Selection bias and land acquisition data

What proportion of industrial projects are being held up by land acquisition challenges? A somewhat abstruse debate entered the mainstream after Rahul Gandhi cited Centre for Monitoring Indian Economy (CMIE) data (provided by the Finance Ministry) in a 12 May Lok Sabha speech:

Although I have argued elsewhere that the 8% figure may be an exaggeration in the context of Narendra Modi’s land amendments, the more common view is that it understates the extent to which land acquisition difficulties inhibit manufacturing in India, as Maitreesh Ghatak has explained most clearly in Quartz:

“It’s a classic underreporting problem,” said Maitreesh Ghatak, a professor at the London School of Economics who has studied land acquisition law in India. “There may be projects that never got started because they anticipated these problems. Also, the ones that did get started are likely to have been selected because the risk of land acquisition problems was low for them for whatever reason.”

This is a perfectly fair point, but it doesn’t necessarily follow that the 8% number is an understatement. Imagine a businessperson who is contemplating setting up a plant to manufacture wickets. One could easily imagine her investigating the feasibility of setting up such a plant, but giving up because she failed to procure land.

But one could also imagine her giving up because she couldn’t get a large enough bank loan, or a sufficient supply of workers, or even permission to cut trees to manufacture the wickets. To use Ghatak’s language, she may have chosen not to start because she anticipated any, or several of these problems. One simply does not have enough information about the universe of projects that were contemplated but not started, which doesn’t justify throwing out the data about projects that were started but subsequently ran into trouble. Because the ones that got started are also likely to have been selected (into the CMIE sample (pdf) of 804 projects) because the risk of labour, capital or market problems was low for whatever reason.

But let’s assume for argument’s sake that the number of unobserved projects delayed by land acquisition issues is in fact significantly high. It doesn’t follow that Modi’s land amendments will have any impact on their viability. The original 1894 land act was in operation until 31 December 2013, until which time the government was able to compulsorily purchase land for private companies without landowner consent or carrying out a social impact assessment, just as in the amended law. Yet land acquisition problems abounded. It would be ludicrous to argue that a law that was in operation for a single year — and excluded nuclear energy, mining, railways, national highways and petroleum pipelines from its purview — was responsible to delaying land acquisition in the prior decade.

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