Expert Speak India Matters
Published on Mar 03, 2017
How to make contract farming suitable for Indian farmers

Contract farming is sounded like a panacea for all ills surrounding the hapless farmers of India. The Niti Ayog is drafting a model law on contract farming which will contain updated legislations for contract farming to take off in a big way. Like the Manmohan Singh government, the Narendra Modi government seems to be keen to go ahead with corporatised agriculture in which big corporations (domestic and foreign) will have contracts with small and medium farmers to produce what they need for processing in their food and agro based industries.

Contract farming has been in India since the 1960s and amendments to the APMC Act at State levels in the last decade has made it legal. It was widely adopted across a variety of crops, regions and companies.

In 2003, a Model Agricultural Produce Marketing (Regulation) Act was circulated by the central government to the States for implementing market reforms. It has provisions for registration of contract farming sponsors and recording of contract farming agreements with the APMC; protection of title or rights of farmers over the land under such contracts, dispute settlement mechanism and a model draft agreement suggesting various terms and conditions. Several State governments have made provisions in their APMC Acts for providing a legal framework to contract farming.

The Niti Ayog thinks a model law is needed to streamline the contract farming system and make it more uniform across the States. Presently, contract farming has been co-opted by 22 States but there is no uniformity or homogeneity regarding the kinds of produce that can come under it and the conditions under which contract farming should be allowed. According to Niti Ayog, “The law that shall be formulated will be a general one for all commodities and will aim at laying down a uniform set of terms and conditions that will significantly reduce conflicts. It is quite clear that such a law will be positive and a good move.” The idea of a model Act is to vertically integrate farmers producing fruits and vegetables with agro processing units for better price realization and post-harvest losses.

Read also | < style="color: #960f0f">Policy imperatives for India’s small farmers

Under contract farming, farmers can be given seeds, credit, fertilizers, machinery and technical advice so that their produce is tailor made for the requirements of the companies. There would be no middlemen involved and farmers would get a predetermined sale price from the companies. It sounds good and easy and the farmer does not have to make trips to the mandis nor worry about getting seeds and credit for farming operations. By entering into a contract, the farmer reduces the risk of fluctuating market demand and prices for his produce and the companies reduce the risk of non-availability of raw materials.

Contract farming can fill the gap of lack of investment and land improvement by supplying quality inputs, giving technical guidance and management skills.

Punjab has had corporate faming for over 15 years and success stories range from Pepsico India in tomatoes, potatoes, groundnut and chilli, safflower in Madhya Pradesh, palm oil in Andhra Pradesh and seed production contracts for hybrid seed companies which helped growers in realising better returns for their produce.

If contract farming is indeed such a clean and good option for farmers, there should not be any objections to it. Many countries have successfully undertaken corporate farming, including China. Why should there be any second thoughts about going ahead with it on a big scale?

Problems arise in the case of very small and marginal farmers. They may not be roped in for this form of farming because companies may want a particular size of the crop which small farmers with their small parcels of land may not be able to produce. So, this will leave out the most vulnerable farmers from the ambit of corporate farming.

To make contract farming inclusive, farming groups like cooperatives should be encouraged.  Sometimes, however, small farmers are picked up because there is benefit of low cost of production as these farmers have access to cheaper family labour who work more conscientiously than hired labour.

Second, the medium size farmer may not be literate enough to understand the nitty gritty of the contract and all the clauses, and if the produce does not meet the standards of the company, he may face mass rejection. What would be his fate then? Where can he dispose of the produce? It will be like the export rejects that can be found in stores across India, but to sell perishable produce is quite another matter.

Third, the farmer may be forced to produce only tomatoes or onions year after year which will lead to monoculture and he will have no options left to produce whatever mix of crops which he may think is good for his farm. His freedom will be curbed no doubt and this is a serious setback to the individual freedom of farmers and their rights.

Fourth, predetermined prices do not take care of food inflation and in case there is a price rise of the product, the farmer cannot take advantage and make a windfall profit because he is under contract to sell at the price agreed upon beforehand.

Fifth, the average farmer being poor and semi-literate has little bargaining power vis-à-vis big corporations and hence there is little chance of his getting a fair price for his produce.

Sixth, should we let the corporate sector take over our agricultural operations? Wouldn’t it affect the food security of the country? As its seeds production is largely controlled by multinational companies.

Last, contract farming is best suited to special types of crops and not all farming activities. In China, only specific agricultural produce is under contract farming.

In general, the best practices from the most successful cases of contract farming should be taken into account when drafting the model law. Many of the shortcomings of agricultural marketing can indeed be overcome and eliminated because the farmer is not hassled with problems of storage or distress sales and going through middlemen. But in all, agriculture has to remain in the hands of the farmers and not the corporate sector. There should be provisions for quick and just dispute settlement between the big corporations and small and medium farmers.

Also, companies and States should promote group contracts with the intermediation of local NGOs and other organisations and institutions so that contractual relationships are more durable and fair. Insurance component is a must to protect contract famers’ interests. There is thus the need for collective action through cooperative process to be able to buy and sell at better prices. There has to be a system which monitors contracts to facilitate its smooth functioning in the context of small farmers. If all such steps are taken, may be contract farming will spread rapidly across India.

The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.


David Rusnok

David Rusnok

David Rusnok Researcher Strengthening National Climate Policy Implementation (SNAPFI) project DIW Germany

Read More +