While the Centre’s move to legalise contract farming is welcome, the new law must address issues related to growers’ security, monopsony market, farmers’ production risk, and registration of contracts
On May 15, the Centre came up with three major agricultural reforms as part of the efforts of the BJP Government’s Atmanirbhar Bharat Abhiyan to boost the economy, hit by the global spread of the coronavirus pandemic.
One of the major reforms, announced by Finance Minister Nirmala Sitharaman, is the Centre’s plan to bring in legal provisions to help farmers engage with processors, aggregators, large retailers and exports. According to the Centre, this move will provide the much-required impetus to contract farming. This has generally been welcomed and is seen as one that holds hope for Indian growers.
Contract farming is not new to this country. It was attempted two decades ago and ran into problems. The best example of the troublesome past is the contract farming agreement that three Coimbatore-based private textile mills, led by Super Spinning Mills, entered into with cotton growers in 2005. According to the agreement, farmers in Tamil Nadu were to produce extra-long staple cotton on 42,500 acres for these three firms.
While cotton for Super Spinning was to be grown on 20,000 acres, the natural fibre was to be cultivated on an equal area for Royal Classic Mills. Cotton for Appachi Cotton Company, the third firm, was to be grown in another 2,500 acres.
The agreement, for 2005-06, was a tripartite one with the Tamil Nadu Government being the third party. The State Department of Agriculture was to act as the coordinator of the programme, while the Tamil Nadu Agricultural University agreed to render research and development support.
The programme looked promising but ran into trouble due to inherent problems in the agreement. The buyers never spelt out the specifications for the fibre they required and didn’t come forward to buy the cotton when the crop was ready for harvest.
They finally told the growers that they could sell the cotton to whoever they wished to. There are also unconfirmed reports that farmers sought a higher payment as they felt market prices were higher. Similar experiments in Punjab and Haryana failed as farmers were offered lower “contractual” prices.
Currently, there are some corporates that have launched outreach and extension initiatives to try contract farming in a different way. Technically, these initiatives are not contract farming but they show how farmers can meet the needs of the user industry.
Kolkata-based multi-national conglomerate ITC Ltd has a Value Chain project for wheat and chilli, helping farmers to produce food-safe products such as chilli, maintain soil health, save water besides training them in other agricultural practices such as growing seedlings in trays, integrated pest management and post-harvest management.
Growers have no obligation to sell their produce to these corporates, but they offer it to firms such as ITC. This is because they get a premium over prevailing market rates for their products.
In addition, giving their produce at the farm gate saves them the trouble of having to transport it to the nearest agriculture market and spend hours to sell.
It is a win-win situation since the farmers get a premium for their product, while the corporate firm gets a product that caters to the niche and export markets.
The Union Government’s decision to come up with legal provisions to help farmers directly sell their produce to the user industry, large retailers and aggregators is a welcome move. But the Centre has to address a few issues in its legal provisions to overcome the shortcomings of the previous experiments.
First, the government will have to include provisions that will ensure security to the growers. This would require buyers and users to enter into a long-term contract that will ensure additional investments to help improve productivity and quality.
Second, monopsony has to be avoided in contract farming since one company entering into an agreement with a large number of farmers puts the growers at a disadvantage.
Third, the contracts should cover farmers’ production risk. Earlier, the agreements protected the company’s interests rather than the growers.
Fourth, the Centre should have provisions for registration of contracts with an authorised agency — something that had been lacking all through. The agency can also check the track record of the firms that enter into an agreement to ensure that growers are not affected by companies that spring up overnight.
The government has already come up with a model Act on contract farming which has provisions to deal with disputes from the lowest level to a high appellate authority. The Act has specified time limits to resolve disputes.
The Centre could well dust the model Act from the shelves and give it the necessary tweaks that will, per se, protect the interests of all, and more importantly that of farmers.
The Centre also stands to gain if it takes a look at the Agricultural Produce and Livestock Contract Farming and Services (Promotion and Facilitation) Act that was passed by the Tamil Nadu Assembly on February 14 last year. The Act has many salient features.
The writer is Executive Editor, Swarajya