Accounting for Redeployment of Land
Dr. Basudeb Sen
Management Professional and Business Economist
This article is composed in a dialogue form that captures the various issues relating to controversies over State Governments acquiring large tracts of agricultural land from landowners for onward selling to large companies for setting up new industries. The dialogue is between Mr. Fakir, an erstwhile small farmer from Ingur district, and Mr. Amir Fata, a renowned industrialist. They had a chance meeting in a small restaurant at a New York Airport. Mr. Amir was enjoying a cup of coffee waiting for his next flight to Los Angles.
Fakir (F): Good Morning, Mr. Amir. Enjoying your Coffee, Sir.
Amir (A): Yes. Thank you.
F: Sir. There’s headline CNN news on our country and your company, Sir.
A: You know about my company!
F: My name is Fakir, Sir. I have come to USA because of the new car factory your company is setting up in my native state.
A: How did my car company cause your travel to US, Mr. Fakir?
F: I am very happy, Sir, that your company helped me to come to USA and enjoy a better life.
A: Mr. Fakir, I am unable to understand the link between your coming to US and my company.
F: Sir, please notice the CNN headlines. “Legislators break Assembly House Furniture: Furor over Amir Car Land deal”.
A: Yes. In our democratic country, every political party seems to know what is the best for the country but they seldom agree on what is the best. They do not seem to know how to account for costs and benefits of the land transfer to our company.
F: Sir, I do not agree with you. The politicians do not seem to know anything except street shouting, fighting, and lecturing to the illiterate and half-educated majority of our countrymen. And, of course, they know how to act as medieval kings collecting money from others by ingenious methods of extortion and spending growing amounts of public money without contributing anything worthwhile to the country.
A: I do not want to discuss about our politicians. You know as an industrialist, I cannot afford to annoy the kings and the potential kings of a democracy. To survive as a businessman, I must keep good relations with all political parties. But I am interested in knowing how my company helped you to come to USA.
F: Sir, that is because your company wants to set up a car factory back home in our village.
F: Please elaborate. Mr. Fakir.
F: Sir, I am benefited just because you planned to set up your car factory there. I come from the rural, agricultural locality where your company is setting up the factory to manufacture low cost Amir car for relatively poor countrymen. My father in-law inherited from his forefathers a large tract of agricultural land in the same locality. The Govt. took away the major part of the land he held about two decades back to distribute these lands to landless farmers. That was named the great land reforms revolution.
A: I have read about this great land revolution. Excess land with rich peasantry was distributed among the landless farmers: this was hailed as great socialistic achievement of ensuring land to the tillers. This resulted in rapid growth in agricultural production and productivity. But what did your father in-law do after losing the land?
F: Fortunately, the land was still in his name. As the legally required documentation formalities were not properly completed during the last twenty years, mutation of ownership in favour of the farmers who received the land as gift from the Govt. was not completed. So my father in-law could sell the same land to locally influential land dealers at a very good price.
A: Why did these dealers give you good price to your father in-law? The land truly belonged to the farmers.
F: The land dealers being influential knew about the land deal with your company in advance and used their information to buy the land from my father in-law and ultimately sold the land to the govt. at a price equal to about double the market price. Within a short period of three months they made 20 % return on their investment and earned a measure of goodwill in govt. circles for facilitating quick land acquisition.
A: So, you mean that both your father in-law and the land dealers benefited because of our decision to set up a car factory there. But how did you get benefited?
F: I happened to fall in love with and marry the only daughter of my father in-law. So, he gave my wife a part of the sale proceeds he received. I used part of money he gave her to get trained in information technology enabled services. This helped me to get a job in a multinational financial services company operating a BPO facility in my State’s capital city. After three months’ training, I will be posted as Assistant Client Service Operations Manager in my city. I am taking the same flight with you to Los Angles and could not resist picking up a conversation with you and than you.
A: It was so kind of you to do that. I am happy that I met a person like you who could account for at least three sets of people who benefited even before my company invested a rupee in the car factory.
F: But there may be some who may suffer because of your car factory.
A: I hear that some landowners in your locality are not willing to sell their lands to the Govt. for ultimate transfer to my company for setting up the car factory. That is why they are agitating. That is why there was this revolutionary act in the Assembly House in your State capital. The small farmers who lost the land and did not get compensated must have been adversely affected.
Fakir: I am one among such small farmers who lost the land once given to them free by the State, Sir. A small piece of land was given by the Govt. to my father as a landless farmer two decades back. I along with my four brothers inherited that land. But it was really uneconomic for four of us to cultivate that small land. It was too small. The Govt. helped my father to get this land free for twenty years during which he earned from the land and gave us some education. We were not much interested in continuing as farmers on a small plot of land. Even then losing the land was emotionally painful. But the land dealers gave us some money so that we do not create any fuss. So, we got some money. Two of my brothers have decided to set up small food-cum-stationery shops to cater to the demand of the construction workers for the factory and subsequently to the demands of the factory workers. The other two brothers have been working in nearby towns as semi-skilled factory labour for the past three years.
A: So, the farmers like you and your brothers are not adversely affected. But all farmers are not going to get small business opportunities to earn their living or may not have got any money from the land dealers. In any case not all are as fortunate as you or your father in-law.
F: You are right. Some farmers, who got their land from the govt. two decades ago, had got their name in the land ownership records. They have got good compensation from the govt.: they got nearly double the market value of the land they gave to the govt. Not all landowners, who sold their lands to the govt., are real farmers and with the sub-division of ancestral land among siblings, the small land plots are in any case becoming uneconomic to cultivate. It would have been useful if your company had set up, instead of a car factory, an agricultural cultivation factory and employed the farmers as agricultural workers. I understand some of the farmer families would get employment in your factory.
A: Yes, when the car factory comes up, it will absorb some displaced farmers as factory workers. There is a proposal to train some farmers in skilled work required by the factory. And, during the factory construction period, the farmers can find employment as land preparation and construction workers. But it seems that some of the real farmers will not get compensated.
F: Yes. Even after two decades, some sharecroppers, who were given land by the Govt. free, could not get their ownership registered in the official records. They are unable to legally claim compensation for the land they were actually cultivating and now being acquired by the govt.
A: The govt. should compensate them also.
F: Yes. That is likely to happen now that the govt. has come to know of the ground realities.
A: In that case, the entire land deal will be fair to all. Everyone will be protected and satisfied.
F: Still some people would have transitional problems once they lose their land you are getting for the car factory.
A: This happens even when a factory closes down because of permanent loss of its commercial viability. New factories come up to absorb some of them. Others have to be taken care of by the Govt. by giving them training in other vocations and skills, finding for them redeployment opportunities as also providing them some financial help to tide over the transition process. Our factory may create some new employment directly. But more employment will be generated outside our factory. Our vendors, suppliers and transporters will create employment. The people working in the factory will generate demand for goods and services from new local shops that will hire people from local farming families.
F: Maybe, that will happen. But people say food prices will rise as a result of transfer of land from agriculture to industry.
S: How will the prices go up?
F: Transfer of such a large tract of land from agriculture to industry will mean loss of agricultural output. The output of rice and potatoes will decline. This will mean prices of these will rise.
A: That may not be true. Actually, the land that the factory will take away from agriculture is a small percentage of total agricultural land in your State. So, agricultural production need not go down as a result of our factory taking away some land. We must try raising the productivity of agricultural land by consolidation of fragmented land and introducing large-scale commercial farming. Then we can produce more agricultural crops even by using much smaller land area for farming.
F: That is why I was suggesting that you set up large agricultural operations factories, if not instead of, but in addition to a car factory.
A: We may not be very good at running an agricultural factory. But when the govt. allows, some others who are more competent than us in this field will set up such large agricultural factories when the Govt. allows such things. At present, that is not permitted by the govt.
F: That is unfortunate. We will need more and more land for residential homes, schools, colleges, entertainment parks, offices, factories, shops and roads to meet the demands of our huge and growing population with rising incomes. This would mean transfer of more and more land from agriculture.
A: Do not worry. One day, the State will realize what it needs to do about increasing agricultural productivity and production so that industrial, housing and transport growth in your State does not get constrained.
F: But till that happens more factories means less agricultural output. We will have to import food grains and other commodities from other States and countries to keep the prices in check and feed our countrymen.
A: Such imports will take place automatically. Other States and countries will export their agricultural products to your State and your State will export various goods including small cars from our car factory to the outside. At one point of time, your state had numerous tanks and ponds. These were supplying various types of fish to the kitchens of your State where fish is daily item of consumption. Later, water in those ponds and lakes were drained out and residential and other buildings constructed in their place. Your state now imports fish from other states where fish is not a daily item of consumption!
F: But why did you take away good agricultural lands producing three crops a year for the car factory? You could have taken barren or low productivity lands.
A: We require a large stretch of contiguous land that enjoys convenient links to good transport and other infrastructure. The contiguous tract of land we chose for the car project unfortunately contains a small percentage of highly productive lands. Some three-crop producing land is interspersed with some one or two-crop producing land. So we cannot help. This seems unavoidable.
F: But good quality land should get higher compensation.
A: Ideally yes. But in the 21st century, all land under agricultural operations must produce as many crops as possible and all agricultural land that industries are not taking away should be upgraded to produce three crops. F: How would you like to value the land plots you are purchasing?
A: The ruling market price could be a basis for valuation.
F: Ruling market price does not really reflect the true value of the land being acquired by the govt. for your car company. A competitive market for selling and buying land does not exist. So, land cannot be valued at the ruling market price.
A: I agree with you. That is why I understand that the govt. is giving a price that is nearly double of the ruling market price. But how do you really value of the land being acquired by the State for onward sale to your company?
F: It is so simple. You have to find out the opportunity cost.
A: You are right. Each piece of land acquired should be transferred at its opportunity cost.
F: The opportunity cost is nothing but the aggregate sum of the present values of annual income, net of all costs, which the land owning farmer will have earned by using the land for agriculture for the next 30 or 50 years. To arrive at today’s values, each future year’s annual net income from the land has to be discounted at the interest rate on long-term government bonds.
A: Ah! You are talking about the valuation methods we adopt when we make investment and other resource use decisions in industrial companies.
F: If that is the method you found suitable in your companies, why can’t the decision to transfer land from agricultural use to industrial and other uses be made with the help of such methods of accounting for costs and benefits?
A: I agree with you. We should use scientific accounting methods to arrive at correct decisions.
F: In that case, transfer of land from agricultural to car manufacturing factory should be at least at the opportunity cost, i.e. at the present discounted value of the future stream of net income from agricultural use of the land. If a new factory is viable after purchasing the land at that opportunity cost price, the land can be transferred to the car factory. Otherwise, it is a net loss to the society.
A: I agree.
F: Have you done such calculations to find out whether the society will be a net gainer by transferring agricultural land in favour of the proposed car factory?
A: Not really. This is what should be done by the State because it has taken the authority to decide on land use. Maybe they have done but such calculations do not seem to be available in the public domain.
F: Yes. We have a non-transparent, opaque democracy managed by elected political despots. We cannot expect such calculations to be made or, if made, disclosed to the public.
F: It seems you are getting the land cheaper. You should pay higher prices for the land you are buying from the Govt. Land cost is a small percentage of the cost of setting up a project. If you give a 50% higher price, your total project cost would not have increased by more than 25 or so.
A: You are right. But the people who have invested in our company expect me to buy land and other things at the lowest possible cost without undermining quality. I am obliged to do that. If other states offer me land at a lower price, I have no moral right to buy land in your State at a higher price.
F: I agree. But it seems that the govt. is a big loser from your car project.
A: No, that is not true at all. With the new car factory and activities linked to it, more employment, more income and more income tax and other revenues will be generated. Over a period of time the govt. will also benefit considerably.
F. I thought so. Thanks to your car project, every one in the State seems likely to be benefited, except a few who would have temporary difficulties and they can be assisted to tide over that transition phase. But no one seems to have used scientific methods to calculate the cost and benefits.
A: You are right.
F: It is because of the reluctance to apply scientific methods to calculate costs and benefits that we have heated controversies and bandhs? Also, such useless and costly controversies and bandhs may happen again and again when factories, townships, airports projects are proposed and the govt. has to go in for land acquisition. Each bandh is a cost to the society without any benefit: so are the protracted emotional debates in the media, the legislature’s offices and political propaganda meetings. All this is sheer wastage of national resources: money, paper, time and effort.
A: You are right. Maybe in democracy we have to bear this additional cost.
F: I do not agree with you, Sir. We are reluctant to use proper quantitative accounting of effects of alternative decisions. When we are in the political arena, our politicians and elite classes forget everything except counting of potential votes in favour or against, emotionally charged public speaking without any substance, and muscle power. Muscle power technology and street shouting technology are the pillars of our democracy: accounting technology is for other commercial business applications.
A: You have a brilliant idea. How did it occur to you? You are not a Chartered Accountant or MBA.
F: No, Sir. I am only a bachelor of commerce. It seems accountancy and accountability is not what our democracy likes to adapt to.
A: Good observation. We could discuss this if we meet again.
F: You are a very old, reputed industry house with considerable focus on societal welfare. Why don’t you consider grant options to buy 10 shares of your car company per acre of land given to you by the farmers with an exercise price equal to your company’s market price as of 31st March 2009 and options exercisable between 31st March 2012 and 31st March 2015? With that the farmers will feel that they have an upside. This would prove that you have purchased the land with a greater measure of fairness.
A: Thank you for a novel suggestion. But I regret we have to hurry now. They have announced the last and final call for our boarding.
F: Yes, Sir. Thank you for spending some time with me.
A: I enjoyed the time with you. Good luck to you
No comments:
Post a Comment