Ankur Aggarwal: Contract farming will give a boost to Indian agriculture

India is predominantly a rural economy. Agriculture and allied sectors presently employ almost half of the country’s total workforce. Development in agriculture is therefore one the most important pillars of socio-economic growth. While efforts are on to increase the emphasis on the modernisation of agriculture with corrective policy changes, the slowdown in agricultural growth in recent years is a cause of concern for our economists in the recent past.

Hands-on, process-oriented approach is needed to meet the challenges of the sector agriculture sector. The emergence of contract farming via revolutionary farm-firm linkages can create unparalleled value addition here. Following announcements by Finance Minister Arun Jaitley in this year’s Union Budget to create a new legislation as a part of the reform measures for agriculture, the NITI Aayog (erstwhile Planning Commission) is preparing an outline structure for the proposed Contract Farming Law, to connect farmers with all stakeholders.

Understanding the concept & models
Contract farming is defined as agricultural function carried out as per an agreement between corporates and farmers, where production and marketing aspects of one or more farm products are looked at in an integrated manner with partnership. When it comes to contract farming, in some cases, the farmer himself may agree to provide specified quantities agricultural products to the buyers, in others, quality standards are often determined by the purchaser up to a certain extent.

Here are a few models applicable with respect to contract farming in India:

Informal model is the most speculative one among all types of contract farming models; where firms engage in informal seasonal production contracts with smallholders with a risk of default profit or loss for both the promoter and the agriculturist. However, long-term relationships generally reduce the risk of opportunistic behaviour, and increase chances of meaningful yields.

Intermediary model is where the buyer subcontracts an intermediary collector or farm aggregator to produce and purchase the crop, provide embedded services and incentives to farmers and ensure quality assurance of the yield output.

Multipartite model can develop from previously existing centralised models, and involve various types of organisations such as statutory bodies, private companies, financial institutions, and third party service providers. It generally guarantees equity share schemes for producers, attracting investors to draw attention towards the food processing industry at large.

Nucleus estate model is where the company manages and oversees a plantation or production facility to supplement the production of smallholders and provide minimum throughput through the year. This approach is mainly used for tree crops such as oilseeds and rubber.

Challenges and opportunities
The critical issues plaguing Indian agriculture, at present, are lack of knowledge and infrastructure deficit, limited artificial irrigation facilities, high cost of agricultural inputs and modern technological interventions, small and fragmented landholdings, and so on. Embracing sustainable practices such as contact farming can help productivity enhancement and fortify the food security of the nation over the long term. However, like any other business contract, there are a number of risks and limitations associated this type of farming, notably extra-contractual marketing (farmers selling to a buyer other than the person with whom they are holding contracts), discrepancies arising from legal frameworks, unrealistic expectations creeping up from enterprises on the capacity of output.

While challenges are many, new-age information and education disseminated through regular training sessions can provide a big fillip to agriculture in the country. This, along with the presence of support infrastructure and innovative marketing, and private enterprises, can play a big role in improving things. With ever-increasing constraints on the supply side, it is important to highlight that the private sector, especially agrochemical companies that possess an understanding of the market scenario, have the potential to offer long-term solutions for the agriculture sector, which include financial interventions and on-ground delivery mechanisms.

In recent years, contract farming has been successfully used for agricultural production enhancement in many developing countries. The concept must not be viewed merely as a business proposition, but an effective tool to solve multiple market access and input supply problems faced along the entire agriculture value chain.

Over the long term, this method of farming can help farmers substantially in raising the supply of farm inputs, land preparation, intelligent crop rotation, soil management, water conservation, and last but not the least -provide invaluable technical expertise-based advice and knowledge to rural communities. However, willingness to collaborate and share information are the key pillars to success here, and all the stakeholders need to come together in an integrated manner to achieve meaningful outcomes and reap best benefits at different stages, including supply, production, processing, trading, marketing of crops, and so on.

Way forward
The government's National Agricultural Policy envisages promotion of private participation via contract farming and land leasing arrangements. Fast-track implementation of contract farming in India could be the new ray of hope in the coming years for the agriculture industry. Once this is executed, accelerated technology transfer and capital inflow is expected to penetrate and an assured market for crop production (especially of oilseeds, cotton, and horticultural crops) will grow.

In fact, contract farming is expected to become the new buzzword in agriculture in the months to come. It will safeguard the interest of small and marginal farmers, which in turn, could lead to a complete makeover of the agriculture industry in India.