Business Government and Society: Assignment - 3

BUSINESS GOVERNMENT AND SOCIETY
Assignment - 3
Group 6
Section - A
Can we use contract farming to increase profitability in agriculture in India? Describe a challenge that you will face
and how you can resolve this?
Indian agriculture is mired in the problems of low viability and high volatility. Majority of the farmers in India are small
subsistence farmers with landholdings below 2 hectares. Further there is limited access to credit for working capital
needs. The lack of technology and know-how for increasing yields also plagues the Indian agriculture leading to low
productivity. On the market side, difficulty in accessing markets and high price fluctuations (volatility) for the final
produce leave them at the mercy of middlemen and moneylenders.
Contract farming involves agreements between farmers and buyers with obligations on the farmers to supply volumes
at specified qualities and on the buyers to accept all produce at a pre-agreed price. Generally, under this arrangement,
buyers i.e. typically big companies transfer to farmers cutting-edge technology and the know-how to grow high quality
crops with high yields. The companies provide the best varieties of seeds along with advisory services at all stages of
production. By getting access to technology and know-how, farmers get higher returns from agriculture as shown by
studies of tomato production in Punjab and Haryana which showed net returns under contract farming being much
higher than those under non-contract situations. It also provides enormous opportunities for farmers to transfer these
good agricultural practices to other crops they grow outside contractual arrangements. Importantly, as seen in the
case of potato farming in Jharkhand under BASIX and PepsiCo, companies provide initial working capital to the farmers
for buying seeds, fertilizers et cetera. The promise of assured payment, barring crop failures, encourages banks to lend
to farmers. Many state governments also see contract farming as an effective way to boost farm incomes. ICICI bank
and Madhya Pradesh government in partnership with Rallis started wheat contract farming with 250 acres and 50
farmers. Now, there are 15,000 acres under wheat cultivation illustrating the success of the project.
On the market side, contract farming provides guaranteed markets for farmers which reduces the market risks. Amul’s
big success in increasing supply of milk was because farmers knew that they had an assured market and thus could
invest in more cows and take up dairy work. Similarly, the volatility of market is challenged in contract farming as the
farmers now have a specified price and a buyer in the contract giving them assured returns (at least from the market
side) helping them strategically invest in production.
Challenges and Resolutions

A major challenge with contract farming in India is that there is no credible enforcement mechanism for contract
farming in India. There have been instances where the buyer has reneged on honouring the contract leaving the
hapless farmers again at the mercy of middlemen and cases of payments being severely delayed post procurement.
Conversely, as it happened in BASIX case, farmers also engage in side-selling and breach the contract when the open
market gives higher price than the contract price. There is threat of farmer leaking the technology to competitor
companies. Also, there is a fear of large MNCs monopolizing over small landowners leaving them vulnerable to
exploitation while on the other end, farmers might switch to competitors giving little incentive for the MNCs to invest
in increasing productivity of the farmers. State level legislation should be made for the regulation of contract farming.
Contracts should be made more transparent to give farmers higher bargaining power and legal protection from
exploitation. Government should educate farmers against side-selling as it can result in the termination of the contract,
ruin farmers’ reputation, and prevent them from engaging in mutually beneficial relationships with trusted buyers.
References
1) Contract Farming: An Approach for Agriculture Development, Indian Research Journal of Extension
Education, Special Issue (Volume II), 2012
2) Contract Farming for Agricultural Development and Diversification in Punjab: Problems and Prospects -
Sukhpal Singh, Indian Institute of Management, Ahmedabad
3) http://www.ncap.res.in/contract_%20farming/resources/16.1%20rcajain.pdf

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BUSINESS GOVERNMENT AND SOCIETY

Challenges and Resolutions

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