Why Modi govt’s contract farming ordinance is a win-win for farmers, buyers & even traders

Illustration by Ramandeep Kaur | ThePrint

The ordinance on contract farming is part of the new legal framework for agricultural markets. It is in addition to the other two ordinances that amend the Essential Commodities Act and reduce the power of APMCs, with the aim of setting up a national market for food.

Called the Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance, it provides a framework for farmers to enter into direct contracts with those who wish to buy farm produce. So far, in most of the country, a farmer cannot directly sell his produce to consumers or food processing companies; he has to go through a licenced trader.

If a certain kind of potato was needed for potato chips, or a specific variety of oranges was more suited to making juice, or a restaurant chain needed a large quantity of mushrooms or asparagus, the company needed to go through a trader. It could not get into a contract with farmers to grow that particular item and buy it later at prices already agreed upon. This framework left the farmer at the mercy of the trader, who wanted to increase his own margins.

Solving the problem of APMC laws

State governments have the power to regulate agricultural markets and fairs. However, most APMC laws stretch this definition by designating ‘market areas’. A market area can range from a block to an entire district, and a farmer in a market area is compelled, by law, to sell his produce in the designated APMC market. He is prohibited from going to even the next APMC in the next district, even if it is nearer.

Some states allow farmers to sell to licenced buyers without bringing the produce to the APMC market. However, even when the APMC’s services are not used, farmers/traders often have to pay service fees to the APMC. This leads to uncompetitive practices. Traders find it easy to form cartels in these markets and offer low prices to farmers. Farmers are also left to the vagaries of daily price changes.

The ordinance changes this. From now on, any farmer may enter into a contract with any person or company to sell his produce. The ordinance states that APMC market laws will only apply in the physical space of the market, and will not govern transactions outside the market. No taxes or fees associated with any APMC can be levied on such transactions.

Farmers can lock in prices and buyers for their produce even before the harvest, and intermediaries can be assured of supply and price at the time of harvest. It is a win-win solution for both parties.

While intermediaries play an essential role in meeting supply and demand, at present, the APMC law creates a monopoly profession which does not have to be competitive. This law removes the lack of competition from the intermediary/trader market. It does not prohibit intermediaries or discourage them in any manner. It does not do away with APMCs. However, from now on, they have to compete with other buyers to provide better services or prices.

Boost for farmers

The law will allow farmers to contract with processors (or anyone) for quantity, quality and price. It can be a large processor like PepsiCo, or a single restaurant interested in a steady supply of vegetables and organic lentils.

Since the ordinance (in addition to other ordinance on the Essential Commodities Act) exempts intermediaries from stock limits for contract farming, it will give comfort to large organisations to participate in contract farming. It may also encourage smaller traders to expand capacity.

Attracting larger and more numerous buyers for farm produce will increase competition in favour of farmers. These steps will be critical to establishing a national market for agricultural commodities.

The idea of contract farming is not new; some states like Punjab have attempted to encourage it through state legislation. Even today, in spite of multiple legal hurdles, the small scale of contract farming in India is playing a positive role for farmers.

The agriculture ministry had released a model law to govern contract farming in 2018, but it was a little too prescriptive. It allowed contract farming, but only in notified commodities; the price was determined by government rules; and each contract had to be registered with a district authority. In contrast, the ordinance allows contract farming in any agricultural product, leaves pricing to the parties, and allows for a central e-registration of contracts.

Potential for govt interference

While the ordinance is a positive move towards freedom of contracting, it leaves the potential for government interference in two areas: Executive adjudication and suo motu litigation. These need to re-evaluated when the ordinance is tabled in Parliament to become an act.

Instead of using the regular judiciary for dispute resolution between parties, the ordinance delegates dispute resolution to the executive (sub-divisional magistrate), who will not be bound by rules of procedure. This gives the government more powers than the parties in the case. That would not happen if disputes were required to go to the judiciary.

The ordinance also creates a window for reintroducing government interference by giving the executive powers to adjudicate disputes through suo motu cases. These are cases where neither of the parties to a farming contract has raised a dispute, but the authority still can enter into the contract and make changes. This violates a fundamental principle of contract law: If the parties to a contract are not complaining, third parties should not interfere in the contractual relationship (called ‘privity of contract’). Violating this principle undermines the commercial relationship between the parties. If the government intervenes in contract farming agreements frequently, buyers may back out.

The 1991 reforms saw a fundamental shift in the legal approach to industry and services. A whole host of laws of the licence, permit and inspection raj were withdrawn, and more freedom was given to the participants. Today, we can see the benefits of freedom.

Sadly, the agricultural sector did not get those freedoms. The participants in this sector still live in the old legal regime. The ordinances are a welcome step in giving freedom to farmers to sell their produce without restrictions.

Ila Patnaik is an economist and a professor at the National Institute of Public Finance and Policy.

Shubho Roy is a researcher at the University of Chicago.

Views are personal.