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.

Modi’s land amendment would do very little for stalled projects

Thanks to a Right to Information request to the Ministry of Finance by Venkatesh Nayak of the Commonwealth Human Rights Initiative, we have more detail regarding how many industrial projects are being held up by land acquisition difficulties. The data were collected by the Centre for Monitoring Indian Economy (CMIE) and analysed in Chapter 4 (PDF) in the first volume of the 2014-15 Economic Survey.

As low as the headline number of 8% appears, it may be an overstatement in the context of the government’s land acquisition amendments, since it includes government projects that do not fall under their purview. Remember that the hotly-debated consent clauses of the 2013 Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act applied only to land acquisition by the state on behalf of private companies (whether directly or via public-private partnerships). This means that the amendments will do nothing for public sector projects.

The 8% headline number comes from the list of 66 (of 804) projects that the CMIE has identified as held up by land acquisition difficulties, but 27 of these happen to be government-owned projects that will be unaffected by the land acquisition ordinance. Therefore the proportion of projects that stands to benefit from the Modi government’s land acquisition amendments is in fact 39 of 804, or 5% of the total.

If we take a stricter view and filter out real estate projects (townships, malls etc.), then the number of private industrial projects held up by land acquisition problems drops further to 26, around 3% of the total.

Now there is a view that the the observed number of projects could understate the effect of land acquisition difficulties on investment, since many projects will have been considered and dismissed without actually being launched. But this holds true of all factors of production (labour, capital, etc.), so it’s pretty hard to come up with a comprehensive and correctly weighted counterfactual.

So far as the current land act amendments are concerned, a quick scan of the list of 804 projects shows that many of them date back a decade (such as POSCO’s Paradip steel plant and Tata Steel’s Jharkhand plant). The 2013 land act came into force on 1 January 2014, which means that the consent and social impact assessment clauses can’t be really be blamed for the observed delays.

Ground realities

In its recently released election manifesto, the Indian National Congress sought to take credit for passing the land acquisition act in August 2013:

The seminal Right to
 Fair Compensation
 and Transparency in
 Land Acquisition,
 Rehabilitation and
 Resettlement Act,
 2013 – a key campaign
 promise of the
 Indian National Congress in 2009 – was enacted after two years of nationwide consultations. This law was a historic victory for our brothers and sisters working in the agriculture sector. The law ensures that land cannot be acquired without the land owners consent, promises up to four times the prevailing market value as compensation and repeals the Land Acquisition Act of 1894.

The idea is that a transparent and easy to follow land pricing policy will prevent the recurrence of conflicts over price in transactions in which the state forcibly acquires land from farmers on behalf of companies (that forced the Tatas out of Singur, for instance).

The land acquisition act has attracted some favourable media commentary, but by and large analysis has been critical. In a column titled “The UPA’s worst legacy“, Business Standard Editorial Director TN Ninan asserted that this law was perhaps the UPA’s most economically damaging policy:

The land law stipulates that forcibly acquired land must be paid for at two to four times these market prices, in addition to other relief and rehabilitation costs. So the new law will make land acquisition next to impossible, or unaffordably expensive (which becomes the same thing) in most states. And since development unavoidably means projects that require large bits of contiguous land (railway lines, roads, irrigation canals, power stations), it means that development itself could be slowed down.

It’s not just thoughtful commentators like Ninan who feel this way. Economist and former Federation of Indian Chambers of Commerce and Industry (FICCI) secretary general Rajiv Kumar was so incensed that he tore into an obsolete, previously discarded version of the land bill in a Financial Express column “Land Bill a mortal blow to India’s modernisation“.

I won’t get into the details of this legislation here except to say that my own view of the land acquisition act is closer to what Vinayak Chatterjee, the chairman of infrastructure consultancy Feedback Infra, argues in his Business Standard column “Land and the greater common good.”

The data analysis angle is this: There is a general consensus in the investment research community that the negatives of the act (viz. higher land costs for industrial projects) are eminently manageable and will have a minimal impact on project returns. This is a conclusion that has been derived after careful study of company balance sheets and cost structures. Yet if you read the media, the land acquisition act is presented, more often that not, as Exhibit A in the “UPA killed the India growth story” narrative.

Here’s what Kotak Institutional Equities thinks:

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And this is what UBS Investment Research has to say:

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The end of the “India growth story”? Not even close.