Modernising Indian Agriculture:

The Role of Contract Farming

 Policy Questions for Resolution
A) How to mitigate the various risks namely crop failure, dominant role
by firms in price fixation, rejection on the basis of quality, payment
delay associated with contract farming?

B) What are best ways to actively involve small and marginal farmers in
contract farming system?

C) Workout an effective mechanism to prevent the situation of either

parties (firms or farmers) breaking away from the contract?
 How to mitigate the various risks?
Crop failure: Crop insurance, Use only part of the land to
cultivate contracted crop, Engage with farmers throughout crop
cycle.

Dominant role by firms: Allow farmers to enter into contract

with one or more firms, Encourage contract for minimum period of
one production cycle, Give farmers the power to fix prices together
with firms, Prohibit firms from raising permanent structures on the
farmers’ land, Mandate use of only electronic machines for
weighing of produce, Restriction on transfer of rights, title
ownership or possession for the firm, Recover loans only thru sale
proceeds of the produce rather than by way of sale or mortgage or
lease of the land, Make firms to share windfall gains with farmers
Rejection of the produce: Set independent quality standards,
Allow parties to set their own standards or follow existing
standards, Allow independent bodies to devise and check quality
standards, identify a third party quality assayer, Establish
mechanism to prevent fraud during quality inspection, Levy
penalty on firm, Identify secondary market for the rejected part
of the produce

Payment delay: Make payment through bank or electronic

clearance immediately after sale, Charge penal interest if
payment is delayed beyond a point, Compulsory payment of
50% of amount at the time of delivery, and Advance payment.
How to include small and marginal farmers in CF system?

Make them to engage with firms collectively

Promote FPOs/FPCs for the purpose of mobilising

S&M farmers and engaging with firms collectively
Make use of local govts. & NGOs to guide the farmers
to engage with firms
Charge a small fee on the firms on contracted farm
produce and use the proceeds to train farmers and run
capacity building programmes
 How to prevent and/or resolve contract break?

Mandate that the party breaching the contract has to pay a

compensation or penalty
Organise meetings involving both farmers and firms to discuss and
resolve the various aspects of the contract.
Write contract agreement in local language and in a manner clearly
understandable to the farmer
Mandate written contracts. Invalidate oral contracts
Establish an independent Dispute Settlement Authority (so that the
parties need not have to take the disputes to normal civil court).
Give DSA power of civil court.
Alternative Dispute Resolution (ADR) mechanisms
Set up an official body to oversee the CF operations
 Other Suggestions
Avoid direct govt. involvement (e.g. Punjab)

Encourage start-ups/local players alongside corporates

Fiscal/tax incentives for firms (to incentive adoption

of CF and inclusion of small & marginal farmers)