Reform in Practice: Praveen Ravi (CEGIS) on Freeing Agricultural Land Markets

What is one area of regulation in India that should be deregulated?

I would pick mutation of agriculture land for non-agricultural purposes, that could be industry or for commercial purposes, as the top area where the time is right to deregulate. I'd like to maybe talk briefly about why these barriers to mutation exist in the first place, so that we understand why this needs to be removed now. This is a very long historical concern which dates back to two reasons.

One is on food security, because about 40-50 years ago, food security was a real thing, and therefore the government wanted to stop exit of lands from agricultural purposes. The second is protection of property rights. Neither of these two are really big concerns today, which is why I think the time is right for doing this now.

What would a more effective alternative look like? 

I would propose three ways in which an alternative could work. Number one, to address the concerns of land moving away from productive agricultural uses, one could just identify lands which are in low-yield, low water table areas, because anyway their productivity is like readily limited as of today, and those which are also close to large trunk infrastructure like roads, where the productivity of land used for non-agricultural purposes will be much higher. That is lens number one.

We should remember that these mutations do happen even today. The only difference is that they don't happen on a rules-based way. They happen on a deals-based way. Moving away from the deals-based approach to a rules-based one, where land with water table below a certain area is automatically allowed to be mutated. That's one part of the solution. The second part of the solution is states typically have this fear of being seen as anti-farmer. This mutation will be seen as an anti-farmer, sure.

One way to go about this is to say you apply a cess on all these mutations. It could be 20%, 30%, whatever the political economy finds suitable, and you reinforce this cess to be applied only for agricultural productivity enhancement, because one of the biggest problems over the past 20, 30 years is that all of agricultural growth is happening only on extensive margin. That is, you invest more land, more fertilizers, more people, et cetera, but clearly, we are having negative returns there.

Reinforcing these proceeds into a cess which can improve agricultural productivity will help growth to happen on the intensive margin. That's number two. The last point on how this would happen is a compact between center and states on sharing the savings because the estimates of how much subsidy together states and center put per hectare of land ranges around 1 lakh per year. That's like a huge amount. Moving land away from agriculture can actually help reduce the subsidy on a long-term basis. If there is a grand bargain between the state and the center on sharing the proceeds of these savings, I think that can make things incentive compatible.