Economic potential


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TO understand the economic significance and potential of ‘wastelands’, we must shed the notion that they are wastelands! The categories in official land use statistics like ‘cultivable wastes’, ‘uncultivable wastes’, ‘permanent fallows’ (other than current fallows), and even some of the ‘barren and uncultivable lands’ have served local communities by providing grazing facilities and fodder, fuelwood, leaf manure, wild fruit, small game (like rabbit), leaf manure, building and fencing materials, wood for agricultural implements and so on.

Since these goods are available free, except for the labour involved, the rural poor receive a larger proportion of their total needs and income from them than the non-poor, and as such these ‘wastelands’ are of special economic significance to them. The non-reserve forests (‘protected’ forests) which account for about 46% of area under forests, have also served the same purpose and are generally in a more degraded state than the reserve forests. Thus, they can more rightly be clubbed together with wastelands and all be called as the common property resources (CPRs).

Yet, the connotation of ‘wastelands’ is strictly not the same as that of CPRs. While the former indicates a physical state of degradation, the latter refers to legal status (even if local communities do not strictly possess legal titles, since these lands are generally owned by the government). In practice, however, there is a great degree of overlap between them, so much so that even reserve forests, closely controlled by the government but near local communities, and privately owned/possessed degraded lands are often used as CPRs, with or without the permission of the owners.

It is difficult to decide whether the degraded status of these lands is the cause or a consequence of their being used as CPRs. Wherever the lands were fertile they were either brought under cultivation or tree cover with exclusive control (again, either as commercial plantation for private benefit or as reserve forests), and only relatively degraded lands were left for community use. Under such circumstances, the degraded status is the cause and the preceding circumstance to their being used as CPRs. However, where no proper collective management existed, the collective use could have led to over-exploitation and hence to further degradation.

The breakdown of collective management at the local level was a part of the process of commercialisation and pressure on land. The story of the decline of the CPRs both in quantity and quality at the micro level is well documented in India (Jodha 1985-a, 1985-b; Damodaran 1987; Nadkarni et al 1989; Iyengar 1989; Nadkarni and Pasha 1991). If the degraded status of these lands is both the cause and consequence of their being used as CPRs, it is tempting to take it as indicative of a vicious circle operating. However, this is valid only where collective management has broken down. Moreover, we cannot generalise to the extent of conceptualising all environmental problems in terms of a vicious circle (Nadkarni 2000).

How then do we look at the economics of ‘wastelands’ used as CPRs? One way of looking at them is as an underutilised natural resource capable of development or regeneration to reach their full production potential (Vohra 1973 and 1980; Nadkarni and Deshpande 1979; Romm 1981). In a land scarce country like India, keeping such a precious resource in a degraded state would seem irrational. They indicate a development frontier beckoning to be opened (Romm 1981).



Though these lands have contributed to the local economies of people, particularly the poor, the consensus of scholars seemed to be that their productivity fell below their productive potential thanks to the neglect of conscious management for sustainable use after the sway of market forces and private economies accelerated. Many forestry projects were initiated in the country precisely with the objective of regenerating these lands so that they could better meet the needs of the local people for bio-mass. In the process of meeting these needs, two further indirect economic cum environmental benefits were sought: reducing the pressure on reserve forests and checking deforestation; helping soil and water conservation.

This raises three questions, inter-linked with each other: (a) Is it economically viable to regenerate these lands? (b) Even if viable, what are the institutional constraints to realise their full potential? (c) What are the alternative goals or objectives of their regeneration? By whom and how is the question of choice between alternative uses decided?



In discussing these questions, it is pertinent to keep in mind the distinction between economics of wastelands meant to be made use of to meet people’s needs on the one hand and economics of forests proper (e.g. reserve forests) and conservation parks on the other. While direct economic considerations dominate the first with the environmental benefits being incidental, the environmental considerations dominate the latter with direct economic benefits being incidental. We are concerned here with the economics of wastelands. (For a discussion of economics of forests vis-a-vis people, see Nadkarni 1996: 1-24.)

The question of economic viability must be distinguished from financial or commercial viability. In terms of the former, the basic question is whether total benefits exceed total costs. Not only do the direct benefits like fuelwood, timber, fodder and fruits have to be valued in economic viability analysis, but also indirect and non-monetary benefits from soil and water conservation going to neighbouring areas as positive externalities. Similarly, costs include not only direct and monetary costs, but also indirect and non-monetary costs like the opportunity cost of land in terms of grazing opportunity foregone, to the extent that free grazing is not permitted when wastelands are regenerated.

In a financial viability analysis, not only indirect benefits, but also direct benefits consumed at source (without depending on the market) may be ignored and only cash returns considered. The objective here is to judge whether the costs or investments are recovered from the cash in-flows, i.e. whether the project is ‘bankable’. An outside investor giving loans for regeneration may view it from this point as well, in addition to economic viability. In financial viability analysis, it is not necessary to include the opportunity cost in terms of grazing facility foregone, and only direct and monetary costs need to be reckoned.



The rate of discount in financial viability analysis must normally be the same as the market rate of interest at least as prevailing in the formal banking sector, if not the high rates in the informal sector. In economic viability analysis, however, the rate of discount can be much lower. We have, however, used the same rate of discount for both. It may be noted that a rate of discount is required to convert the cash flows or the estimated value flows to their present value. Cash flows of different periods are not comparable because they need to be at real or inflation-adjusted prices, and even where they are at real prices, they are subject to time preference.

Time preference may include some risk premium as future returns are to an extent uncertain. For example, what if local people do not allow regeneration, making the investment in regeneration a wasteful proposition? The standard practice in India is to use fairly high discount rates such as 12% even in social cost benefit analysis, which is unjustifiably high if the cash flows are in real terms. Such a rate of discount is too high even for financial viability analysis if based on cash flows in real terms. It is enough in such cases if the rate of discount reflects only the rate of time-preference and a risk premium.

If there is a conflict between the two types of analyses, it is of course up to the investor to decide whether she should go by economic or financial analysis. However, while financial or commercial analysis is more relevant in private or farmers’ own holdings, economic viability analysis with a broader perspective is more relevant for common lands. Nevertheless, social costs cannot be ignored even in private enterprises.

It would be pertinent to present a few important findings from a study of economic and financial viability analysis conducted in early 1990. The methodology was first tried for five social forestry projects. The results were encouraging, showing the projects to be viable both in economic and financial terms (Nadkarni et al. 1992). The study was extended to cover eight more social forestry projects which confirmed the earlier results. The combined results for all 13 projects were published by SPWD and the Ford Foundation (Nadkarni et al. 1994).



The 13 social forestry projects were from different parts of Karnataka – from heavy rainfall to semi-arid regions, both in South and North Karnataka. They also represented different production patterns, some with an emphasis on commercial species, some with no particular priority and having a wide mix, and at least one with low density of trees but with more grass cover. Some were recent and some started about five years back and are fairly established, the earliest started in 1985-86 and the latest in 1988-89.

It was not possible to take into account actual cutting of timber, since the trees had not matured for cutting. But actual cutting of grass and estimated (expected) annual cutting of branches of trees for fuelwood were taken into account. We also included in the benefits what value the trees would yield (at constant or base year prices) when they are finally cut (after maturity, not exceeding 40 years). Grass and green manure were included only to the extent that they were found to be or were expected to be harvested over the time period of 40 years, and not the value of all the leaves and grass produced.



Only that part of the bio-mass is valued which was used or expected to be used. Indirect benefits like the value of the impact on soil and water conservation reflected in increased agricultural yields were not included due to nonavailability of reliable information. However, even in terms of direct benefits alone the projects were found to be economically (if not financially) viable. When they passed a more restrictive or stringent criterion, they would pass a less stringent criterion as well. The prices used for valuing the benefits were those prevailing in the concerned villages themselves.

Where market or actual prices were not quoted, they were based on what the villagers were prepared to pay to obtain bio-mass like small wood if it was not available free from the common lands. Grass was valued at Rs 271 per tonne which was lower than the market price for crop residues used as fodder. There was no market for the type of grass grown in social forestry projects. Even if grass fetched no price in the market, it had economic value in terms of the contribution it made to animal husbandry.

The basis for the price of Rs 271 per tonne is that it turned out to be the marginal value product, derived from a linear production function fitted to a cross section of animal holdings of farmers in a semi-arid region of Kolar, taken from the Ph.D thesis of S.A. Pasha on the ‘Economics of Small Ruminants’ prepared at ISEC. The valuation of free fodder, however, was not included in financial viability analysis, except in the project which was specifically a fodder plantation. A sensitivity analysis was also carried out valuing benefits at full expected value as against only half its value.

On the cost side we included not only the initial overheads like civil works but also recurring costs of maintenance and watch and, what is more, opportunity cost of grazing benefits foregone by local people. We have reckoned this opportunity cost as arising throughout the project life. This made our analysis more stringent. The grass and other fodder harvested by local people, which more than offsets the grazing facility foregone, is included on the side of benefits. In financial viability analysis, only benefits in the form of timber and grass expected to be sold or products of commercial value were included and not all products.



We present briefly the findings of only two projects for illustration, taking Sathenhally project in Tumkur district which was mainly a fodder plantation with the lowest density trees (222 trees per hectare) among all projects (and therefore its economic and financial viability was doubted) and, Kolur project in Bangalore district which had mainly commercial species like eucalyptus and casurina with a high density of trees (1990 per hectare). Both the projects were in semi-arid tracts, and had no benefit of irrigation.

All the projects were taken up with an understanding with the villagers concerned that their cooperation would be available in regeneration and protection, and free grazing in the project areas would not be allowed till the trees grow upto a certain nonbrowsable height. The findings for the two projects are given in Table 1 below.



Economic and Financial Viability of Two Social Forestry Projects




1. Product pattern and density of trees

Mainly fodder, fruits, and fuelwood trees (222 per hec.)

Mainly commercial trees: eucalyptus and casurina (1990 per hec)

2. Implementing Agencies


Forest Department

3. Project Area in hectares



Economic Viability

4. Net present value per hectare

(In Rs ’000) at 1989-90 prices

At full benefits expected

Only half benefits realised











5. Internal Rate of Return (%)

At full benefits expected

Only half benefits realised







Financial Viability

6. Net present value per hectare

(In Rs ’000) at 1989-90 prices

At full benefits expected

Only half benefits realised





- 4.0






7. Internal Rate of Return (%)

At full benefits expected

Only half benefits realised







Notes: Project life is assumed to be 40 years. NPV here is not per year, but for the whole project life. A variable discount rate of 3% for the first 10 years, 5% for the next 10 years, and 8% for the remaining 20 years, is used for deriving NPV.

Source: Nadkarni et al. 1992 and 1994.


The two projects present two extremes, the fodder oriented Sathenhally project showing much less economic and financial viability than the Kolur project oriented to commercial species, as was expected. This was so even after taking into account the contribution that grass makes to the value addition in animal husbandry, though it had no market price. However, what is remarkable is that Sathenhally project was found to be economically viable even when only half of the expected benefits of the projects were assumed to be realised. It passed even the financial viability test at the full benefits expected, but not when only half of the expected benefits were assumed to be realised. The other project which is much more commercially oriented, however, passed both the economic and financial viability test under both alternative assumptions about the benefits.

The results show an inherent dilemma in any project of regenerating wastelands. Focusing on commercial species would make it economically attractive, but irrelevant to people and could even provoke their resistance. Focusing on fodder could benefit local people more, but may not be economically very attractive. A balanced mix acceptable to the local people could help in overcoming the dilemma. More on this issue a little later.

Our findings, published earlier, received critical comment on the following aspects: First, the densities of trees in projects excluding Sathenhally were not such as to yield full benefits expected of a tree; they may have planted high densities on the assumption that not all trees would survive. That is why we also carried out a sensitivity analysis under which both the alternative assumptions of full benefits and half benefits were tried as indicated above.



Second, NPV looked so large as to make tree plantations more attractive than annual crops. It should be noted, however, that the NPV here is for the whole project life of 40 years together, and not for each year. The third criticism was that the cost of land was not taken. This was because they were waste lands and had no market as such. However, we did take into account the opportunity cost of the project in the form of grazing benefit foregone for the village people.

Last, a low rate of discount was used to derive NPV (3% for first 10 years, 5% for the next 10 years and 8% for the last 20 years), which is lower than the routine rates like 12% used in social cost benefit in India. The justification for using a lower rate is already given above, and in any case the internal rates of return were also derived.

It is necessary to clarify, however, that the benefits reckoned in the above analysis are on the assumption that the necessary cooperation from the people of the concerned villages is forthcoming in protecting the projects and making sustainable use of them. It is just possible that some of the project sites may later have reverted to their degraded preproject state when no such cooperation was forthcoming and free grazing was resumed. In such cases, the investment in social forestry projects would be a waste. That is why there is so much emphasis on people’s participation in such projects.

One of the major problems in such participation is to decide on the objectives of the project. A commercial plantation on a common land may be tempting in narrow financial terms; but if the costs of exclusion or protection are high, it may not yield the expected results. But even purely grass oriented projects can be economically viable, even if not financially so, as our above analysis has shown. Instead of having purely commercial plantations which local people may resist and not allow, it is more prudent to have what they want and would allow, as decided by the consensus in village meetings. They may allow even commercial or timber species to an extent, if the concerned village benefits from them.



After all, in a case like planning for the regeneration of common lands, the goals of regeneration have to be decided by the beneficiaries themselves. It is, therefore, crucial to attend to institutional questions of formalising and ensuring people’s participation for the whole project life. The question of equity naturally arises here which could be settled by ensuing equal rights to bio-mass on per household basis. These questions have been discussed in the literature on the subject, with illustrations of actual case studies (e.g. Nadkarni 1990; Chopra, Kadekodi and Murty 1990).

The institutional question cannot be avoided even when the ‘wastelands’ are in private possession. Their regeneration may need considerable investment which may sound uneconomical for private individuals, especially if cost of exclusion and protection are high. Also, the party may not have the required funds.

There are the uncertainties to be reckoned with, particularly when the land is encroached and there is a risk of the government not regularising ownership. In such a case, there is no incentive for a private party to undertake long term investment. The state governments are reluctant to liberally regularise encroachments just to give such an incentive, because that would be an open invitation to all the encroachers on CPRs and forests and especially to the powerful village elite who will take full advantage of such a situation.

An example of how the problem of regenerating privately held wastelands was overcome by an NGO (Myrada) in Karnataka may be mentioned. In the PIDOW project in Kamlapur watershed in Gulbarga district, most of the wastelands were privately held by farmers, awaiting regularisation. There being no interest in regenerating them on the part of farmers with their own resources, PIDOW took up this task on the condition that one-third of the output from such lands would be contributed by farmers to a common fund of the village sangha or association.



The contribution in the form of grass harvested was distributed to other households who helped in harvesting it. If the usufruct or timber is sold, one-third of the cash proceeds are to be credited to the common fund for village development. There was a threat of social boycott from the village if the party went back on its commitment after regeneration (cf Nadkarni 1990:49).

There is no end to ingenuity in social engineering and it should be possible to realise the full productive potential of the so-called wastelands in meeting people’s needs. The constraints in this are not so much on the side of economic viability as on the institutional.



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