Wednesday, May 25, 2011

Make market forces work

From the article “Leave It To The Market” by Dilip Modi
  • However, the Land Acquisition Act, 1894, gives sweeping legal powers to the government or its authorised agencies to acquire almost any private land or property provided such acquisition is for "public purpose". Invariably this route is adopted. This is also known as 'eminent domain', regarded as an inherent right of the state to take private property for public use. It is legal in many countries, including the US, UK and France. 
  • The problem lies in interpretation of the term "public purpose". Unfortunately the Act does not define the term. So interpretation was left to the courts. The Supreme Court in 1971 took a very wide view of the term in the case Jage Ram vs the State of Haryana. Yet it did not provide any definition and left it to the state governments to define and thus (mis)interpret the term. Strangely the judgment was delivered when 'right to private property' was still a fundamental right. Subsequent apex court judgments further widened the scope of interpretation. 
  • The economics behind eminent domain and thus the interpretation of the term public purpose assume that the state would always act in the public interest and, therefore, any taking of private property would be to provide certain "public goods" that otherwise would not be provided by the markets. 
  • Lighthouses or clean air are typical examples. One or several ships can use the light at the same moment. Yet no single ship owner would build the lighthouse. The government needs to build it - in other words, provide public goods as the market will not provide them automatically. 
  • This clearly implies the Act's provisions should only be used when the government itself is to provide infrastructure facilities (public good). They should not be used for land acquisition for private investments, whatever the benefits. For such transactions, the market must play out. The government should not undermine market processes. 


  1. There needs to be more debate on land acquisition in our country. While no government intervention to an acquisition is a welcome goal, is it realistic given that most farmers are illeterate and poor and hence gullible to middlemen. Some so...rt of government role is probably necessary, may be even desirable in the short-term. At the least the government can provide an advisory role giving data such as market value of the land etc, to the farmers.

  2. Baibaswata Chatterjee

    The hey day of 'middlemen'have gone far!! It is the State or the Government which become a real middlemen for all wrong reasons in our society. I mean the State should not put its nose in everything including for buying and selling of land farmers etc. it should simply ensure that the sound definition of private property right is implemented with transparently.

  3. Chandra,
    I agree in principle that the state should stay off private property and 'facilitate' implementation of private property rights. However, in India, the bridge between haves and have-nots is too apparent and too profuse and do need some sort of external 'intervention' (in the short-run). Our issues are still very basic and unless the state itself or via incentives to private entrepreneurship bridges this gap, such wide differences will continue to exist to the detriment of our society.