In his budget speech [2017-18], finance minister, Arun Jaitley had announced union government’s decision to bring a model contract farming Act with the intent to protect farmers from price volatility by ensuring guaranteed price for their produce.
As a follow up, a draft legislation has now been released for comments from stakeholders including farmers. The latter have been given 30 days to give their suggestions. Thereafter, a final`model’ contract farming Act is expected to be released in November after incorporating the suggestions. This will serve as a guide for states to bring required legislation.
Because of the heavy dependence on rainfall [70% of the cultivated area is rain-fed and even for balance 30% under irrigation, rainfall is a crucial factor in determining the water level in reservoirs – main source of water for irrigated fields], the farm output is prone to wide fluctuations. Either a farmer gets bumper crop or he/she gets very little or nothing. In the latter scenario, anyway he meets with a disaster; even under former, his income is low due to low price realization from sales on the one hand and substantial wastage on the other.
The price realization in turn, is low because there is no one to buy the produce around the time it is ready for being disposed off/sold and farmer does not have the capacity to store even for a few days [the situation is all the more precarious for perishable items like fruits and vegetables]; nor he has the wherewithal to transport it to the nearest market/mandi within a short time frame.
The traders exploit these inherent vulnerabilities of farmers and buy their produce at throwaway prices often at rates which does not even cover cost of production. There are examples galore most recent being in Madhya Pradesh when farmers were forced to destroy tomato/onion in the fields or state having to procure [following demonstration/agitation] only to destroy the stocks as it had no space to keep.
In this backdrop, contract farming is a good idea in which agro-processing/exporting or trading units enter into a contract with farmers to purchase a specified quantity of any agricultural commodity at a pre-agreed price. Such advance agreement can be a great help in stabilizing the revenue stream of farmers especially those growing horticultural crops such as fruits and vegetables.
The contractual arrangement can go much beyond a commitment by agro-processing unit to pick up specified quantity at agreed price. It can incorporate investment by latter in technology, arranging quality inputs viz. seeds, fertilizers, pesticides and even provide management skills to increase productivity and reduce transaction costs. Indeed, this can be a great help in shielding agri-produce from shocks of truant weather and reining in post-harvest losses.
From the processors/traders perspective also, this is a good proposition as they get access to assured and un-interrupted supply of raw material [read: tomato/potato etc] at a definitive price. Besides, enabling certain projections about the cost of running the business, this also helps in maintaining supplies – both in domestic and international markets. Clearly, it is a win-win for both processors and farmers.
Therefore, it is good that the government has taken cognizance of the potential in this area and wants to put in place a law to regulate ‘contract farming’. A proper system of registration of contracts [that includes rights and obligations on both parties to the contract] with an authorized state agency and dispute resolution mechanisms is an absolute must. This is necessary for verification of sponsoring companies and ensuring that farmers are not taken for a ride. However, this by itself will not deliver.
The conditions on the ground have to be congenial for processing companies to enter into such contracts and invest on farm land for increasing and stabilizing crop production. For instance, they should have opportunity to sell processed food through their own retail outlets. The local laws viz. APMC [agriculture produce market committee] Act should make way for direct purchase of agri-produce from farmers. There has to be a well spread network of access roads connecting fields to storage centers. The storage, handling and quality testing facilities need to be in place in adequate measure.
The absence/lack of any of these will discourage companies from entering into such contract. This is because in such a scenario they will not be able lift the committed quantity [either due to provisions of the law viz. APMC Act or absence of road connectivity] or even if lifted, they won’t be able to sell; courtesy, restrictive policies relating to foreign direct investment [FDI] in multi-brand retail [in the budget for 2016-17, even as the government permitted 100% FDI in food retail, this has come with certain riders].
On the farm land too, considering that there is preponderance of small and marginal holdings [more than 80%], the much needed capital investment and technological improvements won’t be possible unless there is consolidation of land holdings. Again, for this to happen, there is need for amendment in the relevant laws.
To sum up, legislative enactment on contract farming alone will not be enough to achieve the intended result. For instance, Punjab had enacted a law in 2013 but it has so far not implemented it. Other states such as Gujarat, Haryana, Karnataka, Maharashtra and Madhya Pradesh have made amendments to their existing laws on ‘agricultural marketing’ for select crops. Yet, barring a few cases here and there, not much progress is seen in taking this forward.
While, the union government may come up with a model law on contract farming that all state governments can legislate, there is an urgent need for a ‘holistic’ approach to make it work. It should work on all relevant factors which enable farmers produce contracted quantity and at the same time, incentivize processors lift it. The center and states should also take all necessary steps to unshackle farmers from the extant controls so that they have the freedom to sell their produce.