretty much any project that you can think of can be categorized under this and subsequently you can waive off the consent clause on them.

So, you have an existing situation where you have such a strict clause that not only do you require 80% consent from the landowners, but 80% consent from all affected families, and you have an amendment which for all practical purposes waives off any consent at all.

I think both these situations are really bad. It is not practical to expect 80% approval for any land acquisition specially when you include affected families because just to assess who those affected families are will pose a very real practical and challenging problem. It is not hard to see why land acquisitions have become really difficult in the current situation.

On the other hand, if you remove the consent clause altogether, you give the government wide reaching powers to acquire land from people even when a large percentage of them are unwilling, and I think that is not a fair situation either.

Getting rid of the affected families terminology: The amendment gets rid of the affected families phrase and from what I understand only the landowners will have a say in acquisition. It is very difficult to practically ascertain who the affected families are  and unless someone has any ideas on how this can be practically implemented, I don’t see how you can continue to have this terminology and have a good act.

Impact Assessment: The existing act provides for an impact assessment which means that there would be a committee of people who will evaluate whether the potential benefits of the project outweigh the costs, and if there is un-utilized land at the end of the project it is returned within five years, among other things.

The new amendment removes the impact assessment for the five categories, which means you don’t need an impact assessment at all if you are under one of these five categories. I have presented a very simplified version of the impact assessment because they want to get rid of it altogether which I think is completely unreasonable because if you are going to potentially displace a large number of people the least you owe them is a proper assessment of what it is going to take to rehabilitate them.

In my opinion the existing act cripples action because you just can’t go through the restrictive clauses, but the amendment is over-reaching as well because it will remove all the checks that were present to protect the rights of the people.

There has to be a middle way to do this because it is essential that India finds a way to make this happen. There is no way that the millions of Indians who come into the labor force every year can be absorbed in the agricultural or services sector, so developing manufacturing is a must, and to develop an industrial base, land is an imperative.

The Make in India Concept

I don’t think there are many Indians today who haven’t heard of the Make in India campaign that was launched last September by the Modi government.

The idea behind it is rather simple – increase the share of manufacturing in the GDP, and the reason for that is rather simple as well.

With the exception of oil producing countries, there hasn’t been a single country in the world that has been able to go from developing to developed without having a strong manufacturing base.

This is simply because agriculture can only support a small percentage of population in a developed country and services can only support the better educated ones, so there are millions of people who have to rely on manufacturing jobs to get a better life that an industrialized and developed country promises.

This is obviously a great concept and anyone can see the utility of it, but how does it translate into reality and if you were to evaluate this tangibly – how would you do that?

How do you measure the success of Make in India?

I think the answer to that is fairly straightforward – If five years from now – the share of manufacturing in Indian GDP grows considerably then the campaign would have succeeded in its goal else it would have failed.

I have kept this statement deliberately qualititative because you could say that the Modi government has set up a target of doubling exports to $900 billion by 2020 and if they don’t meet that target then the campaign would have failed, or have any other hard number like that, but realistically, after the last ten years, would falling short of a hard number really be a failure if the manufacturing sector has improved in general?

But how do you know whether the campaign is just a lot of publicity without any real weight behind it before the lapse of five years?

I think you have to look at the GDP numbers and manufacturing PMI index every quarter to see if you can detect any trend and look at the reforms and big ticket investments that take place day to day.

For instance, the currently concluded Hannover Messe fair doesn’t seem to have gone down well because investments for only a few hundred million dollars have been committed as opposed to investments of 1.3 billion dollars when India was the partner country in 2006.

On the other hand, there have been several proposoals and deals from companies like Airbus, Areva, Asus, and Volkswagen that sound promising and will be a very good boost to manufacturing if they come to fruition.

Obviously, the key question here is if they will ever come to fruition, and that hinges on policy changes like the Land Acquisition Bill as well as overcoming the bureacracy and red tape that genereally exists in the Indian landscape.

Will Make in India be successful?

There are a lot of challenges that the current government face in order to make this successful. They don’t have a majority in Rajya Sabha so passing any reforms are difficult, the global economy has picked but it is still not at the pre-recession levels, and in general, it is now believed that it won’t be as easy for a developing country to create a manufacturing base as it has been in the past due to a number of technological advancements that allow roboitics to replace people on the shop floor.

That said, I have no doubt in my mind that this endeavor will be successful because there is a lot of political will to make things happen and this can be seen with the number of small steps that are taken almost every day.

Where the previous government was mired in inertia and scams, the current government has been action oriented and energetic.

Just the absence of self goals like going after Vodafone or Nokia with huge tax bills will go a long way in promoting investment in India.

I don’t think I’m alone in my optimism and since we started consulting people I’ve seen a general change in the mental outlooks of almost everyone I speak and this is best expemplified in the willingness to accept a much higher return on equities over a long period of time. People are in general much more optimistic on what the future holds for them, and I agree with that optimism.

The way things are going, the next ten years are going to be a lot better than the last ten years.