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Contract Farming in India – A Hope for the Agricultural Sector in India

Contract Farming

More than 75 years after independence, India remains a primarily agrarian economy, relying on its farmers to toil and reap the benefits of the varied and fertile soils in India. Farmers are the backbone of the Indian economy and as such have to be sheltered and protected against various economic forces such as inflation and recession. Farmers often have to face fluctuating prices for their goods and in general, struggle to make a profit from the sales of their goods on more minor scales. In addition to poor yields, most farmers in India are owners of small plots of agricultural land and a significant portion of the total number of farmers in India are landless. They usually find employment in the lands of farmers that own larger plots of land.

Further, the farmers and the dairy/rearing industry in India are closely linked with farmers allowing dairy farmers and rearers of other mulch animals to graze their herds on their farms in exchange for manure made from the waste of these animals. This relationship is significant; both parties depend on each other to reduce costs and remain profitable. The introduction of contract farming will serve to disrupt this connection between the farmers and the rearers, regardless of the benefit to the farmers.

What is Contract Farming?

Contract Farming is a type of farming where the farmer enters into a signed agreement (contract) with a purchaser or facilitator to produce and supply a predetermined quantity at a predetermined price to the purchaser/facilitator on or before the date due per the contract signed by both parties. This type of farming is commonly carried out by farmers where there is no certainty of payment on the harvest of produce or those farmers who have access to large swathes of land and are able to invest time, effort, and resources to fulfill large orders. There are many types of contract farming in India such as –

  • Centralized model; the buyer and the seller enter into a direct contract where most of the aspects of production such as land, quality of resources used, and technique of growth are all controlled by the buyer.
  • Intermediary model; an intermediary is appointed by a centralized agency to recruit and enter into contracts with farmers on behalf of the buyer (centralized agency). There is the involvement of a middleman who contracts and recruits farmers for this type of farming. 
  • Multipartite model; in this model, an entire community or a collection of farmers enter into a contract with a buyer to purchase their stock at a pre-decided rate and a predecided quantity. This allows for flexibility among the farmers and a reduction of wastage due to improper storage of excess produced or penalty for low seasonal harvest.

How does Contract Farming help Indian Farmers?

Agriculture

The agricultural sector in India has not seen much development in recent years and the government has consistently been pushing for increased industrial development, often choosing to ignore the Indian farmer in favor of the Indian (factory) floor worker and factory owner. Contract farming is an efficient way to ensure that there is increased investment in the agricultural sector thanks to increased interest arising out of contractual farming. It also acts as a buffer in situations where there is an unprecedented and unforeseen decrease in the MSRP of most produce crops.

Most experts agree that contract farming generally tends to favor larger farmers more than smaller farmers, mainly due to the increased efficiency in operating and communicating with a single farmer. The recent bill allowing contract farming makes it possible to effect changes that experts on agriculture and the economy have been suggesting for decades; the consolidation of smaller farms. It was found in surveys that over 82.61% of the farms in India were under 2 hectares in size.

Why should Contract Farming not be allowed in India?

The most raised point in arguments against contract farming in India is the aggressive acquisition policies of larger companies that will adversely affect the farmer and agrarian population. Opponents of the contract farming idea strongly contest that aggressive land acquisition policies will render farmers penniless. Other popular arguments include the commercialization of agriculture with the use of high-tech machinery which will rob the jobs of hundreds of thousands of landless laborers and the reduced fertility of the soil due to the excessive planting and harvesting that contract farming requires to meet the quantities demanded.

In addition to this, recent acts released to facilitate contract farming in India are not very well thought through and often impose costs and restrictions on the parties, increasing the time and cost required to enter into a contract. This is especially difficult for smaller farmers who struggle to break even and make profits due to the competitive nature of the market. The opponents of contract farming in India contend that there are other and more effective government methods that can be implemented to better the economic situation of the farmers in India such as removing middlemen and improving access to credit facilities and sabzi mandis.

Model Act of 2018

Parliament of India
Photo by Mohd Zakir/Hindustan Times via Getty Images

In order to facilitate and legitimize contract farming in India, the Indian Government 2018 made the ‘Model Agricultural Produce and Lifestock Contract Farming Act’ which enabled all farmers to enter into contracts with various companies based on the provisions of the Indian Contract, 1872. The provisions of the 2018 act made it possible for the farmer to lease out land under their name legally to a lessee and receive in return from the lessee a fixed amount of payment for the land or a share in the profits of the harvest from the land.

In addition to this law, there was the enactment of the controversial Farm Laws of 2020 which dismantled the existing trade monopoly thus far enjoyed by the Food Commission of India (FCI) and the Agricultural Produce Market (APMC). This act was intended to relieve the farmers of middlemen and to make the process of the farmer selling to the end customer easier and more profitable for the farmer. Despite these various legislations there exists a stigma against contractual farming in India which stems primarily from the distrust people have towards large organizations and companies.

Should Contract Farming be allowed in India?

The decision on if contract farming should be allowed in India must be decided by a committee that has reviewed not just the previous laws surrounding contract farming but also after thoroughly considering all decisions and statistics surrounding farmers and their preferences, their landholding patterns, and bargaining power. Both arguments for and against contract farming have their own merits and can both be applied equally but the decision must be taken keeping in mind the future of agriculture in India and the evolving market situation surrounding the cultivation and sale of crops in the near future. There are little to no risks involved to the farmers’ livelihood through contract farming as even smaller landholding farmers can form unions and engage in multipartite contracts with companies and lease their lands to them. Similarly, larger farmers do have increased power and they also benefit from the efficiency of a larger farm making them more lucrative for the larger companies. The farmers’ market has the potential for larger investment and growth through the introduction of contract farming.

Conclusion

Contract farming is a type of farming in which companies or other large organizations enter into a contract with a farmer or with multiple farmers to grow a pre-decided amount of crops using the investment and equipment the organization provides. This act of growing the decided amount of crops or leasing the property to the organization for a fixed price is decided on or before the drafting of the contract. Contract farming is considered a lucrative option by many organizations interested in cultivating very specific crops on a large scale.

There are many types of contract farming, most of which are when there is direct contact between the farmer and the organization. The issues relating to benefits to farmers can be addressed by making sure that there are government opportunities made available at competitive rates with similar benefits to the opportunities presented by commercial contract farming. Contract farming promises to bring in new investment and new avenues to the agricultural sector in India and is capable of changing the way crops are grown in India but it must be implemented keeping in mind the statistics and the ground reality of farmers and land holdings in India.

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