Do Contract Farming Advantages Outweigh Concerns?

Contractual agreements between the farmers and agribusiness companies have gained immense momentum in many developing countries including India. Besides ensuring economies of scale, contract farming facilitates access to technology, capital and quality inputs for the farmers. Consequently, the arrangements hold much significance given that agriculture accounts for 16 per cent share in India’s GDP against its 4 per cent share in world GDP and 55 per cent of the country’s population is dependent on it. However, there are a number of business and legal challenges plaguing the commercial agreements between the sponsoring companies and the farmers. Enforceability of contracts by either party is a worrisome aspect that calls for immediate attention from the various stakeholders. The centre announced the Model Agricultural Produce and Livestock Contract Farming Act 2018 with a view to address such discrepancies. The primary purpose was to legi$mate contract farming in India which has been largely based on the provisions of Indian Contract Act 1872. AgroSpectrum India digs deeper into the contract farming landscape to uncover the complexities and benefits.

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Contract farming is not a new practice in India and has been in place since the early 1900s or earlier. During the colonial period, cash crops such as tea, coffee, rubber, poppy, and indigo were grown in various parts of the country, mostly through central, expatriate-owned estates surrounded by small outgrowers. Most such arrangements exploited small peasantry and resulted in indenture and alienation in some instances. The ITC introduced cultivation of Virginia tobacco in coastal Andhra Pradesh in the 1920s incorporating most elements of a fair contract farming system and met with a good farmer response. This was replaced by auctions in 1984.

The British East India Company used the contract farming model for the procurement of crops like jute and tobacco for export to the West, and post-Independence some crops were still grown and procured by both processors and mills under this mechanism.

The first and most significant push for contract farming in independent India, despite varying opinions among many, came in the late 1980s when PepsiCo was permitted to use the contract farming model for growing and procuring a special variety of potatoes for their famous “Lay’s” brand. Since then, there has been no looking back. Contract farming as a model has been used by several businesses to benefit both the corporates and the farmers. Currently, several businesses are using the contract farming model in India. While PepsiCo uses it for procuring potato in Punjab, Adani Wilmar uses it to avail groundnut and oil palms in Gujarat. There are also several brands of tobacco using the model for getting their business needs met. Contract farming is in use in the procurement of basmati rice, chili, and some horticulture products as well.

Two sides of the coin