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Liberalising the Lease Market

Despite the enactment and implementation of various tenancy laws, concealed tenancy continues to be widely prevalent. However, banning tenancy completely may not be a feasible option. This article argues for a selective liberalisation of the lease market coupled with adequate safeguards to protect the interests of small and marginal farmers.

Liberalising the Lease Market

Despite the enactment and implementation of various tenancy laws, concealed tenancy continues to be widely prevalent. However, banning tenancy completely may not be a feasible option. This article argues for a selective liberalisation of the lease market coupled with adequate safeguards to protect the interests of small and marginal farmers.


he broad features of the land lease policy that was followed in postindependent India evolved via the recommendations of the Congress Agrarian Reform Committee, report of the Panel on Land Reforms and successive five-year plans. Following these recommendations, the tenancy laws enacted and implemented in different states aimed at providing security of tenure, fixing fair land rent ranging from one-fourth to one-fifth of the gross produce and allowing landowners to resume land for self-cultivation up to a limited area. It was further provided that on non-resumable land, the landlordtenant nexus should end and tenants in these areas be brought into direct contact with state. According to the provisions in various tenancy laws, major states can be classified into following broad categories. First, Kerala, Jammu and Kashmir and Gujarat have legally banned the leasing out of agricultural land without any exception whatsoever. Second, in the Telangana area of Andhra Pradesh, the leasing out of land by largeholders is prohibited; smallholders are allowed to lease out land for a period of five years. In the Andhra region, leasing is permitted but regulated. Third, Karnataka, Himachal Pradesh, Bihar and Uttar Pradesh have legally prohibited the leasing out of agricultural land with the exception of certain disabled categories like widows, minors, armed personnel, etc. Fourth, Punjab, Haryana, Maharashtra and Assam have not banned leasing. However, while in Punjab and Haryana, tenants do not acquire any rights on land, in Maharashtra they acquire the right to purchase the land within one year of the commencement of tenancy. Leasing is also permitted in Tamil Nadu but the law stipulates that every contract should be in written form and in triplicate. A copy of the document is required to be deposited with the revenue officials. In Rajasthan, the landowners can lease out land for a non-renewable period of five years. Fifth, in Orissa, all future leases have been prohibited. However, leases taken on past agreements continue after surrendering half the leased land to the landlords or the ‘raiyat’. In Madhya Pradesh, existing leases were abolished but the future leases have been permitted. Sixth, in scheduled tribe areas of Andhra Pradesh, Bihar, Orissa, Madhya Pradesh and Maharashtra transfer of tribal land to non-tribals even on lease basis, can be permitted by competent authority.

The actual implementation has, however, fallen far short of the provisions of the laws. A review of the enactment and implementation of tenancy laws in different states shows that the fair rent has been fixed much above the recommended levels; the definition of tenants has often excluded share tenants who constitute a fairly large proportion of tenants; the ejectment of tenants from their landholding was permitted on many pretexts and the provision for conferment of ownership rights on the tenants on nonresumable land has been far from real. The tenants were allowed to surrender land voluntarily and the definition of personal cultivation did not include physical labour as was recommended by the Panel on Land Reforms in 1956.

Functioning of Lease Market

The data brought out by different rounds of the NSS on landholdings since the early 1950s down to the early 1990s throw up the following broad conclusions about the functioning of the land lease market. First, in most states, the incidence of tenancy has declined over the period in all manifestations like the proportion of operational holdings leasing-in and proportion of operated area leased-in, the proportion of households owning but not operating land and the proportion of entirely leased-in holdings. Second, the terms of tenancy have also changed. The importance of share tenancy had declined and by implication, the proportion of holdings and area leasedin under fixed money and fixed produce has shown an increase. The data, however, reveals that the proportion of holdings and area leased-in under other terms has increased over the period. Third, reverse tenancy does not prevail in any of the states. In fact, leasing-in and leasing-out land pervades across varying farm sizes. In terms of the proportion of lessees and lessors from different size categories, the traditional variety of tenancy relations was in evidence only in Karnataka and Rajasthan. In terms of acreage transacted upon, three distinct patterns emerge: (i) in seven states (Andhra Pradesh, Assam, Jammu and Kashmir, Orissa, Tamil Nadu, Uttar Pradesh and West Bengal) most of the leased-in and leased-out area was accounted for by households of lower farm size categories; (ii) the traditional variety of tenancy relations prevailed in six states (Bihar, Gujarat, Karnataka, Madhya Pradesh, Maharashtra and Rajasthan); and

(iii) between Punjab and Haryana, while semi-medium, medium and large households account for most of the area leasedin and area leased-out, in the former, the extent of reverse tenancy was more pronounced than in the latter.

The evidence emanating from microstudies from different states/regions of the country shows that the proportion of leasedin land is significantly higher than that reported by both the NSS and census data.

Economic and Political Weekly February 25, 2006

In some cases, it is as high as 20-25 per cent of the gross cultivated area. Tenancy contracts are oral and prevail for a short period rarely extending beyond one year. The proportion of leased-in land is higher in agriculturally developed regions than compared to more backward regions. All classes of households participate in the lease market, as lessors and lessees. However, while in backward agricultural regions, the traditional pattern is more common with small and marginal farmers dominate the lease market as lessees and large and medium farmers as lessors, in agriculturally advanced regions, the lease market is in a state of transition where all classes of households participate. The trend towards reverse tenancy has become more pronounced in these regions. Among crops, the proportion of leased-in area is very high in case of non-foodgrain crops compared to food crops. More recent studies also show that small and marginal farmers have started leasing-out land primarily due to an increase in the cost of production, the growing scarcity of water, falling returns and increasing uncertainty on account of erratic weather conditions. There is also anecdotal evidence to suggest that many farmers, including small and marginal ones, are leaving their land fallow in view of restrictive tenancy laws.

Terms of Tenancy

Insofar as terms of tenancy are concerned, share tenancy with input cost sharing continues to be an important mode of leasing-in land, particularly for small and marginal farmers. Though output sharing ratios vary from state to state, most of the studies do report 50:50 share or even less. Most studies also show that the area leased-in for growing non-foodgrain crops is under fixed money or fixed produce. Further, while in agriculturally backward regions, share tenancy with input cost sharing is more common, in agriculturally developed regions fixed rent tenancy is more common. Micro-studies also seem to suggest that small and marginal farmers prefer to lease-in land under share tenancy with input cost sharing, perhaps because of lack of resources to pay cash rent in advance under fixed money or their inability to bear entire risk of crop failure which has increased in recent times. Recent studies from Bihar, where tenancy relations are presumed to be more exploitative, also confirm the above findings on magnitude and terms of tenancy.

Studies examining the effect of tenancy on inputs used and output produced have thrown up mixed results. While some studies actually find lower use of inputs and low level of yields on the leased-in plots compared to owned plots, the findings of others are just contrary to these. An exhaustive survey of literature, however, suggests that there is no conclusive evidence to support the hypothesis that yields under share tenancy are lower than those obtained under owner farming or fixed rent leasehold tenancy. Likewise, there is also no conclusive evidence to indicate that the yield levels for households involved in interlocking of factor markets are lower than their counterparts not involved in interlocking. Regarding factors determining the magnitude of tenancy, the findings broadly support the hypothesis that households of different size categories participate in the lease market to utilise their indivisible and nontradable inputs and capital resources like family labour, bullock labour, machinery (tractors, bore wells), etc, more optimally. Nonetheless, a variety of other factors like absenteeism of landowners, inferior quality of land, land not suitably located, escalation in the cost of production, growing uncertainty in crop production, etc, are also cited as important reasons obliging landowners to lease-out land.

Possible Options

Thus, there is widespread prevalence of concealed tenancy despite enactment and implementation of radical tenancy laws in different states. One obvious option is to end the landlord-tenant nexus by implementing the existing tenancy laws stringently as was recommended in different Five-Year Plans and to confer ownership rights on to tenants. The definition of personal cultivation needs to be made more stringent incorporating, among other things, performance of physical labour. However, going by the experiences of the actual implementation of tenancy laws in different states over the last 40 years, stringent implementation of these laws seems a remote possibility. Among other options, it has also been suggested by the available literature that entry to lease market should be permitted only to petty peasants while medium and large farmers should be banned from leasing-in land. This also seems to be an impractical suggestion. The recording of tenants on the pattern of “Operation Barga” in West Bengal has also been suggested as a viable option to provide security to the tenants. However, even though recording of share tenants under Operation Barga in West Bengal conferred tenurial security on tenants and had a positive and significant impact on agricultural production, this is not a permanent solution. The permanent solution lies in conferring ownership rights on land cultivated by sharecroppers. There are studies to show that Operation Barga has affected the creation of future tenancies, and that the creation of share tenancies has declined significantly in the aftermath of the implementation of this operation. The tenancies are now created for a short period that is for “boro” (spring summer crop) paddy. This affects the landpoor households adversely.

Nevertheless, even if it is possible to ban tenancy completely, this may not be desirable in the present socio-economic context because of several reasons. Factors like increase in population coupled with lack of alternative employment opportunities will always create a strong demand for land, especially from the land-poor households. This was emphasised by the Panel on Land Reforms way back in 1956 and is much more relevant in contemporary times. In a growing economy, there will always be some people who switch over to non-farm activities, migrate to urban areas or are unable to cultivate their land themselves, all of whom would be willing to lease-out land. They would not be willing to sell their land due to their attachment to land and also because of a lack of social security. Hence, if the tenancy is completely banned, they would prefer to keep their land fallow or lease it out to their own kin which would hardly serve the land-poor households. Further, in agriculturally developed regions, there would always be a strong demand from medium and large farmers for leasedin land to expand their scale of production and utilise their capital inputs optimally.

Thus, in view of past experience relating to the implementation of tenancy laws and the prevailing socio-economic realities in the countryside, there is a strong case to selectively liberalise the lease market and allow leasing-in and leasing-out with adequate safeguards to protect the interests of small and marginal farmers. The liberalisation of the lease market shall allow all sections of rural population to participate in the lease market depending upon their resource endowment. In some states like Punjab and Haryana, small and large farmers may be tempted to lease-out and medium and small farmers to lease-in land. Studies have shown that large and medium

Economic and Political Weekly February 25, 2006 farmers who have leased in land from small and marginal farmers have been able to invest in modern inputs, reap the economies of scale and raise their level of productivity. In a similar vein, marginal and small farmers who have leased out their land also gained in terms of their occupational mobility while realising higher annual income. In other states like Bihar and Orissa, where wages are low and adequate employment opportunities are lacking, small and marginal farmers shall be in a position to enlarge their holdings and thus afford a reasonable level of living. The medium and large farmers in these states are likely to migrate to urban areas to take to non-farm employment without any risk of losing their land. The liberalisation of lease market will also help in consolidation of holdings as the farmers will prefer to lease out rather than sell the piece of land that is inconveniently located.

There is enough evidence to show that lessors in large parts of country today are different from their predecessors in the 1950s, 1960s and the early 1970s when many amongst them did not take any interest in the agricultural operations and were leasing out land to maintain control over tenants by exploiting them. They take active interest in agriculture in terms of input cost sharing and assume greater risk and uncertainty. Liberalisation of lease market seems to be a better option not only with regard to the market-friendly land reforms promoted by the World Bank but also to confiscatory land reforms advocated by the so-called neo-populist school. Nevertheless, while liberalising lease market, adequate safeguards should be provided to protect the lessees of lower categories. Some of these are (i) the tenure of the lease contracts should be clearly defined. The lessees should be allowed to resume the land for self-cultivation after the expiry of lease, if they so desire. Otherwise, the lease should be presumed to have extended for another period; (ii) the ownership rights should not be conferred on the tenants if the leased-in land belongs to small and marginal farmers; (iii) under no circumstances, the lessees, particularly the medium and large ones, should be allowed to buy land from lessors belonging to small and marginal farm size categories. This will remove the fear of small and marginal farmers being wiped out and their land getting alienated and transferred to medium and large farmers.



Economic and Political Weekly February 25, 2006

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