Bringing the Focus Back on Land Economics

For far too long, modern economic thought has given land a secondary status while offering primacy to technical progress, labour productivity, urbanization, migration and decentralization of powers. However, the land has become the basis for almost every other factor of production barring labour and imperative for today’s policymakers to renew their focus on land. It is also in the context of changing land-use patterns in India observed over the last few decades with the growing number of urban centres that makes it all the more necessary to study land with new spectacles.

Readers would be aware that in the feudal ages, it was observed that land was the key resource that yielded the maximum benefits owing to agriculture being the mainstay of most people. As a result, conquests by kingdoms meant acquiring more fertile areas and generating revenue through agriculture. However, things have changed quite remarkably over the last few centuries as economic thought transitioned from feudal systems to mercantilists, physiocrats, capitalists, and communists. The 21st century with exponential technology advancement could have downplayed the importance of land. However, the inelastic supply of land creates a need to reflect the focus back onto land and question the sustainability of this resource. 

Land, in simple terms, can be a delineated area where most activities occur and in the broader context, can include a lot like forests, deserts, and much more. We find that there is a derived demand for land owing to the possibility of converting it into a farm, factory, or a racecourse or a stadium, for all practical purposes. A stretch of land will only be demanded provided there’s a use for it – be it building residential complexes, factories, government buildings, or otherwise. Suppose there’s an open stretch of land which happens to be close to a popular city center, naturally its value goes up and is demanded development (shops, businesses, etc.). Similarly, if it is in the vicinity of good connectivity such as airports and mass rapid transit systems.

Land in Economic Thought 

Incidentally, it was not the mercantilists (who wanted to acquire more and more colonies and expand their empire) but the physiocrats like Francois Quesnay who while focusing exclusively on agriculture, understood the importance of land and land value. So did a set of capitalists like Adam Smith and David Ricardo, by indicating that proceeds from the land would be added into the net surplus or national income as it was a key factor of production. However, with evolution, economics, and its systems diversified, with the focus shifting away from land. Alfred Marshall introduced the idea of the Marginal Revolution, an extension of the concept of marginal productivity to factors of production such as labor, capital, and technology owing to the Industrial Revolution in the west. As a result, land as a component in the growth matrix was sidelined and underplayed. 

It goes without saying that land is unique in its character, as David Ricardo put, a ‘Natural Gift’ and is the basis for most other factors of production. In the context of reviving policy-based focus on land as a resource, many economists such as Johann Heinrich Von Thunen, Albert Weber, Henry George have contributed immensely in this regard to develop theories in what can collectively be called Land Economics.  

Von Thunen gave us the model of rural land use and the allocation of activities based on their proximity to cities or central business areas, meanwhile, Albert Weber, had created a revolution by proposing the  Least Cost Theory of Location; an insight into a firm’s location based on the low cost of transportation. Another economist named Harold Hotelling introduced the idea of Spatial Competition wherein he advocated that left to market forces, firms would compete for an ideal location and thus optimize the available land area. A key contribution to the subject however was made much earlier by Henry George through his famous theorem in the 1870s, where he advocated public expenditure financing and public goods provision by way of taxation of land and land value increments rather than income. This idea had albeit in a very loose context found mention in Adam Smith’s Wealth of Nations wherein he had opined a land tax was a better alternative to tax on housing, as the land value would appreciate over a period of time. In a way, it would be fair to say Henry George Theorem became the basis for land-based financing at local and provincial levels as the idea has found wide acceptance and has metamorphosed into various forms of levies and taxes to finance the provision of public goods as well as regulate land markets.

Land Use Patterns in India – How do we fare? 

Given land is turning out to be a resource more than a mere factor of production, we have to look at land use in India. It has been changing from time to time given the nature of socio-economic change. Primarily there are 9 types of land-use as per MOSPI  and they all have undergone a sea change since the ‘50s. Data put out by the Ministry of Agriculture, Government of India shows that forest area has gone up by 9% since 1950 while the area under non-agricultural use (predominantly urban and semi-urban centers has gone up by 5 % indicating growing urbanization even at town level). Total Net Area sown has increased only by 4 % in the last 7 decades. However, the proportion of land holdings is skewed with small and marginal farmers (who own a hectare or two) owning nearly 85  % of the holdings.

In addition to the above, data from the Urban Affairs Ministry shows the number of urban areas (cities and towns) with more than a million population has gone up 35 to 53 in 2011. 10 years on, we can expect the figure to be much higher post 2021 census as the rate of urbanisation is pegged at 34 % by Statista which is a 3 % increase from Census 2011 figure of 31 %.

Urbanization thus has put greater emphasis on land value and is a major driver of land-use patterns at the local level. Unchecked urban sprawls and lack of planning have generated massive negative externalities to megacities such as Mumbai, Chennai, and recently, Hyderabad.  NITI Aayog’s report of 2019 shows that there’s a major water crisis brewing if the status quo does not change. This also has to be viewed in light of the renewed focus on decongesting city traffic by way of Transport Oriented Development (T.O.D) which argues for utilizing increments in land values to self-finance infra projects such as metro rail and BRTS while developing the route alongside each station so as to make cities more liveable, public transport friendly and more importantly capture land value.  Cities like New Delhi and Hyderabad have started using T.O.D on their metro rail corridors to focus on raising land value which implies a driven policy focus on land value capture. Thus it’s a brewing ground for the land, environment, and urban development economists alike to get together and analyze these cities’ growth and plan accordingly for the coming years. 

Deregulation Key to Efficient Land Use

It is, at this stage, pertinent to observe the many acts that exist from the bottom to the top concerning land use regulation and the granting of land rights. However, there are many instances in many states where the land ownership becomes blurred leading to numerous civil suits and as a consequence affects land acquisition by governments for the development of lands for better connectivity. Thus blurred land ownerships, missing land records, and related issues of the land acquisition have become a big problem and it was in this context that the Central Government had launched Digital Land Records Modernization Programme in 2018 (the computerization effort has been in existence since 1988). Though most states found it problematic, it is a work in progress and recently, Telangana has begun updating land records through the DHARANI portal to ensure there is no burden on citizens in the future thus placing land records and land rights at the forefront to protect the lands of poor and more importantly, the lower-middle class. This would not only ensure that there is going to be adequate data but would also provide insight to the authorities in question which areas would need affordable housing and which do not. 

Amongst the plethora of rules and regulations, the politicization of the land acquisition process takes the cake – misuse of regulations, heavy compliance costs, etc. In this context it would be good to remember what the popular urban planner Alain Bertaud has to say on it: “Land use regulations have costs and benefits. When regulatory costs outweigh benefits, regulations should be amended or repealed.”. Thus, for an economic powerhouse like India, with a rising urban population coupled with haphazard urban growth and reliance on agriculture; the key lies in unlocking the potential of our vast tracts of land. Not riddled by regulation rather driven by land-use patterns, the end goal ideally should be to ensure land markets are not distorted and see to it affordable quality housing is provided to the common man in urban areas while maintaining the urban-rural balance and utilizing land value in a big way.

Note and Further Readings.

Francois Quesnay wrote a classic work titled ‘Tableau Economique’ or ‘The Economic Table’ which was one of the earliest forms of Input Output Analysis which got a proper structure when Wassily Leontief of Harvard University perfected it in a much more applicable format using matrices, in the 20th century.,market%20respect%20to%20one%20another.&text=The%20two%20sellers%20would%20then,the%20beach%20ice%20cream%20market.,of%20land%20comprises%20up%204.67%25.

Pavan Thimmavajjala
Pavan is currently pursuing Masters in Economics from the University of Hyderabad. His research interests include growth economics, macroeconomics, and law. He is also a blogger and runs a podcase titled 'Seedhi Baat'.