Equity and efficiency impacts of rural land rental restrictions : Evidence from India Land Policies & Legal Empowerment of the Poor Nov 3, 2006 H.K. Nagarajan, Klaus Deininger, Songqing Jin

Background & Motivation Rental markets: Concepts & Empirical evidence Transfer (temporary) to better cultivators; low risk Facilitate link to off-farm economy; consolidation of holdings Rapid expansion with economic growth (China, Vietnam) But: Limited extent in India – why and what to do about it? Questions to be addressed Origin & justification of rental restrictions Are land markets still backward & exploitative? What is the equity/efficiency impact of rental restrictions? Methodology Simple household model of land market participation Use of state-level variation in rental restrictions Measure for household ability to assess productivity impact

Origin & nature of rental restrictions Land-reform related interventions Elimination of intermediaries Ownership ceilings Tenancy reform: Rent ceilings & tenancy rights Variations in implementation effort Slow implementation Many loopholes Limitations in scope Evidence on impact Nation-wide state level regressions West Bengal? Second generation problems?

Evidence on implementation

Theoretical predictions Rental restrictions in urban areas Textbook example for policy distortion Benefits sitting tenants; reduces mobility Reduces investment & supply of land to rental market Social cost will increase over time as demand increases Reasons for greater importance in rural areas Higher elasticity of supply (self or wage cultivation) Impact on productive efficiency: Size & generational shift Sharecropping less flexible with possibly high investment impact Evidence from studies in India Case studies: High level of informality; contravention of law Aggregate studies: Positive short-term impact of reforms But no assessment of cost or longer-term effects This will be needed to guide policy

Model Setup  Households endowed with endowments of labor ( ) and land ( ), and agricultural ability (  i )  Households divide labor between farm work and off-farm wage employment  No farm labor market, renting of land incurs transaction costs  Households maximize income by optimizing labor allocation and choosing optimal operated land size through rental  Policy restrictions (3 versions) affect transaction costs

Conceptual framework

Data & descriptive statistics Data sources NCAER ARIS/REDS panel data 1982 & 1999 About 7,500 obs. in 2 periods Household characteristics Increased educational attainment (26% to 50%) Narrowing of N-S gap; asset inequality decreased Land p.c. dropped; income growth of 3% p.a. Economic structure Agriculture very important (70% to 63%) Higher participation in agr. wage employment (36% to 43%) Share of self-employment broadly constant

Key household characteristics by region

Rental Activity and Determinants Rental market activity –Increase in overall activity (5 to 10% out) –More hhs renting than benefited from reform –Increased share of landless (12 to 37%) Characteristics by nature of market participation –Asset-poor rent in, rich rent out –Gap narrowed slightly over time in panel –High share of wage workers renting in

Determinants of market participation Overall equation –Landless and –poor, labor abundant likely to rent in –Education, village income increase renting out –Ability increase rent-in; robust to inclusion –No minimum wealth requirement; input/credit market Lower bound (out to autarky) –Policy variables: More autarky; laws < implement. –SC/ST increases & time decreases transaction costs Upper bound (autarky to in) –Implementation, but not law increases autarky –Autarky areas decreased, i.e. markets more active –But: long time to offset impacts of restrictions

Equity & efficiency impacts Why expect differential impacts? –Circumventing restrictions easier for rich than poor –Is there a trade-off between equity & efficiency? Empirical results –Restrictions wipe out advantage of landless in accessing land –Once this accounted for, no more effect of legislation –Robust to inclusion of ability –Increases autarky band for higher ability people

Variation over time & equity impact Is there a justification for restrictions? –Wealth bias in 1982, no more in 1999 –No reverse tenancy, increased supply by large owners –Monopolistic landlord behavior to extract rent? Potential equity impact of rental access –Mean return/labor day close to R 150 (= VMPL) –Compare to wage rate for ag. labor: R 46 or 34 –-> Significant welfare gains, especially for women

Conclusion and policy implications Land rental market functioning –Improve equity and efficiency –Wealth bias eliminated over time –But impeded by tenancy legislation –Large benefits from increased access (women) Policy implications –Improve equity & efficiency by reducing restrictions –Doing so is not infeasible –Sitting tenants’ welfare to be considered –This can increase welfare significantly but is second best to deal with problem of inequality