Announcing the third trance of Modi government’s Rs.20 Lakh crore economic stimulus Finance minister Nirmala Sitharaman said that Center plans to come up with a legal framework to facilitate contract farming. This move is welcomed by all sectors considering the freedom it gives to the farmers. 

“A facilitative legal framework to be created for enabling farmers to engage with processors, aggregators, large retailers, and exporters fairly and transparently,” she said.

In contract farming farmers and buyers sign an agreement before the agricultural production, which involves quantity required and rate of the crop. India did experiments in contract farming two decades ago and ran into problems. 

In 2005, three Coimbatore based textile mills led by Super Spinning Mills agreed with cotton farmers. According to the contract farmers in Tamil Nadu were to produce 42,500 acres of the extra-long staple, the Tamil Nadu government was the third party in the agreement. 

This program at first looked promising but later ran into huge problems. The buyers didn’t specify the type of cotton they need at first and later reject to but the produce of farmers. Textile mills told the growers to sell the produce to sell the cotton to whomever they want. Unconfirmed reports pointed farmers asked for higher prices as the market rates were higher than what textile mills offered. 

At present few companies are helping farmers how they can produce agriculture products based on the industry’s requirement. Kolkata based ITC Ltd under its value chain project for wheat and chilli help farmers to produce chilli, maintain soil and save water. They train farmers to grow seedlings in trays, pest management, and post-harvest management. Farmers have no obligation to sell their products to corporates, they get premium over the market rates which is a win-win situation. 

Tamil Nadu is the first Indian state to pass a law promoting contract tracing called Agricultural Produce and Livestock Contract Farming and Services (Promotion and Facilitation) Act. This law ensures buyers to get assured supply at pre-determined prices. This law can be used to study for the new provisions the central government decided to introduce. 

The government should focus on addressing the limitations in the previous experiments in the new legal framework to provide a successful model for farmers. In its provisions, the government should ensure the security of the growers, which requires buyers and the farmers to sign long term contracts so productivity and the crop quality are maintained through proper investments. Often one single company tie-up with many farmers putting the growers at a disadvantage.

The contracts need to cover production risks, not just protect the company’s interest rates like in earlier contracts. Provisions for registration under authorised agency are important, so the agency can look up the track records of the companies who want to sign the deal with growers.