In the on-going debate on the best system of commercial farming, Shiv Kumar Gupta argues in favour of contract farming as against corporate farming

India is the third largest food producer in the world with an annual output of 601 million tonnes. It ranks second in horticultural production with 132 million tonnes and first in milk production with 78 million tonnes. But its share in the global agricultural market is hardly 2 per cent.

At the Agri-food summit 2001 that was recently held in Bangalore, all players concluded that there is an urgent need to increase this share to 10 per cent. The summit has identified contract farming as a vital element of policies aimed at raising the level of food processing in India.

Why is commercial agriculture?

Agriculture performance determines the growth of the Indian economy. Commercialisation of agriculture in India is critical:

Indian agriculture has all the three phases of agriculture development: Traditional agriculture with low energy, capital and input-output ratio/surplus; technologically dynamic agriculture with low capital intensity and low market integration and technologically dynamic agriculture with high capital intensity and high market integration.

Support	Benefits
Technology (seed/ equipment/ controls)	Increase productivity
Management Practices	Reduce costs/ better quality
Skills	Costing / information usage/ Using modern technology
Post-harvest measures	Add value/ cut losses in quantity/ quality
Systems	Contract forming / Networking

Farmers find commercial agriculture more attractive than traditional agriculture because the production is market-oriented and it is conducted on the principles governing any business. Moreover, there is achievement of predetermined rate of return on investment and business planning, investment, implementation, cost control, efficient marketing and continuous monitoring is essential.

The Indian farmer is a low cost producer but subject to many risks. All risks cannot be removed but the incidence can be reduced or compensated by providing the following, directly or indirectly through tie-ups and government schemes.

Corporates aren’t perfect

Corporates incur high overheads for productivity and quality. On the other hand, farmers have low costs, but low productivity and quality, and low access to market information, credit and systems. Success lies in combining the competitiveness of both.

Despite the corporate organisation’s appearance of universal suitability, it is not the only form of organisation that zealously pursues efficiency and competitiveness. It is one of many ways in which economic activity could be organised and operated successfully. There are other forms that are as efficient as incorporated business and perhaps more appropriate in particular circumstances.

India is a throbbing laboratory for conducting a myriad of businesses. Their characteristics differ from those of corporate organisations. Though they do not confer to a corporate structure, they account for a large part of the economy. What is more important their vitality drives purchasing power.

The National Agriculture Policy (NAP) announced in July 2000 mistakenly emphasises on corporate farming. It encourages the participation of the corporate sector through contract farming and land leases to allow technology transfer, capital inflows and assured markets and through collaboration between producer co-operatives. It also promotes the agro-processing industry.

Weaknesses in corporate farming

Corporate structures have evolved in response to size, complexity and risk. However, they have advantages and limitations. The limitations in the context of agriculture exceed the advantages. First, financial economics argues that managers may digress from corporate objectives for private gain. Such digression and the controls put in place to dissuade managers from digression impose significant costs. These are known as agency costs. Agency costs in agriculture are extraordinarily complex and tough to keep in check. There are numerous opportunities and the incentives to divert resources. For example, it is almost impossible to monitor rainy days; pest and insect attacks, topsoil erosion and the effect of gusty winds over every hectare of a large holding in order to objectively justify expenses. The unsuccessful foray by many companies into fishing, forestry and floriculture is a result of uncontrollable agency costs.

The control of agency costs and the maximisation of corporate objectives require a deft balance between centralisation and decentralisation. They require all manner of differentiation and integration and these two principal components of good corporate governance have yet to mature satisfactorily in some companies. Should Indian agriculture be exposed to the undesirable components of corporate governance?

Second, farmers who own land have important incentives to effectively manage the size, complexity and risks in agriculture. It is their asset and not merely a piece of equipment supplied by some company. It is their property and not that of a collective as in China in the past. Planners in China had argued that agriculture, like industry, had the potential to realise economies of scale over the entire range of its activities. This orthodoxy lasted for many years. A collective ethos reigned from the mid-1950s until the early 1980s. Far from economising on human labour and capital, the collective institutional framework wasted resources. The large size of collectives has lead to disenfranchisement and dispossession in different sections of society. The disenfranchisement and dispossession could be justified if the trade-off were in favour of uncompromising efficiency and competitiveness or if companies could operate comfortably as price takers. However, there is little justification at this time to bet on farming. Farm assets would be safer and more productive in the hands of farmers, small and big. They have the incentives to protect farming and to promote farming productivity.