Critically examine the issues with Contract farming in India and analyse to what extent the recently proposed model contract farming act can address such issues? (200 words)
Refer – Live mint
Enrich the answer from other sources, if the question demands.
IAS Parliament 7 years
KEY POINTS
Contract farming
· It refers to an agreement between farmers and marketing firms for the production and supply of agricultural products at predetermined prices.
· The contract between farmers and buyers insulates farmers from price risk, helps them develop new skills, and opens new markets.
Market failures faced by Contract farming
· Monopsony – Contract firms enter into an agreement with farmers to grow differentiated crops and this turns the firm into a sole buyer and farmers into price-takers.
· Contracting firms can exploit this situation to their advantage by offering lower prices to farmers.
· Information asymmetry – Contracting firms do not have complete information on productivity and land quality.
· On the other hand, farmers sometimes do not understand contract specifications like the quantity and quality to be produced.
· This can lead to a situation where farmers produce below-quality crops.
· Leak of technology – Farmers may indulge in side-selling or leak the technology provided by the contracting firm.
Provisions of the Model Contract Farming Act
· The department of agriculture and farmers welfare has now come out with a draft model contract farming Act, 2018.
· It proposes a state-level agency, the Contract Farming (Development and Facilitation) Authority and requires the sponsor and the farmers to register the contracts with a registering and agreement recording committee.
· Registration imposes additional procedures and costs on the parties, and small and medium farmers cannot easily afford these costs.
· The Act also proposes price protection for farmers by determining a pre-agreed price.
· When the state provides farmers a perverse incentive to not perform, it will be difficult for sponsors to incentivise the farmers to perform.
· The entire premise of the model contract Act seems to be aimed at creating a legal infrastructure to ensure that both parties honour the contract. This approach is flawed.
Way Ahead
· Instead it should correct the problems that lead to contract failures such as –
· Fostering competition by creating market-based incentives for both farmers and buyers.
· It should improve farmers’ connectivity to spot markets and mandis across the country. E-NAM (National Agricultural Market) is a great initiative in that direction.
· Maintaining an information repository of farmers and contracting firms.
· Facilitate the establishment and enforcement of standards for crops.
· Encourage softer means for enforcement – Incorporating risk-sharing mechanisms in contracts, incentive schemes, repeated contracting and renegotiation options, and simplified and transparent contract terms would help in contract enforcement.
· The government can educate farmers and make them more aware about contract farming and model contracts.
