In order to clear the way for contract farming in India, the government is planning a model law, which after getting finalised by the end of this year, would be sent to states so that they can formulate their individual laws. As agriculture is a state subject, the final call to enact law would be the responsibility of states. There is little doubt there is need for a law, which recognises contract farming as legitimate business and clearly defines the rights and obligation of both the farmers and private parties concerned, so that farmers get guaranteed price for their product. Contract farming has been a vexed issue for many reasons and some previous experiments, in the absence of any laid down law, have not borne the desired results.
There are two reasons why the government should push this law on an urgent basis. First, it would help contain the huge wastage in the agriculture supply chain. According to one estimate, more than 30 per cent of fruits and vegetable produced in the country is wasted because of grossly inadequate storage and transport facilities. The lack of storage facilities compels the farmers to sell their product at prices determined by middlemen rather than the market. There have been occasions when even the government goes back on minimum support prices, which it has promised. The hard reality is that in the last 20 years, the government has announced its intent to put in place a system of cold storages and build an eco-system that could take care of agriculture produce. But the fact is that nothing has happened. Overall, the returns in a standalone storage business are extremely low and uncertainty extremely high. Financial incentives given in the past were in form of tax concessions, which never translated in lower operational cost for standalone storage house. It is only when private companies have an interest in saving agricultural produce will they invest in storage and transport facilities, making the combined margins viable.
The second major benefit is that when corporate farming is introduced, a number of middlemen in the supply chain would be eliminated, leading to increased income for farmers. It would also ensure that the price of agro products do not witness a volatile spike that takes place due to cartellisation and hoarding by traders.
However, there is one aspect that the government should take into account while framing this law. Given the way landholding is structured in India, it is very likely that small or marginal farmers — whose numbers in India are huge — may not find a place in the contract farming structure. The fact is that landless farmers take land on lease from large farmers. These are informal contracts, under which either cash or part of the produce post-harvest, is paid to the big farmer as rent for the land. So a kind of contract farming system is already in place. What is required is a law, which recognises the right and obligation of both the landless farmer and the one giving his land out on rent. The moment this structure get a status under law, landless farmers will have access to formal credit, a direly needed reform. After all, it is the cost of credit, which makes the life of a landless farmer miserable in case of drought, driving many of them to suicide.