Specialise, integrate and contract

Farmers are better placed and better motivated to manage the size, complexity and friskiness of farming. Farmers face attractive incentives and forbidding disincentives that naturally bond them to good farming practices and to the maximisation of their incomes. Their private and public gains from such practices are identical, and that is critical to India’s prosperity.

They would do better if their activities could be unbundled to promote specialisation and out sourcing and they are by capitalist agriculture, where farms rarely involve more than three or four workers.

Most Indian farms are small and managed by three or four workers belonging to the owner’s family. Should India forfeit a set of matchless advantages?

Third, corporate farming that involves the permanent transfer of ownership of land to companies would certainly lead to disenfranchisement and dispossession at lower levels of society. Outsourcing of activities related to pre-sowing, sowing, post-sowing and post-harvest stages would not lead to undesirable fluency costs. The costs and risks of poor judgement would yet be borne by farmers despite the outsourcing to specialists, and that too is critical to India’s prosperity.

Procurement, processing and marketing of produce are key services that could be provided by the private sector. Contracts integrate the activities of farmers with specialist suppliers of efficient services. The success of the model depends on a responsive legal framework and institutional support for contracting. The legal framework for contractile is critical to India’s prosperity

Enfranchisement 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 corporate farming. Farms would be safer and more productive in the hands of farmers, small and big. They have the incentives to protect farming assets and to promote farming productivity.

Agriculture in India is not just industry but a way of life. The social aspect, especially employment provided by the sector, is something we cannot ignore. Corporate farming cannot be an answer to problems faced by the country’s agricultural sector. It needs be promoted through small growers rather than corporates undertaking large-scale farming on their own.

What is required instead is contract farming wherein corporates enter into arrangements with farmers to supply crucial farm and management inputs and buy-back the produce, resulting in a win- win situation for the producer as well as the industry. The challenge before us is how to disseminate technology to the two hectare, two acre, two bigha farmers.

Forward contracts have strengths

The expert committee on agricultural marketing, chaired by Shankerlal Guru, has correctly asserted that contract farming is impossible without forward contracts. If farmers and corporate processors and marketers have to make contracts before harvesting, they have to necessarily enter into forward contracts. Neither ready contracts nor futures contracts enable them to achieve those economic objectives that are best served by forward contracts.

But forward contracts in many commodities are prohibited while futures contracts in some commodities are permitted. Futures are merely a subset of forward contracts. The forward markets commission has an excellent idea of the need to reform the forward contracts (Regulation) Act, 1952. Futures are impersonal contracts traded on exchanges. They are standardised contracts. They provide no scope to a farmer to grow such a variety of produce that the corporate buyer’s customers want and yet hedge against price risk. They provide no scope to a corporate buyer to choose particular farmers because they grow varieties that best serve the corporate buyer’s customers. Futures play no role in nurturing supply chains comprising farmers, corporate and customers. Commodity forward contracts nurture partnerships, and supply chains comprising farmers, corporate processors and customers.

Powerful combination

Contract farming and forward contracts form a powerful combination that can be put to use by the government, the private sector, small farmers, big farmers and the wholesale trade to unleash new forces that serve the economy. The combination would bring about the hearty involvement of people who have hitherto been inadvertently excluded from nation building. Contract farming and forward contracts would improve their commitment to and ownership of nation building and simultaneously enable them to manage economic risks more efficiently and more equitably.