From the economy, investments to agriculture and jobs: The many repercussions of India’s land woes

What are the economic costs of ill-functioning Indian land markets? The news and public policy discussions on land often revolve around land acquisition by governments, like the Tata Nano Singur case or the Land Acquisition, Rehabilitation, and Resettlement Act of 2013. But the use of, or lack thereof, eminent domain stems from fundamental problems that make Indian land markets malfunction.

Sources of land frictions

The sources of malfunctioning or frictions with the land markets are many. Like many South and South-East Asian countries, India’s complicated inheritance system has resulted in small land parcels, with land fragmentation increasing over time. The average landholding size among land zoned for agricultural purposes was 1.1 hectares (2.7 acres) in 2015, down from 2.3 hectares (5.7 acres) in 1971.

In addition to small parcels, unclear land titles and slow-moving courts make buying land in India inherently risky. Furthermore, regulations around land rezoning, particularly buying land historically zoned for agricultural use, involve lengthy bureaucratic and legal hurdles.

Frictions in the land markets affect many aspects of the Indian economy. For example, the ill-functioning land markets affect the growth and shape of Indian cities, internal migration, infrastructure development, crop choice, farmer incomes, manufacturing productivity and growth, and the economy’s structural transformation.

Consequences in agriculture, manufacturing

Sixty-eight per cent of farm holdings in India are considered marginal farms — less than 1 hectare (or 2.5 acres in size). In contrast, Pakistan and the United States have 36% and 0% marginal farms, respectively. In conjunction with policies and regulations, small farm sizes make land consolidation difficult and have a detrimental effect on agricultural productivity.

For example, research has shown that strict land tenancy laws adopted post-Independence have resulted in lower rental market participation levels and, thus, reduced farm productivity by 38% on average. Another consequence is that these marginal farms cannot adequately mechanise, efficiently grow cash crops, and benefit from returns to scale.

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