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For the longest time, the price of farmland in Vadicherla stayed below Rs 20,000 an acre. Ten years ago, that began to change. “In 2003, an acre cost Rs 25,000. By 2006-07, it had climbed to Rs 2 lakh,” says Byru Veeraiah, sarpanch of this village in Andhra Pradesh’s Mehbubnagar district.”By 2010, an acre cost Rs 3 lakh. And Rs 12 lakh by 2012.” It was a puzzling spike. This village, with 700-odd families, is nowhere near large cities. Warangal, the nearest large town, is 100 km away. The Vijayawada-Hyderabad highway is a good 15 km away. No farmland in the village or its vicinity was being bought by the government or companies. Vadicherla is not alone. In 10 years, the price of an acre in Ramavarapadu, a village next to Vijayawada, has leapt from Rs 7 lakh to Rs 7 crore. Or take Mardi, 15 km off Solapur, Maharashtra. The price of an acre in this village, says Prakash Arjun Kate, a local, has “climbed from Rs 20,000-25,000 ten years ago to Rs 10 lakh now.” Ramavarapadu, Vadicherla and Mardi are not isolated instances. Microstudies and anecdotal information on 68 villages in seven states gathered by ET suggest a lot of rural India is seeing a similar climb in farmland prices (See graphic), primarily because of highways, investors and urbanisation. “This is true for almost all of India, perhaps barring only the north-east and Kashmir,” says RS Deshpande, former director of Bangalore’s Institute for Social and Economic Change (ISEC). A Trinity Converges For the longest time, farmland markets were comatose. Land ceiling laws, designed to prevent concentration of land ownership, were one reason. Another reason, as academic Sanjoy Chakravorty writes in ‘The Price of Land: Acquisition, Conflict, Consequence’, his book on land acquisition in India, was the limited reason to buy land. He writes: “If land’s value is a measure of its future income, and if the future use is not dramatically different from its current use, a sale is possible only if a buyer’s evaluation of the discounted future income stream is more than the buyer’s valuation of the same.” The wheels are turning faster on both counts. New buyers, with a different assessment of value, are entering the market. In Vadicherla, for instance, says sarpanch Veeraiah, “people from Hyderabad, Warangal and NRIs are buying land.” At the point where the road to the village meets the Suryapet-Warangal road, investors from Suryapet have marked plots to build houses, and are waiting for buyers to come. In Ramavarapdu, outsiders are building four- and five-floor apartment blocks on what used to be farmland. Elsewhere, investors are converting agricultural land into commercial use. Or, they are just holding on to it, waiting for its value to appreciate to offload it in the market. The resultant spike in farmland prices is leaving its imprimatur on rural India. It is giving farmers seeking to leave agriculture an exit option. It is also pulling an unknown quantum of land out of agriculture. As land rates rise, farmers are unable to buy farmland in their own villages. As such, it is reshaping the ownership of land. And it’s all coming about because a trinity is converging on it—investors looking to buy, farmers looking to exit agriculture, and politicians and their associates looking to create a marketplace for such transactions. A Shiny New Investment Investor interest in farmland can be traced back to two factors. First, says Gaurav Jain, a real estate professional who worked with Emaar and DLF before setting up his own consultancy, Samyak Properties & Infrastructure, liberalisation boosted job creation and incomes, and increased demand for housing. Second, as Chakravorty writes, till the mid-1990s, almost all house purchases were in cash. Around 2000, the housing market in credit began to grow. That, he writes, “brought very large numbers of new housing consumers into the market”. This has pushed up land prices. Indian cities, notes Chakravorty, wary of congestion, have kept floor space index (FSI)—a measure of how much can be built on a plot of land—low. Unhappy with the combination of limited (and costly) undeveloped space and low FSI in cities, builders began looking towards the periphery. So did buyers. “The rule of thumb used in much of the developed world is that a family cannot afford a home whose price is three to four times the family’s annual income,” writes Chakravorty. In cities like Mumbai, he notes, a family with a per capita income of Rs 60,000 will take 100 years to buy a 800 sq ft house. As both builders and buyers move to the periphery, and beyond it to towns and villages, their demand is pushing up prices of farmland at a rate faster than traditional financial and real assets (See graphic). Farmland has even outperformed investments in urban property. Says Pran Khanna, a Delhi-based consultant to companies: “A Rs 50 crore investment in a south Delhi house will climb to maybe Rs 55 crore in five years.” In contrast, as Mardi and Vadicherla show, returns can be exponential.   Pure agricultural land, adds Jain, appreciates faster. “It has fewer encumbrances— like pre-existing structures.” This is resulting in land being bought and left fallow. This has created a second set of buyers: investors. The average buyer, says Jain, is “someone who is over 40, kids educated, has a house and is wondering what to do with surplus cash.” Seeing the escalation in land values in peri-urban areas, people began buying land even far from cities, reasoning they would make a killing once the city expanded. Similarly, businessmen, in small towns like Suryapet, knowing they could not buy land near big cities, began buying land in their own peripheries. Their bet: rates can only rise—as population rises, land will only get more scarce. A Ticket Out of Agriculture These buyers are finding willing sellers in farmers. “In rural areas, agriculture is not the most important component any longer,” says Ramesh Chand, director of National Centre for Agricultural Economics and Policy Research (NCAP). “It now accounts, as per NSSO numbers, for just 33% of the rural economy.” From his office in Hyderabad, CS Reddy, the founder of APMAS, a Hyderabad-based organisation that advises SHG (self-help group) organisations, has been watching investors flock to buy farmland. “In the last 10 years, we have seen a lot of farmers become wage labourers,” he says. “This is not only because they sold their land out of distress. Some of them are starting to feel they are better off working as labour than putting money into farming, with its uncertain returns.” A small farmer with an acre of land will get 30 bags of paddy. At Rs 2,000 each, that’s a gross income of Rs 60,000. But net of costs, his net income will probably be closer to Rs 20,000. Even this is subject to weather risk—and price risk for crops not supported by minimum assured government prices. Says Deshpande of ISEC: “The 59th NSSO report asked farmers if they wanted to leave agriculture. 40% said ‘yes’.” That was in 2002. Since then, the drift has only continued. A Source Of Political Rent Politicians, who created a market out of matching buyers and sellers, opened a third flank. In the last 10 years, the cost of fighting elections has shot up, and politicians are using the land boom to subsidise their campaigns. Anil Patil, the Shiv Sena MLA in Madha constituency of Maharashtra, explains the arithmetic, which makes a mockery of election-spending rules. “In 2009, an MLA spent Rs 10 crore on campaigning,” he says. “In 2014, they will probably spend Rs 20 crore. This means an MLA needs to raise at least Rs 30 crore during his five-year stint.” Political parties face a similar arithmetic. They need to, says Patil, “fund at least half the campaign expenses of their MLAs and MPs so that they stay loyal to the party.” Besides parking their own money in land, politicians, through associates, are making a killing by positioning themselves in between real estate companies and the state. What unlocks the value of farmland is change of land use, clearing it for non-agricultural use— like commercial or residential. According to Patil, the region between Pune, Nashik, Mumbai, Thane and Raigad is seeing a real estate boom. Here, he says, politicians either buy the land—through middlemen—from farmers and sell it to builders. Or, they charge a commission for land-use change. This money is then used to buy land elsewhere. Land in Madha that used to cost Rs 50,000 an acre in 2005-06, adds Patil, now costs Rs 15 lakh. Several moves by the state government have given such forces a larger market to play in. For instance, Haryana has relaxed land ceiling laws for non-agricultural owners. Others have made it easier for outsiders to acquire tribal or Dalit land. They are also expanding urban limits. Haryana, for instance, says Jain, has added 30,000 acres to the urban area of Gurgaon.     The Meaning Of It All Besides a reduction in the area under agriculture, the farmland boom is propelling some fundamental shifts. For example, how farmers perceive the value of their land. A farmer, having heard about another farmer selling his land for Rs 80 lakh an acre, will not settle for anything less. Chakravorty feels India is now “permanently in a new land price regime”. “The tipping point has come from the expansion of money supply in India— black, white and foreign,” he writes. In contrast, Himanshu, a professor at the Jawaharlal Nehru University in New Delhi, thinks this is a bubble. Most buyers, he says, are investors. “Are there are enough people willing to buy at the price these people want to sell?” he asks. Over time, Himanshu says, as prices keep rising, the market will shrink to a small number of actors transacting among each other. This will trigger a correction and a return to the rubric of three to four times annual income. “While prices can stay high for some time, the moment one farmer sells at a lower rate, the buyers’ expectations will fall, and that will be the end of the boom,” he adds. In peri-urban areas, land is being bought by people who already know what use they want to put it to. Deeper, however, people are buying land and letting it lie fallow. This is what is happening in villages like Vadicherla. Places deep in the hinterland, feels Himanshu, are likely to attract predominantly black money. “If the money being put into land is illegally sourced, it can be parked here and good as forgotten,” he says. “But if the land is credit-linked, the owner will need to see returns before long.” In the interim, farmers are facing reduced affordability of agricultural land in their own villages, especially in peri-urban areas, which tend to have a high number of buyers and sellers. For example, in Yeshwanthapur, a village between Janagaon and Warangal, a private organisation has bought about 100 acres of land for a golf club. The sarpanch of the village, Clemenca Reddy, says her cousins and her family together sold “about 30 acres of land at Rs 9 lakh per acre.” Her family went 20 km away and bought 25 acres there for Rs 40,000-50,000 an acre. Another villager in Yeshwanthapur, Botla Narsaiah, has a different story. A small farmer with just 2.5 acres, he sold it all in batches to first fund the construction of a house and then to get his daughters married. He is now working as a labourer, making Rs 2,000 a month. “Even far off the highway, land now costs Rs 4 lakh. We cannot afford it,” he says. Human Costs There are human costs too. In villages, youngsters will want the family to sell the land and start a new business instead. In ‘Land Alienation and Local Communities’, a paper published in the Economic & Political Weekly in 2007, V Ratna Reddy and B Suresh Reddy studied the impact of urbanisation and land sales in four villages near Hyderabad. They found traditional rural occupations were being replaced by newer ones — construction contractors, real estate broking, driving auto rickshaws, petty business, etc. Yet others are seeing this as their ticket out of agriculture. In areas near Vijayawada, reports S Ananth, a Hyderabad-based independent researcher studying rural change, “several farmers near Vijayawada have sold their land and bought apartments. They are now living on rental income.” Adds S Malla Reddy, national vice-president of a CPI (M) organisation working on peasant issues: “Due to high prices in villages, villagers are now investing in open plots (real estate ventures) in towns nearby.” In villages, as land prices rise, there will be a concentration of land ownership. Says Chand of NCAP, the country will see a rise in absentee landlordism. This has implications for food production: sharecroppers struggle to improve productivity of their lands. India will also see, says Deshpande of ISEC, “the rise of a white-collared cultivating class. They are better educated and will participate better in markets.” JA Chowdary, chairman of an IT company called Talent Sprint, typifies that. Over the past 10 years, his family has bought 200 acres of farmland in Andhra’s Ananthapur district at Rs 30,000 per acre. Most of them, feels Himanshu, will grow higher value plantations crops. Chowdary is growing mangoes and pomegranates. All this will strain food security and prices further. “Fifty years ago, Pune’s vegetables came from nearby places like Haveli and Purender,” says Patil. “Now, they come from as far as Satara and Kolhapur.” Agrees Himanshu: “In the next 10 years, the number of people leaving agriculture will rise. Cropping intensity, too, will have to go up.” Continue reading →