Blame the British for continued extensive state intervention in land and credit markets
Prof. Anand Swamy of Williams College has a nice piece on knowing history.
We often lament that there is too much govt intervention in land and finance/credit markets. This is of course blamed on the government policies post independence. However, the intervention dates back to British:
It is usually thought that extensive State intervention in market transactions is a post-independence phenomenon in India. Such intervention is closely identified with import-substitution, which was a strategy to promote industrialisation. But as liberalisation has proceeded we are increasingly aware that the State also heavily intervenes in markets in land, and, relatedly, private (non-bank) credit. What are the roots of these interventions? Should these also be traced back to the days of Jawaharlal Nehru and Indira Gandhi? After all, wasn’t the British Raj largely laissez-faire 1? The short answer is No. Despite lip-service to laissez-faire, the British Raj intervened extensively in land markets, and particularly in the relationship between land and credit transactions. This goes back to the 19th century. Independence marked a break in policies pertaining to trade and industry, but on land and non-bank credit this is a story of continuity.
If we consider the land market in 1850 in (say) Bengal or the Bombay Deccan, there was little State intervention. The colonial State wanted its taxes and would seize the land if the owner did not pay. Barring this, owners were free to sell or mortgage their land. But this state of affairs did not last. When land is freely transferable, people will borrow against it. Some will default, and lose their land. Even when land has not been explicitly pledged as collateral, it may have to be sold to repay debt. This process is inevitable at least to some extent, and will occur in any market economy. But its social impact depends on the identities of borrowers and lenders. In a relatively rich region (say, much of Bengal), there was enough capital, so the lenders were local and long-standing members of agrarian society. If land went into their hands, this did not necessarily increase social tensions. However, in poor region (say, Bombay Deccan, or numerous tribal areas), many lenders were immigrants. They were often professional trader-lenders, with no connection to agriculture. When land was transferred to them on a significant scale, this led to social tension. In some instances violence broke out, as in the (tribal) Santhal areas in eastern India in 1855 or the Bombay Deccan in 1875. The colonial State then chose to intervene. They chose two main types of policies: regulating the moneylender; and directly banning land transfers.
I would imagine this even predates British. A reading of political/economic history of most Indian kingdoms shows you that kings intervened excessively in both markets. Land was the real asset people had and finance/credit the pipeline to control the flows of money to people. SO keeping a tab on these two, and virtually all is managed and controlled by the empire..