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Contract farming ordinance isn’t enough

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The present government passed an ordinance, “The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance, 2020“. To give a context, contract farming is an agreement between the producer and buyer for the future purchase of the goods produced at the agreed-upon price and quality. Contract farming is existing in India for a long period of time but the recent ordinance can be viewed as means of legal backing. Even before this ordinance, many states have passed a law concerning contract farming. 

Policymakers argue that contract farming has not picked in India because the farmers were allowed to sell only to licensed traders. These licensed traders were largely APMC, and thus other players in the market were not able to enter into contract farming. This problem was existing in India from the 1950’s, and the APMC was initially set up by the government across the country as guidance to the farmers to market there produce. But the result was that APMC turned into a monopoly and controlled the price of the market in India.

To solve this issue government came up with multiple ordinances and even the recent ordinance on contract farming was aimed at infusing more capital into this sector. There are two main problems that are still unaddressed for contract farming to pick up in India.

First is that the central government has successfully made the ordinance, but they have to convince the state government to implement this at ground level. The traders who are part of APMC have a lot of political influence, and thus whenever the state government comes up with a law to modify APMC rules, there is a huge backlash. They not only have political influence but also have the market power since they control more than 90% of the market in India. Pareto rule can be applied to these traders as 20% of the trader’s control 80% of the wholesale market in India. Thus the voice of this handful of traders is so loud, and even state governments are bound to listen.

Second is that the contract farming is not business-friendly in the way it is drafted. Contract farming largely protects the farmers and not the buyers. When a corporate company enters into a contract farming with farmers, they agree upon many rules based on the price and quality. Farmers demand all the produce grown in the particular set of land to be procured by the buyer as a part of the agreement. The logic for such a claim is that if the farmers break the relationship with APMC and enter into an agreement with corporates which is willing to take a fraction of produce, then the farmers won’t be able to sell the rest of his produce anywhere. Thus, the farmers demand the corporates take entire produce from a particular piece of land under contract farming. But corporates are uninterested in contract farming because,

  • When the price of the goods in the market high compared to the agreed-upon price with corporate, then the farmers will try selling their produce to the market and convey to corporates that there was a crop failure
  • When the price of produce is less in the market than the contract price, then the farmers will buy extra produce from other farmers at the market price and sell it to corporates. Farmers say the reason as bumper crop and demand the corporate to procure all the goods according to the contract.

The above two arguments are valid only when there is a demand for the farmers’ produce. Thus there is a risk of the above two problems with local vegetables and fruits. But PEPSICO is successful in contract farming. PEPSICO enters into contract farming with farmers for producing a special variety of potato, which can be used only for making chips. These potatoes have different price and quality compared to local potato. Thus, they don’t have any demand in the market, and therefore the farmers can’t use the above tricks in this contract. Therefore from the business angle, contract farming is not profitable and sustainable.

For policymaking, it is important to listen to all the stakeholders, but the government has failed to take into consideration of the business community. Relaxing the regulations on APMC and drafting rules for contract farming alone is not enough. The government has a bigger role to play on the implementation, which has a lot of operational difficulties.

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