Industry heads believe that the Land Acquisition will ensure smooth procedure and lesser delays in getting land for development, but will also spike costs of products by almost 20-25 percent.
As voting for the Land Acquisition, Rehabilitation and Resettlement Bill, 2011 gets underway in the Lok Sabha, India Inc expresses mixed reactions to the proposal. Some industrialists feel that this will throttle industrial growth in the country, expressing reservations against crucial clauses in the document, yet some others also welcomed the overall intentions of the Bill. While they foresee lesser delays in acquiring land for development, project costs may also see a surge going forward.
Vinayak Chatterjee, chairman of Feedback Infrastructure believes that the Bill is a much needed reform and needs to be looked from a broader perspective. However, some implementation aspects of it will require restructuring, he told CNBC-TV18.
Venugopal Dhoot of Videocon Industries is also positive about the Bill and its retrospective effect as stalled projects could see a silver lining if it is passed. The Bill is also good for farmers and landowners as it largely favours them, while the industry should be happy on lesser hurdles to projects.
The Bill includes a clause where the compensation to the landowner is four times the market value in rural areas and double in urban areas. Also, consent from 80 percent of displaced people will be required to acquire a chunk of land.
However, Niranjan Hiranandani, managing director of Hiranandani Group of Companies strongly criticised the Bill in its current form. He says that cost of affordable housing will see a spike of 20-25 percent. The state government will also have problems as land acquisition costs will shoot up. As a result, a lot of industrialists will look to invest overseas, Hiranandani affirms.
Ajit Mittal, group ED of Indiabulls group echoed Hiranandani’s views on rising housing costs. He felt that not only will cost of housing in India will substantially go up, but industrial projects will become financially unviable in some cases. He is also worried about implementation of the resettlement and the rehabilitation (R&R) clause, which calls for provisioning for land, housing, employment and annuities above a certain threshold of acquisition.
Below is the edited transcript of their interviews on CNBC-TV18.
Q: What do you think of Land Acquisition Bill in terms of project costs, in terms of acquisition by industry, because no government acquisition will now take place for private projects and the compensation is much higher than what the industry is used to paying?
Chatterjee: It is extremely popular for industry to criticise the Land Acquisition Bill because there are certain clauses that will impact corporate India, make life a little tougher. But we have to stand back from the detail and look at the larger picture that this Land Acquisition Bill was needed in the first place.
The 1894 Punjab Land Acquisition Act has been so thoroughly misused by state governments and often incurring capitalists in cahoots with government that it has made a mockery of people's right to decide whether to sell land or not. So, this new Land Acquisition Act was required and various provisions are pretty logical.
The fact that for infrastructure and for public purposes you can go ahead without asking 80 percent of the people, for public-private partnership (PPP) projects you have to ask 70 percent and for the balance private acquisitions you need 80 percent. The compensation scale is not illogical or priced bad for urban areas and four times that in a sliding scale for urban.
The fact that there is an Resettlement and Rehabilitation (R&R) package is not illogical. If the industry were to take a broader view as to what is good for the country, what is good for all stakeholders then I do not oppose the bill. There are certain clauses and elements in the bill that would certainly need reworking, but it is not a sufficient import to actually reject the bill wholesale.
I welcome the Land Acquisition Bill though it has a higher cost for corporate India. An informal calculation that I have done for a very specific auto project shows that before the Land Acquisition Bill the cost of land acquisition would be 3-4 percent of project cost and after Land Acquisition Bill it will be 8 or 9 percent of project cost.
This incremental cost of land for a specifically scarce and contentious resource is something that over the life of a manufacturing or an infrastructure project and could go from 30 years to 100 years is easily amortisable across the life of the project.
Q: As far as the R&R clause is concerned, compensation is one part, Resettlement and Rehabilitation is another. These clauses will apply to private purchases above a certain threshold decided by state governments. They will include land dependence, dependence for five years to get houses or financial grant, the choice of annuity or employment, Rs 2,000 per month as a family as annuity for 20 years, Rs 5 lakh grant if employment is not forthcoming, transport allowance and resettlement allowance. These are just some of the R&R clauses that industry believes will not be practical to implement on the ground.
Chatterjee: Some of the implementation aspects will require restructuring and tweaking even after the bill is passed from practical experience. Land acquisition is a state subject and a state law. So there is a constitutional issue as to what happens to an act passed in Parliament.
An act passed in Parliament does not necessarily mean that the center has usurped the power of the states. According to a lawyer and a Congress spokesman, there is case law that this law of land acquisition passed in Parliament serves as a benchmark to the 29 state governments to amend their existing Land Acquisition Act in line with the central formula that has been enacted in Parliament today.
State governments can improve it, but cannot worsen it in terms of the provisions. In terms of competitive populism, state governments will now refashion the R&R package, not to be laid, but leaving a further eye to elements of practicality. State governments that help industry and private sector acquire land without necessarily being mandated by the government to do so will attract greater investments than states.
Q: What are your thoughts regarding the bill because industry has been critical of the compensation, of the resettlement package, of the retrospective clause and ofcourse the fact that you would require about 80 percent consensus before you can actually go out there and acquire land?
Hiranandani: I think we needed a new bill. It was pretty old and there was lot of lacuna and a lot of negativism in the old bill, but I don’t think we have a panacea. For example, in case of Navi Mumbai Airport, we acquired 90 percent of the land and for acquiring 10 percent of the land we will have to compensate the farmers, villagers or whoever owns the land equal to 90 percent of the land which is already acquired. So, you will actually increase the cost of acquisition for 10 percent of the land by 9 times which will push up project costs.
In many projects the land component is small percentage of total cost for example power projects or projects of airports. As far as the housing segment is concerned, you will find a huge increase in costs especially in the case of affordable housing where the land component and other things are a large percentage of total costs.
Overall, the bill was needed, certain provisions must be tweaked specially when land is acquired for power projects or other projects of similar nature. If some of the land is postponed, some of it has to be returned to the farmer. I don’t think that is possible because projects do get delayed. A modification in the law was needed and a new bill was called for.
Q: For a real estate player there will be an increase in project costs. Can you quantify the increase?
Hiranandani: In the case of affordable housing it would be about 25 percent increase in total costs – counting the increase in land costs. However, as Vinayak correctly said, if you amortize it, you could absorb the cost but all in all if you acquired land for affordable housing, in that segment you will see about a 20-25 percent increase in total costs for this land and specially if they are outside the urban limits then it would be about 30-35 percent.
Q: What is your view on the provisions in the Land Acquisition Bill and what would it actually mean to costs?
Mittal: This was a very long awaited piece of legislation. Mercifully it has replaced 100 year old archaic Land Acquisition Bill, so this was really the need of the hour and the best thing that this bill will do is to cut down delays.
There are bitter protests from the farmers, there are clashes, particularly in Haryana and Uttar Pradesh, lot of industrial projects were mired in such protests from the farmers. That will definitely be a thing of the past.
We will be naïve if we believe that the cost of housing in the country would not substantially go up, it would and not only housing also some of the industrial projects would appear to become financially unviable. I am not so much worried by the compensation costs going up maybe 4 times in the rural areas and 2 times in the urban areas.
What worries me is the implementation part which is so cumbersome, particularly the Resettlement and Rehabilitation (R&R) part, everything is front-loaded where the project is going to take 3-5 years to become viable, whereas the costs would be absolutely upfront. Overall, it is a good piece with very good intent, but the devil is probably in implementation and that will remain a challenge.
Q: By how much would the costs go up? One of your projects is in Mumbai. Could you tell me how will this affect your project costs?
Mittal: We do not have too many projects where we are directly acquiring land from the farmers. Most of our lands have been purchased through public auctions, particularly from the government National Textile Corporation (NTC) mills. Wherever we have land, that is already up and running. We do not contemplate any fresh acquisitions as of now.
Q: This bill has been controversial, it has been discussed and debated in public, it is a bill that corporate India has had several issues with but still India needs it, what is your view on this?
Dhoot: Yes, it is a controversial bill and it has also become difficult for government to arrive at a solution. No matter what the solution is, both the parties will not be that happy. But now the compromise has been made in such a way that atleast farmers will get the best benefit because in rural area they will get 4 times the value and urban area two times the market value. So, this is a good solution for those whose large projects have been stuck.
Some farmers would not give their land under any circumstances because they say they have inherited from their forefathers and they would not like to give. But when 80 percent of the people are ready then at that time they have to give it and that will be made compulsory.
One more silver lining for the farmers is that the responsibility of rehabilitation and resettlement has been put on the purchaser. That notification will also come in favour of the farmers and therefore, farmers should be happy.
As far as industry is concerned, they will not be much unhappy because suppose you take a power project of Rs 5000 crore, the land cost is not more than Rs 150 crore or 3 percent of it. If it goes to 4 percent they should not be much unhappy but atleast projects and earning will start and so, this solution is good.
For small piece of land if the project is unnecessarily stuck, the project atleast could be started on an immediate basis. Stagnation in capital formation in India will also be solved. These are the salient features of the land bill and industry is also very happy with this because government has come with the solution, people were talking nothing is moving, now the things have started moving and it should be welcomed by both farmers as well as industry.