4 KEY POLICY ISSUES

# LAND MARKETS

If small yet economically viable, family farms are more efficient than large farms, one would expect the land market to re-allocate land in their favor, whether permanently (through sale or purchase) or temporarily (through leasing or other forms of tenancy). The matching of land, labor and capital endowments could, in theory, be brought about through activity in one or more of these markets. In rural India, however, such markets are highly incomplete, imperfect and often (though decreasingly) interlinked, resulting among other things in the persistence of marginal and sub-marginal operational holdings which can neither be easily added to nor disposed _of18._ Most notable among the land market imperfections, and which appear to offer most feasible promise of reduction through public action, are those that result from legislative restrictions on leasing and tenancy, ostensibly designed to protect the poor but frequently having precisely the opposite effect; and the heavy transaction costs in land sale-purchase markets that fall disproportionately on the rural poor. The high cost of land market transactions is discussed below in relation to records of rights in land.

In addition to transaction costs, a further reason why land sale-purchase markets in India are so 'sticky' is related to the broader social value of land which considerably exceeds its direct economic value in terms of capitalized farm profits. There are several dimensions to this. Land is the most durable of assets, and land prices have considerably outstripped the rate of inflation. Land is valued as collateral and provides security against natural hazards (droughts, floods) and other contingencies (dowry, funeral costs). It is of symbolic importance, and land ownership brings a sense of identity and rootedness within a village (Agarwal 1994). However, land is also a source of political power (Neale 1969), which in turn 'provides the means to enhance the return from land' (Faruqee and Carey 1997: 13). It is this power structure that underlies continuing price distortions and institutional biases towards large farmers, whether in infrastructure provision (notably water) or access to credit, inputs or support services, and at the same blocks attempts to reform the land market. This combination of factors explains why there are so few willing sellers of land under prevailing conditions in rural India'<sup>9</sup> .

Given these rigidities in the land sale-purchase market in much of rural India, one would expect the lease market to play an important role in matching land, labor and capital endowments (Bell 1990, Melmed-Sanjak 1998, Sadoulet _et al._ 1998). Land leasing or tenancy may take the form of fixed rentals or sharecropping arrangements, in which rents are paid in cash, in kind, or a combination of the two. Regardless of the type of tenancy contract, what is the evidence on the

- 18 See Binswanger and Rosenzweig (1986) for the theoretical explanation why under poorly developed capital markets land is sold mainly for distress reasons, and why it tends to accumulate with those already having large holdings.

- 19 Carter and Mesbah (1993) consider other possible explanations for missing land market transactions (which they term the 'Chicago question') in addition to land market imperfections. These include: the feudal hypothesis (lack of interest in profit maximization); the price distortions hypothesis (distorted price policy lends an artificial competitive advantage to large-scale agriculture); the inadequate farm savings hypothesis (small farms cannot generate surplus over subsistence requirements); and the capital constraints hypothesis (operating capital is required as well as capital for land purchase, which weakens the IR in imperfect capital markets). All apply, to varying degrees, in India.

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