Land Acquisition May Become Easier in India, but Risks Remain

Posted by Reading Time: 5 minutes

 By Adam Pitman, International Business Advisory Manager, Dezan Shira & Associates 

When foreign companies announce plans to invest in India, they are often inundated with incentives from different levels of Indian government. However, outside the halls of government, officials are constrained in what they can feasibly deliver. In many cases, officials trip on their own shoelaces – projects worth billions of US dollars are currently stalled because of land acquisition regulations.

In recent weeks, the government announced two initiatives that will make acquiring and repurposing land easier for many businesses. Reforms to land acquisition and environmental regulations compliment the government’s ‘Make in India’ initiative, which is designed to improve conditions for manufacturers, but will also improve international perception of India’s investment climate.

The government’s initiatives will alter pre-investment considerations for many businesses; some burdensome aspects of land acquisition and use will be removed for projects in critical development areas. The reforms will also change the nature of on-going land disputes. However, land acquisition and environmental regulations remain sensitive issues; market entry and business advisory services are still mission-critical for foreign companies.

Land Acquisition Reform

Acquiring land in India has never been easy. Land acquisition was governed by colonial-era legislation – the Land Acquisition Act of 1894 – until 2013. However, despite the passage of the landmark Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act in 2013, media sources report that nearly US$300 billion in projects remain stalled partly because of current land acquisition regulations.

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The government’s reforms seek to ease land acquisition restrictions for projects in five critical investment areas: defense and defense production, rural infrastructure, industrial corridors, and social infrastructure projects such as Private Public Partnerships (PPPs). Government officials report that the reforms will ensure that projects in these five areas are exempt from conducting complicated social impact studies and seeking approval from 80% of landowners affected by a project.

Environmental Regulations Reform

Environmental regulations have long proven to be another obstacle for businesses in India. The government has announced plans to reform the Forest Conservation Act of 1980, which currently requires state permission for clearing forests on private land or clearing green areas registered after 1980. The government also plans to alter the appeals process for the National Green Tribunal to limit the potential for legal delays to development projects.

The initiative is part of what Environment Minister Prakash Javadekar has called “a new green regime”. In addition to the Forest Conservation Act, the government intends to amend the Air Act, Environment Protection Act, Indian Forest Act, and Water Act during the upcoming budget session of Parliament between February and May. All of these regulations became law before India’s economic awakening in the early 1990s – the government hopes that these proposed reforms will paint a more business friendly picture for companies interested in expanding.

Risks Involved

The government’s initiatives are politically sensitive. Although it is widely accepted that land acquisition and environmental regulations are imperfect, many local politicians do not support the government’s initiatives and the verdict remains out amongst the public. In rural areas, opposition is palpable – the government’s initiatives limit the leverage local politicians and citizens can exert against businesses and the federal government. This opposition can translate to reputational and operational risks for businesses that take advantage of any reforms.

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Many businesses are also disappointed with the government’s initiatives, albeit for different reasons. For example, challenging aspects of land acquisition remain: businesses will need to continue relocating affected populations, compensating affected individuals with two times the land’s market rate for urban property and four times the rate for rural property. Some corporate decision-makers have noted in the media that these relocation costs are as prohibitive as the complicated social impact and public approval process.

Separately, both reform initiatives await parliamentary hurdles. The ruling Bharatiya Janata Party (BJP) enjoys a majority in the lower house, but represents a distinct minority in the upper house. While legislators will scrutinize the environmental reforms, Prime Minister Narendra Modi passed the land acquisition reform by executive order to bypass parliament. An executive order, known locally as an ‘ordinance’, is valid for six months, but parliament must approve the order within six weeks of the next legislative session to remain in effect. The government can perpetuate the order indefinitely, but this offers little stability for businesses.

These complications illustrate the importance of diligence in pre-investment market entry studies. While the government’s initiative is certainly a positive step forward, and a clear signal that this government means business, foreign investors must exercise diligence before entering unfamiliar markets. Indeed, governments often design their incentive and reform schemes to offset uncompetitive costs of doing business.

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