Why is it hard to shift farmland to non-agricultural use or use it as collateral?

Agricultural land in India is a legal classification that determines what you can and cannot do with your property. Want to build a small food processing unit on your farm? Start a rural tourism venture? Each requires navigating a maze of approvals to convert land from “agricultural” to “non-agricultural” use. Converting land use requires permission from district collectors, revenue officials, and, sometimes, urban development authorities. Each state has different procedures, timelines, and fees. What might take months in one state can take years in another, if approvals come at all. Some states levy conversion charges as high as 40% of the land’s market value. For a smallholder wanting to build a warehouse or workshop on a portion of their land, these costs can be prohibitive. Even willing farmers struggle to prove clear ownership, and digitised records often replicate historical errors from patwari entries. This ambiguity affects up to 60% of rural parcels and severely hampers land conversions and access to credit, despite 95%+ digitisation.

The economist Hernando de Soto coined the term “dead capital” to describe assets that are valuable, but cannot be leveraged in the formal economy. That’s precisely what agricultural land becomes under the restrictions placed on it. Farmers are sitting on what might be their most valuable asset, but they can’t easily use it to start a business, fund medical expenses, or invest in better farming equipment.

When titles are unclear and conversion is difficult, banks hesitate to accept agricultural land as collateral. Why take the risk if foreclosure and resale would be legally complex? In response, farmers turn to informal moneylenders who charge much higher interest rates. When farmers can confidently use their land as capital for whatever productive activity makes sense, they shift from being beneficiaries of government schemes to being genuine economic actors.