In the world of finance, the implicit value of a security or asset lies in its marketability, or the ease with which it can be converted into cash. Laws enacted by the State and rules of exchanges which impede transferability are viewed as regressive. Financial reform has conventionally focused on increasing the marketability of securities and reducing the transaction costs attached to the transfer of securities. On the other hand, land reforms which have been undertaken in India largely since the 1950s, have failed to create a liquid land market by imposing several restrictions on transferability. This is because Indian land reforms were not motivated by the need to create a land market. On the contrary, the outcome of land reforms has increased transaction costs and reduced the transferability of land. Any conversation on the creation of a land market in India must, therefore, begin with the reforms which have hitherto been undertaken.
State intervention in the land market in India: Intentions and Outcomes
In a lucidly written column, Prof. Anand Swamy points out that upto about 1855, State intervention in the land market was limited to the measures taken for collection of revenue and there were practically no restrictions on land transferability in India. This enabled farmers and peasants to freely mortgage and sell their land.The large scale transfer of land to merchants and moneylenders having no connection to agriculture, however, often led to social tensions, especially in the poorer regions of the country. That is when the State (the British, as it were) chose to intervene in the land market to deal with the social tensions that arose from indiscriminate land transferability. This approach towards land reform continued post-independence too.
Post independence, land reform in India was motivated by the following concerns:
- Increasing agricultural production;
- Eliminating exploitation and promotion of social justice in the Indian society by providing security for the tiller of soil;
- Preventing concentration of land holdings in the hands of a few; and
- Protecting tribal communities from the deprivation of land occupied by them.
Motivated by the abovementioned concerns, land reforms in India can be classified into the following categories:
- Reforms which abolished intermediaries such as zamindars. For example, the zamindari abolition legislations which were passed in several states across India such as Rajasthan and West Bengal.
- Reforms which provided for the regulation of tenancies and rents. For example, the Rajasthan Tenancy Act, 1955 and the Mahrashtra Rent Control Act, 1973, which regulate the rights and interests of different class of tenants.
- Reforms which imposed ceilings on landholding. For example, the Rajasthan Imposition of Ceilings on Agricultural Holdings Act, 1973 and the Urban Land Ceiling Act, 1976, both imposing ceiling on the holding of land.
- Reforms which sought to restrict land use for certain purposes only and indirectly affected transferability, except for the restricted uses. For example, the Maharashtra Land Revenue Code, 1966, imposes several restrictions on the transfer and use of land.
The policy underlying the reform led to the imposition of several restrictions on sale, lease and mortgage of land. While many reforms completely prohibited the transfer of land, others required the transferor and the transferee to obtain the permission of the State for making the transfer and others permitted transfers only to certain classes of persons. This increased the transaction costs attached to land transactions.
Case Study of Maharashtra
We studied the laws relating to land prevailing in Maharashtra with the objective of identifying the restrictions imposed by them on land transferability.
The following table gives a snapshot of the laws in Maharashtra which impede the transferability of land:
|Land Laws of Maharashtra|
on transferability (Sale, Lease and Mortgage)
|1||Bombay Tenancy and Agricultural Lands |
|An Act governing tenancies of agricultural land||The Act vested the ownership of agricultural land in the tenant who cultivated such land personally, with effect from a certain date. It permits the deemed owners of agricultural land to sell, mortgage and lease land only under certain conditions and with the permission of the Collector.|
|2||The Maharashtra Agricultural Land (Ceiling on Holdings) Act, 1961.||An Act which imposes a ceiling on agircultural landholdings.||The Act allows agricultural land to be sold or partitioned only in certain circumstances with the permission of the Collector.|
|3||The Bombay Prevention of Fragmentation and Consolidation of |
Holdings Act, 1947.
|An Act to prevent the fragmentation of and better consolidation |
of agricultural land holdings.
|The Act allows the holder of a notified piece of land to sell or lease it only to a holder of a contiguous piece.|
|4||The Maharashtra Land Revenue Code, 1966||An Act which consolidates the law relating to land revenue in Maharashtra.||The Act imposes several restrictions on the transfer and use of land such as (a) restrictions on transfer of tribal land to non-tribals; and (b) restrictions on the use of land used for one |
agricultural purpose for another agricultural purpose. However, such transfers and use-related changes can be made only with the permission of the Collector.
|5||The Maharashtra Co-Operatives Societies Act, 1960.||An Act governing co-operative societies in |
|The Act imposes various restrictions on lease, such as a mortgagor of property mortgaged to an Agriculture and Rural Development Bank, must not, except with the prior consent in |
writing of the bank, and subject to such terms and conditions as the bank may impose, lease or create any tenancy rights on any such property.
Thus, the laws in Maharashtra impose several restrictions on the sale, lease and mortgage of land. While some legislations require the landholder and the transferee to obtain the collector's permission before transferring the land, others mandate that the transfer may be made only to certain classes of transferees such as the holder of a contiguous piece and so and so forth. Under some legislations such as the Bombay Tenancy and Agricultural Lands Act, 1948, the Collector has been permitted to give permission for transfer of land only in certain circumstances, such as if the land is gifted to a member of the owner's family or an institution named in the Act or if the owner is perpetually giving up agriculture or is unable to cultivate the land personally. It dispenses with the requirement to obtain the Collector's permission in certain other set of circumstances such as the purchaser is an agriculturist and the collector's fees are paid.
Restrictions such as the ones illustrated in this case-study have severe implications for the land market, as described in the next two sections.
Prevents bundling of rights in land
In classical economics, when one speaks of land as a factor of production, one does not restrict the purport of land to the physical possession of land. What the land owner, in fact, possesses is the right to carry out a circumscribed list of actions (Coase 1988). Hence, land, as a factor of production, refers to a bundle of rights, which enables a person to "enjoy" the property, namely, the right to sell, lease and mortgage (Commons 1893).
As illustrated in the table above, land reforms in India have effectively prevented the bundling of rights by prohibiting or restricting the right of the holder of the property to hold, sell,lease and mortgage the property. They extensively diluted the value of land as a factor of production.
The second obvious outcome is the impact of such restrictions on transaction costs attached to transfer of land. Apart from direct costs such as the requirement to obtain the Collector's permission for a whole range of transfers, the transferee of the property also needs to take into account the costs associated with investigating the title of the transferor. To take an example from the abovementioned case-study, where the transferee is acquiring agricultural land in Maharashtra, a title investigation will include an enquiry as to whether the transferee has the authority to unconditionally transfer agricultural land, whether the transferee qualifies as an agriculturist and whether the land is eligible for conversion.
Thus, unlike financial reforms which conventionally focus on creating liquidity in assets, land reforms in India have hampered liquidity in the land market. India would not have had a liquid securities market in securities if the right to transfer securities was similarly restricted. This principle is applicable across asset classes.
Land reforms made in India were a symptom of the malaise that prevailed at that time. Today, the reforms themselves are the malaise. Apart from increasing transaction costs, they create tremendous scope for rent-seeking and corruption in the form of mandating permissions for land transfers. Any conversation on land reform for the creation of a liquid land market in India must, therefore, make a clean break from the past.
The authors thank Sattwick Biswas for useful discussions on this subject.
The Firm, the Market and the Law by R. H. Coase (1988), Page 155.
John R. Commons, The Distribution of Wealth (1893), Page 92.
The authors are researchers at the National Institute for Public Finance and Policy.