Contract Farming in India Rural Economy

The process of Contract Farming in India Rural Economy is a new concept. The
process of contract farming involves cultivating and harvesting for and on behalf
of big business establishments or Government agencies and forwarding the
produce at a pre-determined price. In return, the contracted farmers are offered
high price against their farm produce. The role of contract farming in India rural
economy is becoming more and more important, since organized farming
practice has become the need of the hour in the world of rapid industrialization.
The rapid industrialization process in India has created shortage of farmland,
which in turn has necessitated organized farming practice in India.

The process of contract farming in India involves scientific and optimum use of
land and farm resources for maximum output of agriculture produce. Small
time farmers practicing primitive agricultural methods for cultivation and
harvesting of crops dominate the Indian agriculture sector. But, with the
liberalization of India economy, there has been a sudden spurt in contract
farming in India. Moreover, today more and more established business houses
are taking interest in the business of contract farming in India. This has
happened as a result of rapid growth of retail industry in India. The growth of
retail industry in India has propelled the growth of farm retail in India, which
caters fresh vegetables and fruits from the farms to the Indian mass. The
process of contract farming in India involves, engaging rural Indian farmers for
the cultivation of agricultural produce under strict government policies. The role
of Contract Farming in India Rural Economy involves government and private
participation along with the rural workers. Further, it engages a good number of
farmers and other rural workers to discharge other agriculture related activities.

The Indian institutes engaged for marketing agricultural products under contract
marketing are as follows -

• Karnataka State Agricultural Marketing Board

• Krishi Maratavahini
• Madhya Pradesh State Agricultural Marketing Board
• Maharashtra State Agricultural Marketing Board, Pune
• Meghalaya State Agricultural Marketing Board
• Orissa State Agricultural Marketing Board, Bhubaneswar
• Punjab State Marketing Board
• Rajasthan State Marketing Board
• AP Agricultural Marketing Board
• Domestic & Export Market Intelligence Cell
• Tamil Nadu Agricultural University and Agri Marketing Board
 • HP State Agricultural Marketing Board

The main agricultural products of India under the process of contract farming
are as follows -

• Food Grains - Rice, Wheat, Pulses, Cereals, Corn, Maize, Rice Bran
Extractions, Sorghum, Soy meal, Suji, Parmal, Lentils, Jowar, Bajra,
Chick pea,
• Fruits & Nuts - Cashew Kernels, Cashew Nut, Cashews, Almonds, Roasted
Dry Fruits, Peanuts, Groundnut, Walnut Kernels, Walnuts, Indian Peanuts,
HPS Groundnuts
• Fruits - Bananas, Beans, Cherry, Cucumbers, Dried Fruits, Dried Truffles,
Carrots, Lemon, Mandarins, Mango, Meslin, Shallots, Apples, Asparagus,
Grapes, Oranges, Gherkins, Turnips, Oranges, Papaya, Pineapple,
• Vegetables – Potatoes, Bitter gourd, Stripe Gourd, Pumpkin, cauliflower,
Cabbage, Tomato, Onion, Green Pepper, Drum Sticks, Lady's finger,
Banana, Papaya, Spinach, Cucumber, Mushroom, Mushroom Spawn,
Radiata, Seeds, Buds, Plantation & Related Products - Basil Seed, Cumin
seeds, Dill Seed, Buds, Celery Seed, Hybrid Seeds, Sesame Seeds,
Sesbania Seed, Sunflower Seeds, Mustard Seeds, Oil Seeds, Plant
Products, Plantation, Plants, Psyllium Seed, Fennel Seed, Fenugreek
Seed, Herb Seeds, Tamarind Seed, Vegetable Seeds
• Spices - Black Pepper, Chilly, Cinnamon, Cloves, Coriander Powder,
Cumin, Dry Ginger, Dry Red Chilly, Cardamom, Anise, Salt, Pepper,
Fenugreek, Clove, Ginger, Turmeric, Turmeric Powder,
• Tea & Coffee - Black Tea, Coffee, Coffee Beans, Darjeeling Teas, Assam
Teas, Instant Coffee, Leaf Coffee, Leaf Tea, Packaged Tea, Green Tea,
CTC Teas,
• Tobacco & Tobacco Products - Betel nut Leaves, Betel nut, Bidi Leaves,
Chewing Tobacco, Arecanut, Snuff, Opium, Pan, Jute, Tobacco, Rubber
etc

The acts and rules that governs the process of Contract Farming in India Rural
Economy are as follows -

• Agricultural Produce (Grading and Marking) Act, 1937 as amended in

1986.
• Agricultural Produce Grading and Marking Act, 1937
• Schedule Appended to AP (G&M) Act 1937
• General Grading and Marking Rules, 1988
• Commodity Grading and Marking Rules
• List of commodities whose Agmark Grade Standards have been covered
under AP (G&M) Act 1937
• Manual on Standards of Paddy
• Manual on Standards of Wheat
• Manual on Standards of Maize
• Manual on Standards of Mustard and Rapeseed
Pros and cons of contract farming
Farmers in India are all set to see a sea-change in agriculture sector soon, thanks to
contract farming. Winds of change are blowing across the Indian agricultural landscape with
the advancement of contract farming. While earlier it was limited to a certain small initiatives
by the corporate sector, it is likely to become a norm rather than exception, thanks to the
entry of business giants like Reliance and ITC and also because of the encouraging
change in the government policies. The size of agreements for contract farming with the
farmers is also increasing manifold. The central government is so serious about the issue
that it is mulling a contract farming policy for India.

Recently, Union Agriculture Minister Sharad Pawar said contract farming is emerging as an
important institutional arrangement in India that promotes coordination between production
and marketing activities. "The main issue is to upscale contract farming. This will require
both public and private sector investments in roads, cold chains, electrification and
processing," he pointed out. The minister added that the government's main concern is that
smallholders are not left out in the process. He also asked agro-business firms to integrate
farmers on their supply chains through institutions like cooperatives, producers' associations
and contract farming. Pawar made it clear that the contract farming model that to be
implemented in India will ensure that land is permanently owned and cultivated only by
farmers. "We are not encouraging a model of leasing land and allowing the private sector to
acquire it for cultivation," he said. He also disclosed that the Centre is encouraging farmers
to form grass-root level associations or informal cooperatives owned and managed by
farmers themselves or producer companies.

While the corporates will have us believe that contract farming is the panacea for all the ills
affecting the agriculture sector in the country today, it remains to be seen whether it really
turns out to be so.

Contract farming involves a pre-agreed price between the company and the farmer. The
agreement is defined by the commitment of the farmer to provide an agricultural commodity
of a certain type at a time and a price and in the quantity required by a committed buyer,
mostly a large company.

It is clear why the business sector is gunning for contract farming. They seek to integrate
the supply chain to ensure timely availability of quality and quantity of raw material.
Significantly, it also reduces the procurement cost for them by doing away with the
middlemen. It leads to significant gains for them, as not only do they get the raw material as
per their specific demands, the cost is also much less.

It is also believed that the participation of the corporate sector in the farming segment will
play a crucial role in technology transfer, capital inflow as well as lead to assured markets
for crop production.

PepsiCo was the first company in India to start contract farming of tomatoes in Hoshiarpur
district of Punjab . Reliance Life Sciences, ITC (agri-business division) and McDonalds are
some of the prominent business giants, which have either started contract farming projects
already or are in the process of actively discussing them with various state governments.
PepsiCo and other companies have used the contract system for the cultivation of Basmati
rice, chilli and groundnut, as well as for vegetable crops such as potato.

"PepsiCo's involvement in Indian agriculture stems from its vision of creating a cost-
effective, localised agri-base in India by leveraging its access to world class agricultural
practices," PepsiCo spokesperson said.

Till today, PepsiCo India's project with the Punjab Agro Industries Corporation and Punjab
Agriculture University remains one of the most ambitious contracts farming projects in the
country. "The programme focuses on evolving agricultural practices to help Punjab farmers
produce crops that would make Indian products internationally competitive," says the
spokesperson.

What has been of crucial help to the business houses venturing into contract farming is the
amendment of the Agriculture Produce Marketing Committee Act in 14 states, which allows
farmers to sell their produce in open markets. This has opened the gates for the companies
to enter this segment.

The United Progressive Alliance government's 'approach paper' to the Eleventh Plan gives
clear priority to the development of contract farming. A working group set up by the National
Development Council has also made a set of proposals to promote contract farming. The
group suggests greater liberalisation of laws and rules for crop contracts. It has also
proposed tax rebates for food processing, duty-free imports of machinery and equipment
and liberalised imports of seed varieties for contract farming.
The model which is most popular in the country today is the one in which the contractor
supplies all the inputs required for cultivation, while the farmer supplies land and labour.
However, the terms and nature of the contracts vary according to the crops grown, the
agencies involved, the farmers themselves and technologies and the context in which
contract farming is taken up. Generally, a farmer's participation is limited to production in the
fields. However, in the present context, contract farming is clearly a win-win situation for
both the corporates and the farmers. Agriculture sector is facing a number of problems in
the country and farmers actually don't have many options in the matter of deciding whether
or not to go in for contract farming.

With rising debt and soaring seed and fertiliser costs, contract farming seems to be the only
choice left open to them. This is mainly because the company provides all the material
including seeds as well as technical know-how and there is also a guarantee of purchase of
the produce after harvest. In most cases, the minimum price of the produce is fixed in
advance. In the present scenario, the increasing number of farmers' suicides is seen as a
reflection of the fact that agriculture is no longer seen as a profitable venture.

This makes the economic security offered by the contract farming very attractive. The
detractors of the contract farming believe that far from being a panacea for agriculture
sector, contract farming is likely to increase the problems.

The main concern is that the land, which is currently used to grow staple crops like wheat
and rice, will be used to grow crops required by the food-processing industry, which also
has a significant overseas market. The switch to contract farming, therefore, leads to a rise

exports.

In fact, many corporates enter contract farming to fulfil their export obligations. It is believed
that contract farming would double agriculture exports from India to $20 billion by 2010.
Many believe that the rampant increase in contract farming will eventually lead to loss of
food security of the country, implying that the country might become dependent on imports.

"We are bound to lose food security considering the way the government is supporting
contract farming without thinking of farmers. The main thing is that farmers don't have any
role to play in contract farming except providing the corporates with labour and land. The
government should also take into account that the situation is very different in our country
as compared to other countries.

About 70 per cent of the population is dependent on agriculture. The government should
involve the farmers in policy making otherwise their concerns are likely to be left out," says
Dr Kishan Bir Chaudhary of Bharat Krishak Samaj, which claims to represent around 5,000
farmers in the country.

There is also a belief that it might also lead to the loss of natural seeds. Many times, the
crop required by the company is not recommended for that particular area. This can also
have negative implications on the quality of soil.

There have been numerous studies to examine the impact of contract farming on farmers.
Recently, Dr Sukhpal Singh of Indian Institute of Management, Ahmedabad .conducted a
study - 'Contract Farming for Agricultural Development: Experience of the Indian Punjab
and Northern Thailand'. He observes in his study, "Contract farming, in a political economy,
is one mode of capitalist penetration of agriculture for capital accumulation and exploitation
of the farming sector by agri-business companies."

But for farmers, this is a matter of survival. It is also because public institutions have failed
to provide farmers with the essential protection and support required for viability on a
sustained basis.

"Farming was hardly a profit making venture but thanks to the company people we also can
afford to have some self-respect now. Of course, there are problems associated with
companies also like if a crop doesn't meet their requirements they will not take it. For
instance, if they want chilli, it has to be a particular variety and it's not like anything will do,"
says Shirish Mane, who owns a 3-acre farm at Loni Khand village, about 20 kms from Pune.

Certainly, not all contract farming is bad for farmers. It can lead to sustainable cultivation
practices. However, there is a need for the government to step in and monitor the contract
farming practices.