Making Roads and Mortgaging Farmland

February 4, 2008

Four months ago, I wrote a post on how allowing the free sale of agricultural land for any use was the best possible move against agricultural distress. My logic in that post was:

  1. Allowing the free and easy conversion of agricultural land for residential, commercial, or industrial purposes creates a liquid market for agricultural land.
  2. The liquid market for agricultural land makes it more acceptable as collateral for lending.
  3. The existence of the liquid market also makes agricultural land more valuable.
  4. Point 2 and Point 3 combine to drive down interest rates and increase the loan amount a farmer can get against his land.
  5. This means that being indebted is not such a problem for farmers.

I now worry that I gave the impression back in October that allowing the sale and conversion of agricultural land was a magic bullet, and that once this happened we would enter a happy agricultural paradise. It isn’t. It’s necessary, but not sufficient. You need other things too. The three most important ones I can think of are:

  1. Farmers actually knowing that they can sell and mortgage their property legally, and knowing what the market rate is. Currently, anybody who wants to buy agricultural land to put up flats or a factory bribes the collector to change the land usage, buys it at a bargain basement rate from the farmer, and then goes ahead and develops it. If land sale is legalised, but the farmer doesn’t know about how much more valuable this makes the land, all that changes is that the developer no longer has to pay a bribe (or as much of one). As I mentioned in the October post, auction sales are a good mechanism to prevent this happening.
  2. Competition in the market for lending. Which means multiple banks lending to rural areas. As things currently stand, I think each Regional Rural Bank has a geographical monopoly on rural banking in its particular region. Discussing how to create viable and competitive rural banking is a blogpost in itself – many blogposts axshully. Maybe later.
  3. The agricultural land needs to be well-connected enough to urban centres that there’s demand for it. Which in turn means rural roads. Rural roads also have the advantage that they make it easier for banks to reach farmers (fulfilling Point 2), and make it easier for multiple land developers to court farmers for their land (fulfilling Point 1).

Happily, this week’s Swaminomics (h/t: Ravikiran) is all about rural roads. Key excerpts:

For every million rupees spent, roads raised 335 people above the poverty line, and R&D 323. Every million rupees spent on education reduced poverty by 109 people, and on irrigation by 67 people. The lowest returns came from subsidies that are the most popular with politicians – subsidies on credit (42 people), power (27 people) and fertilisers (24 people).

For decades, rural roads in India were neglected by most states. Besides, rural employment schemes, starting with Maharashtra’s Employment Guarantee Scheme in the 1970s, created the illusion that durable rural roads could be built with labour-intensive techniques. In practice labour-intensive roads proved not durable at all, and those built in the dry season vanished in the monsoons.

The posts on rural banking and agricultural finance will happen sometime in the future. Work is horrible this month.