Land Acquisition Costs and Sectoral Composition: Evidence from India

Abstract

For many governments of transition economies, compulsory land acquisition is an increasingly integral part of industrial policy. In these countries, private land acquisition involves high negotiation costs due to fragmented land ownership; compulsory land acquisition shifts this burden from the private investor to the government. In theory, this tool might be the most efficient to stimulate industrialisation and development; in practice, we see most economies in transition being led by services-led growth. To understand this phenomenon, this paper investigates the impact of land acquisition costs on sectoral composition in non-agriculture. I first document novel stylised facts that show the difference between manufacturing and services in their relation to compulsory land acquisition intensity. Then, I study the impact of an increase in land acquisition costs by exploiting an unexpected reform that placed restrictions on compulsory land acquisition for Special Economic Zones (SEZs) in India. I leverage ex-ante variation across Indian states in land acquisition intensity in a shift-share design to obtain causal estimates. I find that this increase in land acquisition costs changes the composition of the non-agricultural sector, with the share of manufacturing decreasing by more than 50 percent. This illustrates how a reduction in government intervention on the land market hinders industrialisation.