Ease land markets: Karnataka’s legislative change to help unlock land market is a welcome step

Of all factors of production, the market for land in India is arguably the most distorted. A part of the distortion comes from long standing legislations which do not meet the economy’s changing needs. Karnataka’s legislative assembly in March had cleared an important amendment to the land reform legislation, which has now been notified. With this, the state has taken an important step to allow both farmers and firms to realise greater value from sale of a scarce resource. This should help it attract more investments.

Land is an important means of collateral for both farmers and firms which borrow long-term. Therefore, the state of land markets feeds into the credit market. A messy titling system and rigidities introduced by old legislations have choked India’s development potential by creating shortages. To illustrate, the legislative change Karnataka has made will provide more options to firms to sell their land and attract new investment. Separately, land market transactions can be made fairer by other measures such as easing permissions for land use conversion. This will encourage farmers open to selling land.

Land in India is predominantly a state subject. Therefore, many changes have to come from their end. A catalyst for this change is competition among states to attract investment. Karnataka’s change was triggered partly by feedback from investors and the fact that land markets in Tamil Nadu and Telangana were not hamstrung by some of Karnataka’s legislative requirements. States can do much more to free up their land market. An essential requirement for a well-functioning land market is clear titling. Evidence of titling is often spread across multiple arms of state governments which don’t communicate. Consequentially, the titling system in India is based on presumptive as against conclusive titles.

This leads to endless rounds of litigation which in turn distort the market. If these distortions are removed it will help all economic agents realise more from this asset. This will also lead to political and social benefits as the land acquisition legislation will then rarely need to be used. If there is a well-functioning market, the incidence of using the state’s overarching powers will reduce. Moreover, it will provide a boost to the credit market. It is over a decade since a national land record modernisation project began. The Centre should handhold the states and back it with resources to conclusively clear India’s titling mess.