The issue of special economic zones (SEZs) has set off a series of contradictory announcements by the government and ensuing debates, both in the media and the academia. There have also been passionate and violent protests by farmers and labourers. Indeed, this issue has pushed to centre stage the fallacies that plague the political economy of property rights in India.

The acquisition of private property by the state is admittedly a very challenging subject. It throws up several tradeoffs in theory as well as in practice. For example, should the state be allowed to acquire private property? If yes, in which circumstances and on what conditions? A fair amount of theoretical as well as empirical knowledge is available to guide us. It is another matter that the current policy fails to make sense from any rational perspective.

The Land Acquisition (Amendment) Act, 1984, provides for acquisition by the government. Section 38 allows acquisition for companies as well. However, the acquisition has to be for public purposes only.

The centre made agriculture land available up-for-grabs, doles out unprecedented and unwarranted fiscal incentives to the potential developers and users of SEZs. In return, all it expects from them is a positive (however small) level of forex earnings! On cue, state governments go into a frenzy of land acquisition, completely ignoring the plight of many people who are direct and immediate victims of this process; small farmers and landless labourers.

In desperation, the Centre swings to the other extreme; completely bars the states from acquiring any land for SEZs with private participation, and freezes the approval process altogether. If one goes by media reports, the government has even considered amending the Act to buffer the disputes over compensation from courts.

In their obsession with symptoms, the policymakers are completely overlooking the root causes, namely the procedural aspects of the acquisition policy. It may be obvious why landless labourers, tillers and share-croppers are protesting against the acquisition. These people are not legal owners, and while the only source of their livelihood is being snatched away, they are entitled to meagre or no compensation.

In contrast, agitations by land-owning farmers in Haryana and Maharashtra are somewhat surprising. If compensation paid to them is ‘adequate’, why there are so many violent protests? These incidents are testimony to the serious problems besetting the entire approach.

Section 23 of the Act entitles the owners to market value of the property being acquired plus a solatium of 30%. In fact, on various counts the compensation adds up to much more than the market value of the property. Still, it is instructive to know that the affected parties — whenever they can afford it — sue governments for not paying the market value. Indeed, in many instances they file civil writ petitions against the acquisition per se.

Yet another feature of the policy has turned welfare economics on its head, by asking the developers to buy land directly from farmers and simultaneously fixing caps on the size and number of SEZs. No doubt, even a voluntary exchange may require regulation — because of skewed barging power of the parties involved or externalities caused by such transactions, etc. However, a cap on the magnitude of the trade is not a solution.

Small zones are more likely to draw on rather than contribute to local infrastructure. Further, ceiling on the size and number of SEZs will allow only a fraction of potential buyers and sellers to trade. Perhaps mainstream economics is yet to learn that there can be a justification for allowing some while excluding others from entering into a genuinely voluntary exchange.
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