Sunday, April 03, 2011

Defence land: A key dimension of India's privatisation problem

As Vijay Kelkar has long emphasised, India's privatisation question should be viewed as a question about the portfolio of the State. For each Rs.10,000 crore of shares of Air India that the government owns, it is forgoing 2,000 kilometres of highways. The State needs to ask itself whether it is better to own 2,000 kilometres of highways as opposed to owning the same shares of Air India. On this subject, also see Section 4.3 of this paper.

The second key dimension that should shape the discussion on privatisation is that of improving GDP growth. When assets are moved from public control to private control, the translation of capital stock and labour into GDP growth generally becomes more effective. Through this, India would reap GDP growth by better utilisation of existing resources.

Both these issues have, so far, been largely seen questions about the control of public sector undertakings (PSUs). But both issues are broader: they are about asset ownership by the government more broadly. Given India's socialist background, government has frequently and wantonly grabbed assets, far beyond those required for the production of public goods. Hence, the problem of selling off assets is much bigger than just PSUs.

As an example, this article says:
The defence ministry is the largest state landowner, holding 80 percent of the 7,000 square kilometres of government land, much of it now prime real estate, according to the CAG report released Friday.
Here is the CAG report referenced there.

There are two interesting dimensions to the problems of defence land. First, while the Ministry of Defence undoubtedly needs large tracts of land on which it can run exercises, training, experiments, etc., it certainly does not require prime land in cities.

The heart and soul of a city is the dense interactions between top decile people. What makes a great city is greater interactions within a greater density of higher talent people. By definition, military installations are aloof from the general population; they do not interact with the main citizenry. Hence, large military installations are like black holes in a city: they increase distances for everyone else, and they stand aloof. The presence of big defence lands in cities is not just about wasting fiscal resources (you'd be better off selling that land and retiring public debt) but primarily about increasing the quality of the cities.

There is a case for placing defence research labs in other innovation hubs of India - e.g. Bangalore, Poona or Bombay. This is justified because they would serve to increase the density of scientists thus enhancing the quality of these cities, and because these defence labs would benefit from interactions with civilian scientists. Barring research labs, there is no case for placing defence facilities in cities.

There may be a role for one big HQ in New Delhi, but I don't see why dozens or other defence installations are required to be in Delhi. The governments stands to raise trillions of rupees by selling this land and shifting these organisations to locations in the boondocks, where land is roughly free. And there is a further kicker: When defence holdings in places like New Delhi or Poona are moved off into private ownership, India's GDP will go up. So this is a win-win at two levels: First, India's fiscal problem is eased by selling defence land and writing down debt, and India's GDP is increased because the land gets put to productive use.

Similarly, I don't see why anything connected with the Indian Navy needs to be in Bombay. It's perfectly feasible to create naval bases at boondocks locations on the coast and thus free up the space used in high marginal product land.

The second interesting dimension is that of the Ministry of Defence as a creator of new cities. If you start off with land in the boondocks, on day one, nobody wants to go there. The Ministry of Defence has the ability to solve the coordination problem. It can engineer the synchronised movement of a large number of distinct pieces that are required to create a new cantonment town. Once this has been put into motion, within 20 years or so after starting up, it would be wise for the government to sell this off and start over. For MoD, there is little difference between being in a mature cantonment town versus a brand-new one. But for the exchequer, enormous value is created through this process. And for India, this works well because new cities can be steadily created in this fashion.

6 comments:

  1. Sir, there is a episode of Yes, Prime Minister where Jim Hacker the Prime Minister of England suggests the very same thing (Over there they suggest they sell military properties in London and move them to the North of England). But the plan gets thwarted because the bureaucrats heading the Labour and Defence ministries and the cabinet secretary conspire against this. Their interest in the matter is beautifully depicted when one of them says "The Generals couldn't afford to miss Wimbledon, their wives wouldn't stand being sent so far away from Harrods". I'm afraid this is very much the case in India. The Army holds on to this land precisely for the same reason the private sector is willing to pay big money for it. They have all the conveniences of big cities at hand when they set up base here. Would the Lt. Generals consent to bringing up their progeny in say Tembhli(Where the first UIDAI was given)? Of course political will is needed to push this through, but political will is rarer than platinum in our country.

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  2. Also, the diversification argument: a nuclear bomb on bombay wont wipe out your naval base at the same time..?

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  3. Free up the Defence land, collect a lot of money .. trillions in this case, and give our politicians a chance to become wealthy and rich while selling that land to private parties. That seems a good idea, very similar to the scams made by our politicians while selling defence spectrum to telecom operators. Defence has a strong case against privatisation of any of the defence asset by government. Do we have the system which can guarantee that there will be no scam again?

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  4. This is one of those ideas which sound very good because you aren't looking at the bigger picture. A classic case of losing the forest for the trees.

    You also need to realise that there is a huge shortage of officers in the armed forces in India. And postings in/near urban areas is one of the things which the officers look forward to, For most army officers the first few years they end up being posted high-stress postings in J&K/NorthEast. So these postings help make up for the years spent isolation from the civilian population and allow them to spend time with their family in a "normal" environment.

    If joining the armed forces means you are going to spend the whole of your life in the boondocks where is the motivation for officers to join/continue to serve in the services?

    @vikramhegde The question isn't would the Generals consent to raising their progeny in Tembhli, how many Indians would(asprire to) move to Tembhli and do the same? 100% EOU software units are just as aloof from the local population and have minimum interaction with the local businesses. So why not ask/force an Infosys or Wipro to move to Tembhli?

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  5. @Atul Jain : Well put, if the execution of these ideas were well executed then it would make sense. But TII(This is India)we cannot stop being greedy.

    Defence has excess land because cities in India have evolved around locations which had high British Army concentration(exceptions do exist).
    Now most of the military locations do not need a committee to go green. They generally are Green. So selling all this land to make trillions of Rupees and making a concrete jungle seems less justified.

    I see some of the plots on which work is being done in cities like Pune and Bangalore where the land is first made bald(culling trees, destroying the top soil...) and then worked on to build high rises, followed by planting few samplings and grass, a scenery of cement and grass. That is not happening.

    Also why are our cities growing beyond what they can actually sustain? Should we not shift outside the realms of few chosen cities and bring up the so called Tier II and Tier III cities. Just a thought.

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  6. First, just for the sake of avoiding confusion (just in case there is any): Vijay Kelkar does not propose moving defence establishments! Read the paper!
    It would be shocking if it were otherwise!!!
    Second, consider this: (hypothetically) India relocates its entire defence establishment (Army, Navy and Air Force) to the deserts of Rajasthan/Gujarat and adjoining coastline (Gujarat has India's largest coastline among all Indian States). The trouble is: India's biggest threat comes from China. And luckily Indian politicians and military strategists are not as hare-brained as some would think. That's the reason that 40% of India's troops are under the Eastern Command (headquarters: Fort William, Kolkata).
    3. Essential Reading for Dr Ajay Shah: Enemy at the Gates : The Battle for Stalingrad. If he has any doubts about how important urban installations and urban warefare is then this should convince him.
    4. It would help if Dr. Ajay Shah does not think of profiting from insurance (defence). That's precisely the mindset of those who bought ULIPs! Maybe he will be able to understand now.

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