The Hindu Business Line : En`titling' the farmers

Conferring land titles on landless peasants could be the starting point of attempts at eradication of poverty at the grassroots level. Emphasis will have to be placed on the marginal land and a strong support structure would have to be provided to the farmers, says T. C. A. RAMANUJAM.

PROPER TITLING could allow the poor to collateralise the land. In turn, this credit could be invested as capital in productive projects, thereby increasing labour productivity and income.

"The market economy is irrelevant for those who cannot join the market."

— Mr B. L. Mungekar, Member, Planning Commission

Rural India is in a ferment. Suicides by farmers in Andhra Pradesh and Maharashtra, Naxalite menace in Jharkhand and hunger deaths in parts of Orissa highlight the acute problems of Bharat, where live two-thirds of the country populace, engaged in agricultural and related operations.

The Planning Commission's Mid-Term Appraisal of the economy had attributed the deceleration in the growth of agriculture to inadequate investment. The share of agriculture in total gross capital formation has been coming down progressively from 15.4 per cent in 1980-81 to 8 per cent in 2001-02. Its contribution to GDP has declined from 3.5 per cent in 1980-81 to 1.6 per cent in 2001-02.

Defining poverty

Economists have differed as to whether poverty should be considered in absolute terms, as falling below some fixed minimum consumption level, or if it should be defined in relative terms, so that poverty means inability to afford what average people have. If an absolute standard is accepted, then technical progress may eventually lift everybody above the poverty line. If poverty is relative, the poor will be always with us.

Property Rights for the Poor

It was Peruvian economist Hernando De Soto who sought to attribute the lingering poverty in the Third World to the failure to create a system of recognising and organising each citizen's property that will allow for it to be converted into dynamic capital useable to produce wealth.

Advocating land-titling programmes as powerful instruments for poverty reduction, De Soto emphasised that the lack of property rights impedes the transformation of the wealth owned by the poor into capital.

Yet, the Tamil Nadu Government's plan to confer title to farmers below the poverty line to the extent of two acres per family is getting mired in needless controversy about its feasibility based on the availability of farmland for distribution. After all, the poverty line represents an income level supposed to be just enough to avoid inadequate consumption.

Proper titling could allow the poor to collateralise the land. In turn, this credit could be invested as capital in productive projects, thereby increasing labour productivity and income. Inspired by these ideas, international development agencies have fostered land-titling programmes through the developing economies.

The Peruvian Government issued property titles to 1.2 million urban households during the 1990s; millions of titles are being issued in Vietnam and Cambodia. The Brazilian President, Mr Luiz Inacio Lula da Silva, announced during his first week in office a massive plan to title the huge favelas (slums) of the major Brazilian cities.

De Soto argues that the major stumbling block that keeps the Third World from benefiting from capitalism is its inability to produce capital. Capital is the force that raises the productivity of the labour and creates the wealth of a nation.

According to De Soto, most of the poor people already have the assets they need to make a success of capitalism. But they hold these resources in defective form; houses built on land whose ownership is not adequately recorded, unincorporated businesses with undefined liability; industries where financiers and investors cannot see them. Because of inadequate documentation, these assets cannot readily be turned into capital, outside the narrow local circles where people know and trust each other.

Under-capitalised

Farmers without title to the land cannot offer the land as a collateral for a loan. As a result, most of them are under-capitalised, in the same way a firm is under-capitalised when it issues fewer securities than its income and assets would justify. The poor citizens have houses but not titles; crops but not deeds; businesses but not statutes of incorporation. "They have assets that invisibly harbour capital."

In the West, by contrast, every parcel of land, every building, and every piece of equipment is represented in a property document that connects all these assets to the rest of the economy. They can be used as collateral for credit. By these processes, the West injects life into assets and makes them capital.

Following the incisive analysis by De Soto in his book, The Mystery of Capital, the Argentinean Government enacted a law expropriating land from its rightful owners and bestowing titles on the lessees. Some of the landowners accepted the government's compensation but others went to court.

This provided an opportunity for economists to test the De Soto hypothesis about the effects of land titling. Sebastian Galiani of San Andres University and Ernesto Schargrodsky of Torcuato di Tella University have come out with the results of their study in their paper, Property Rights for the Poor.

Mere title not enough

They observe that while secured land rights do encourage the poor to build their own nests, mere title is not enough in itself to animate the debt capital interred in land and property. Banks tend to lend only to workers with high wages and stable jobs.

Credit markets have been slow to respond to the land titling movement in Peru carried out by the government with the help of De Soto's think-tank, the Institute for Liberty and Democracy. Households with titles were more likely to secure loans from government banks. The odds of getting a private loan did not improve.

Titling programmes signal to lenders that the government is more likely to take the borrower's side in enforcing a credit contract. There was no evidence that the titles increased the likelihood of receiving credit from the private sector banks.

The failure of commercial banks to increase their rate of lending to households that obtain property titles through government programmes has important implications for the potential effects of property reform on economic growth and poverty reduction. One explanation for this failure is that titling programmes reduce banks' perceptions of their ability to foreclose. Individuals with titles have less fear of losing property in cases of default.

A starting point

Conferring titles on the landless peasants can only be the starting point of attempts at eradication of poverty at the grassroots level. Much depends on the availability of water, power, fertilisers and a profitable market. Emphasis will have to be placed on the marginal land.

Land will become worth farming if output prices rose slightly, or would go out of cultivation if prices fell slightly. The volatility of global prices has hit Indian farmers hard.

There is need for proper support structures for the marginal farmers and the poor. There should be a Centre-State price stabilisation fund to protect the farmers from sharp fluctuations in price. The state has to think beyond symbolism and palliatives such as write-off of loans and conferring titles on a few rural families.

(The author is a former Chief Commissioner of Income-Tax.)

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