Nano: The Car for the Common Man?

September 25, 2008

A set of weather events that individually give rise to only a mild to moderate storm turn deadly when they occur simultaneously. The result is what meteorologists call a “perfect” storm. The Singur tragedy is such a storm caused by confluence of an aggressive corporation, a zealous government and an opportunist politician.

Until recently, it was a mystery why Tata Motors had chosen West Bengal, a state with a Marxist government, as the site for manufacturing Nano. Partial revelation of a tripartite agreement, signed by Tata Motors, West Bengal government and West Bengal Industrial Development Corporation (WBIDC) in March 2007, has now provided the explanation.

Seeking to maximise profits, Tata Motors went on to pit the states of West Bengal, Uttarakhand and Himachal Pradesh against one another when choosing the production site for Nano. The ensuing competition produced the most lucrative deal for the corporation. The West Bengal government not only agreed to award it prime location at Singur, a town just 30 miles northwest of Calcutta, it also sweetened the pot with subsidy on land, concessional power, a soft loan and gigantic tax breaks.

Under the tripartite agreement, WBIDC committed to acquiring 997 acres of land of which 650 acres would be for the Tatas for the mother plant and the rest for parts suppliers. WBIDC agreed to give land to the Tatas on a 90-year lease at the annual rent of just Rs 1 crore (Rs 15,380 per acre) the first five years with 25% increase every five years until 30 years.

Starting 31st year, the rent would rise to Rs 5 crore with 30% increase every 10 years until 60th year. From 61st to 90th year, the rent would remain fixed at Rs 20 crore. Parts suppliers have an even sweeter deal with the rent fixed at Rs 8,000 per acre for the first 45 years and Rs 16,000 per acre for the rest.

In addition, the government agreed to provide Tata Motors a twenty-year loan of Rs 200 crore at 1% interest. It is to also provide electricity to Tata Motors at the rate of Rs 3 per kWh. Tariff increase is limited to Re 0.25 per kWh once every five years. For several years, the Tatas will also receive effective exemption from value-added tax and central sales tax.

Against the backdrop of this aggressive pursuit of profits by Tata Motors, with a substantial cost falling on taxpayers and farmers, exhortations by the Tata Group leadership to India Inc to live up to their social responsibility ring hollow. The petition by the Tatas in the high court to keep confidential those parts of the tripartite agreement not yet made public also raises doubts about the group’s commitment to transparency. The defence by the state industries minister in the assembly some months ago that the agreement is a “trade secret” is not credible.

Turning to the government, chief minister Buddhadeb Bhattacharjee is surely to be applauded for taking a leaf out of the Chinese experience and shedding his party’s traditional hostility towards industrialists. Yet, the government cannot escape criticism, even condemnation, for its failure to recognise that democratic governments simply cannot do certain things that authoritarian governments can.

Although land acquisition by WBDIC was well within the law, its approach was heavy handed and lacked transparency. For instance, it sought signatures of farmers on the consent forms prior to even announcing the land price. It was also reluctant to offer information on how many farmers had signed consent forms and how many had not till long after the deadline for consent was past.

Under the antiquated Land Acquisition Act 1894, the government was required to set the price of land at the average of registration price in the preceding three years. On the surface, the government was generous and set the price at the highest registration price in the preceding year. But as is well known, in reality, a substantial payment on land sales in India is given in black so that the registration price substantially understates the true price.

Therefore, a significant element of expropriation in the acquisition price remained. Unsurprisingly, 30% of the farmers refused to sign consent forms and did not accept the payment. Instead, they took their case in the public domain where Mamata Banerjee eagerly awaited to champion their cause.

Though Tata is now poised to move Nano to Karnataka, a fairer and efficient solution would be for the corporation to make a financial contribution towards compensating all farmers at the true market price prevailing at the time of acquisition. Any difference not covered by this contribution may be borne by West Bengal taxpayers. As long as the financial contribution made by Tata Motors is below what it would cost to move the project to Karnataka, it will benefit from the deal. As for Mamata Banerjee, she should recognise that under the existing law, her farmers could do a lot worse.

From the long-run perspective, defunct Land Acquisition Act, 1894 must be overhauled. According to published reports, privately negotiated outcomes, satisfactory to both industrialists and landowners, have been achieved in states such as Gujarat and Punjab. If this is confirmed upon closer examination, the central government must consider limiting the scope of land acquisition by states to public projects such as roads, railways, airports and ports.

States should be permitted to intervene on behalf of industrialists under only exceptional circumstances and after explicit permission from the central government. The interests of small landowners against forced purchases by powerful industrialists may be protected through NGO oversight and free legal assistance.

There also needs to be greater transparency in the provision of subsidies by the states to industrialists. When public money is involved, there should be no room for secret deals between the government and industrialists. Requirement of disclosure will also restrain states from competing for projects through wasteful subsidies.

This commentary was originally published under the title “El Nano: A Perfect Storm”.