This webpage describes the nature, uses, method, limitations, and potential future works related to the IIMA-SFarmsIndia Agri Land Price Index (ISALPI) launched during the second quarter of 2022. It also provides a brief primer on popular indices. After several rounds of discussion, SFarmsIndia, a Hyderabad-based Agri Land (Online) marketplace, signed a memorandum of understanding (MoU) with the Indian Institute of Management Ahmedabad (IIMA) on 25 November 2021. The MoU laid out the blueprint for a collaborative research project on pricing of Agri Land parcels listed on the SFarmsIndia platform. SFarmsIndia agreed to share new land listing data with IIMA on a regular frequency. IIMA agreed to explore the idea of developing an Agri Land Price Index for India based on the SFarmsIndia data. The first batch of data included over 6,000 listings across several states of India starting the January of 2019. For a meaningful index, we selected data from the six states: Andhra Pradesh, Karnataka, Maharashtra, Tamil Nadu, Telangana, and Uttar Pradesh. These states offered a critical mass of listings adequate to be included in the index formation. Currently, the aggregate of these six states is posited as the National ISALPI. As more data is generated, ISALPI will be expanded for wider and more granular geographic coverage. The ISALP index is based on a hedonic pricing model on a monthly frequency of land listing data and could be treated as a “Constant-Quality Agri land price Index for India.”
Land stays central to agricultural activities. In 2016, India was home to nearly 200 million hectares of cropped land with an average landholding of 1 hectare (2.5 acres approx.) per household. Although agriculture contributes less than 20% to the national GDP, it claims to employ nearly 60% of the population in India. Also, the gross value added (GVA) of agriculture is growing roughly at 3-4% per year. Beyond production, agriculture also contributes to capital formation. According to NABARD, agriculture contributed over 7% of gross capital formation (GCF) during 2019-2020. The National Sample Survey Organization (NSSO) Report 587 on agricultural land possessed by Indian households suggests that nearly 80% of the agricultural households are self-employed, with most (70%) involved in crop production. This statistic broadly matches the NSSO report. In some parts of India such as Varanasi, the agricultural land area increased by 40% between 1993 and 2013 (S. K. Patel et al., 2019).
Importance of Agri Land
The pace of growth in agriculture is surpassed by the growth in the manufacturing and service sectors. However, although India contributes only 2.3% of the world’s land area, it feeds 17% of the world’s population (A. Patel, 2015). The latest trends in agri-business posit Agri land as an important asset class.
Development of farm land supports entrepreneurship in numerous allied areas: agricultural engineering, crop protection technology, precision farming, food technology, supply chain management, green energy, and agricultural education, among others (Bhooshan & Sharma, 2021). This trend is espoused by world-class educational programs. For example, IIM Ahmedabad’s agribusiness program is globally ranked one, and two other Indian-based programs rank among the top 50.
The green revolution of India during the later half of the twentieth century was blamed for the widespread use of chemical fertilizers and genetically modified crops (Prabhu, 2012). As a result, several states, such as Andhra Pradesh and Kerala, came up with policies to support organic farming. An increased awareness and government support policies towards the Environmental, Social and Corporate Governance (ESG) goals has led to increased enthusiasm for organic farming in India and has opened new doors for innovative Agri entrepreneurship. Thus, the interest in Agri land is expanding from agricultural households to a new breed of new-age entrepreneurs.
Depletion of vegetation lends as much importance to Agri land as to real estate development. For example, In Varanasi, an 86% decrease in vegetation meant a 40% increase in Agri land, but a 350% increase in built-up area (S. K. Patel et al., 2019). Besides, in peri-urban areas agricultural land conversion (ALC) to urban land has led to several studies that call for Agri land protection (Govindaprasad & Manikandan, 2016).
The Need for Tracking Agri Land Prices
“Buy land, they're not making it anymore” – Mark Twain
For agricultural households, the land possessed is a critical component of wealth. In financial terms, however, operating Agri land may not create adequate additional wealth. For example, the annual yield from crop farming is often as small as 1-2%. On the other hand, land, as a resource, gets scarcer with the increase in population. Thus, land price appreciation is the dominant way for landowners to track their wealth. As the majority of the Indian population is still agriculturally based, the question of tracking land prices over time is an important policy goal.
The Challenges with Creating a Land Price Index
There are centralized marketplaces for goods (e.g. Amazon), services (e.g. Fiverr), or assets (e.g. Bombay Stock Exchange). Some items being sold may be homogeneous, e.g. toothpaste tubes of a specific brand and batch, or securities (e.g. common stocks of a company). Yet, several goods (e.g. computers) or assets (e.g. homes, artworks, land parcels, etc.) of the same type sold within a market may be different from each other significantly.
Consider some examples. No two homes are exactly alike: They may differ in orientation, location, and several other characteristics. Even within a brand and make, a buyer may customize her car to differentiate from other buyers. Two paintings by the same painter will not be the same even if the painter endeavours to replicate his work: It may differ in the quality of canvas (or paint), brush strokes, or in more abstract terms (e.g., the first one may have the “novelty/premier” status while others will not). Similarly, two land parcels can never be identical: They will differ in their geographic coordinates, access to amenities (e.g. roads, views, sunlight) even if they are sub-plotted from the same parcel. Pricing homogeneous assets (e.g. stocks, bonds), therefore, is a different type of exercise compared to pricing heterogeneous assets (e.g. land, artwork, homes, etc.). As the assets are not identical, one may easily argue that the price differential observed between two items is due to differences in the attributes between these assets, and not because the underlying supply-demand conditions for the asset class have fundamentally changed.
Applications of ISALPI
The index should be of interest to existing agri-land owners, prospective buyers, financiers, policymakers, local governments, environmentalists, and agri-entrepreneurs. Existing landowners may use the index to assess how the valuation of their holdings have evolved over time. Sellers and buyers could use this information to assess the historical risk and return and predict these metrics for the future to prudently decide on their buying/selling decision. ISALPI may be useful in reducing litigation cost in some situations, e.g. when agri-land is acquired for public use (e.g., highway) or private interests (e.g., a manufacturing facility) by informing the price movements over time.
Uncertainty in price movements increase the cost of financing or insuring the underlying assets. The transparency offered by the land price index may not only reduce the landowners’ underwriting costs, the financial market products (insurance, mortgage, etc.) the availability and cost of financial products will also improve.
Researchers could use this information to study how economic events and factors are associated with price movements in a specific asset class. Benchmarking land price movements in rural or semi-urban areas to a standard land price index will signal the potential conversion of agricultural land into real estate. Policymakers may use it to modulate their policies.
The landholding per household has almost halved in the last fifty years. In 1970-71, it was around 2.28 hectares.
GVA reflects the state of the supply side (producers) of an economy whereas GDP relates to the demand (consumer) side.
GCF is a measure of the net new fixed capital formation in an economy. GCF = Gross fixed capital formation + ΔInventory + (Acquisition – Disposition) of valuables
However, we recommend avoiding using this index for performance appraisal of such managers. See the FAQ section for more details.
Note that this graphic, although complete is presented here for illustrative purposes. The latest (and updated) index value can be seen on the Index website.