SPECIAL ARTICLE
India’s Contract Farming Act
Does It Serve Farmers’ Interest?
Sthanu R Nair, Reddy Sai Shiva Jayanth, Deva Prasad M
The Farmers (Empowerment and Protection) Agreement
on Price Assurance and Farm Services Act, 2020 is an
important legislative landmark in the context of Indian
agricultural policy. The major concerns relating to the
adoption of the contract farming system in the Indian
context are proposed to be resolved through the
enabling legislative measures proposed in the act.
This paper critically examines the various provisions
contained in the act to assess its potential in mitigating
the key concerns of adopting the CF practice in India.
The authors are thankful for valuable comments and suggestions from an
anonymous referee of this journal. Thanks are also due to Jainendran,
Ravichandran, Krishna Kumar, Babu Gopalakrishnan, P S Pradeep,
Siva Prasad and O S K Reddy for helping the authors reach out to the
stakeholders for conducting the interviews. The competent research
assistance provided by Issabella Jose, Mohammed Shahdab, and Anshi T
in writing this paper is acknowledged. The usual disclaimer applies.
Sthanu R Nair (srn@iimk.ac.in) teaches economics, Reddy Sai Shiva Jayanth
(reddys10fpm@iimk.ac.in) is a doctoral student and Deva Prasad M
(devaprasad@iimk.ac.in) is law faculty at the Indian Institute of
Management Kozhikode.
42
A
s part of the economic stimulus package to fight COVID-19
under Atmanirbhar Bharat Abhiyan, the union govern-
ment promulgated an ordinance named the Farmers
(Empowerment and Protection) Agreement on Price Assurance
and Farm Services Ordinance, 2020 aimed at providing a legal
and regulatory framework for protecting and empowering the
farmers engaged in the contract farming (CF) model of farming.
The ordinance was recently replaced by an act (hereafter the
CF Act) passed in Parliament amid protest from farmers groups,
opposition parties and an ally of the ruling government. The
CF model involves linking farmers with a known buyer (for
example, an agribusiness firm, an exporter or a retail chain)
through a forward contract in which the former promises to
supply a certain quantity of an agricultural product to the lat-
ter within a pre-agreed time frame subject to certain condi-
tions mutually agreed upon by the contracting parties (Eaton
and Shepherd 2001; Narayanan 2011; Singh 2002).
The adoption of CF practices across the world has proven
that the model has several advantages and disadvantages
(Dev and Rao 2005; Glover 1987; Wang et al 2014; Minot and
Sawyer 2016; Barrett et al 2012; Bellemare 2012). The key
advantages are the crop diversification; higher crop yield;
reduction in price uncertainty; better price and assured
market for farmers; increase in profit and income of farmers;
supply of quality farm inputs, including farm credit techno-
logy and scientific know-how to farmers; reduction in trans-
portation costs; growth of food processing industry; and inte-
gration of farmers into the industry and global market. Some
of the key disadvantages of CF practice are neglect of small
and marginal (S&M) farmers by firms,1 dominant role by firms
in price fixation, delay in making payments to farmers, non-
purchase of contracted produce on quality and other grounds,
manipulation of grading standards, breaking away from
contracts by either party, difficulty of legal enforcement of
contracts and lower long-term commitment among corporates
for rural development.
Though the CF model is currently practised in some states in
India, it is yet to gain stability and greater acceptability (Jain
2008; Narayanan 2011, 2012). While some states follow a liberal
policy in permitting CF, many others permit it only in select
farm products (Narayanan 2012). This is due to the cautious
approach of the state governments as they are concerned
about the drawbacks of the CF model. One of the best ways to
address the concerns is to provide an effective legislative
mechanism aimed at protecting and promoting the interests of
october 1, 2022 vol lVii no 40 EPW Economic & Political Weekly

the stakeholders—farmers and firms—involved in the CF system
(Narayanan 2011; Eaton and Shepherd 2001). A legal and regu-
latory framework could help in bringing more clarity among
the stakeholders regarding their role and responsibilities and
in reducing exploitative practices of firms (Viinikainen and
Caro 2018). The passage of the act on CF must be viewed in
this context.
The objective of this paper is to critically examine whether
the provisions contained in the CF Act are sufficient to address
the major concerns relating to the adoption of the CF system in
India. We followed a three-step procedure for addressing the
research objective. After conducting a systematic evaluation
of the CF Act, we framed the various provisions contained in
the act into questions, which were posed to five stakeholders
involved in CF system, namely farmers, firms, farmer producer
organisations (FPOs), aggregators, and government officials.
We conducted 16 in-depth semi-structured telephonic inter-
views with these stakeholders comprising four farmers and
firms, three FPOs and government officials and two aggregators.
We conducted the interviews before the ordinance came up for
discussion in Parliament. We ensured a pan-India coverage
to obtain findings that were more representative in nature.
Respondents were spread across Andhra Pradesh, Karnataka,
Kerala, Maharashtra, Tamil Nadu (TN), Telangana, and Uttar
Pradesh. The questionnaire contained a mix of close and open-
ended questions to elicit responses on various aspects of the
proposed legislation. It is pertinent to note that all the inter-
views had been conducted before the passage of the CF Act in
Parliament and the subsequent nationwide debate and resist-
ance among farmer groups and opposition parties that ensued.
Further, we took additional care in framing questions without
any direct reference to the corresponding legislation. These
two aspects of our interactions took care of any inclinations or
biases in the responses received.
Evolution of Regulatory Framework on CF in India
Though the system of CF is not new to India, the regulatory
restrictions prevailing at the state level came in the way of its
faster adoption. As per the Constitution, intra-state trading of
agricultural produce falls under the domain of the states.
Such trading has been governed by the Agricultural Produce
Market Committee (APMC) acts of respective states. The APMC
Act empowers the states to establish government-regulated
agricultural markets or mandis. The farmers could sell their
produce only through an auction at a mandi. The mono-
polistic practices of the traders and commission agents (TCA s)
involved in mandis have prevented new entrants in the trad-
ing of agricultural produce (Chatterjee and Kapur 2016; Singh
2017). To overcome this barrier, legal backing for the direct
procurement of farm produce from the farmers was sought
(Narayanan 2011).
In response, the union government introduced the Model APMC
Act (MAA) in 2003.2 This legislation provided a provision for
direct selling of the farm products by farmers to CF firms by
bypassing the mandis. The MAA was circulated to the states for
their implementation. However, the progress in the expansion
Economic & Political Weekly EPW october 1, 2022 vol lVii no 40
SPECIAL ARTICLE
of the CF practice under the provisions contained in the MAA
was slow due to two reasons. First, the MAA does not lay down
detailed guidelines for enforcing CF (Jayan 2017). It contained
a short chapter addressing only four procedural aspects
governing CF agreements but without necessary clarity.
Other aspects relating to the operation of CF were included in
an addendum on the model specification of CF agreements
without enough clarity and guidelines. As a result, the states
did not invoke the CF provisions in the MAA. Second, as per
the MAA, CF arrangement requires registration of the firm
with the APMC that oversees the functioning of mandis. How-
ever, the APMC lacked the incentive to promote CF because,
being a market player themselves, the TCA s faced the threat of
their business in mandis getting eroded (Singh 2017, 2018;
MoAFW 2018).
It is to overcome these lacunae the union government
drafted a new MAA for governing the mandis. This act left out
all provisions relating to CF under the MAA, thereby paving
the way for drafting a separate legislation on the subject of CF.
Subsequently, in consultation with various stakeholders such
as state governments, farmers’ organisations and industry,
the union government released a model CF Act named the
State/UT Agricultural Produce and Livestock Contract Farming
and Services (Promotion & Facilitation) Act, 2018 (hereafter
the Model Act) in May 2018 for adoption by the states (MoAFW
2018). The rate of adoption of the model CF Act was poor.
Only TN has enacted a CF legislation based on the Model Act.
Subsequently, in June 2020, the union government promul-
gated an ordinance to facilitate CF, which was passed by
Parliament as an act in September 2020. In consistent with
this move, Parliament also passed an act to allow farmers to
sell their produce directly to anyone outside the notified APMC
market yards.
The CF Act is a better piece of legislation unlike the MAA due
to four major reasons. First, enacting a new legislation on CF
could be a simpler policy option compared to tweaking exist-
ing agriculture laws as the latter could be politically difficult
(Viinikainen and Caro 2018). This is evident from the failed
experiment to promote CF by providing a provision for it in the
MAA. Second, a new and stand-alone legislation on CF would
provide more visibility and clarity for the legislation, make
interpretation of rules easier and more predictable, and be
easier to amend in the future (Viinikainen and Caro 2018;
Wehling and Garthwaite 2015). Third, as discussed below, the
CF Act addresses the key operational aspects of CF. Fourth,
among the parties involved in CF, the one at a disadvantage
and subject to exploitation is the farmer. The CF provisions
contained in MAA do not fully protect farmers’ interest, which
makes the CF Act relevant.
Analysis of Act Provisions
Absence of official body: Currently, there is no dedicated
agency to oversee and facilitate the operation of the CF system
in India. A dedicated agency could help in reducing uncertainty,
ensuring better contract compliance and dialogue between
43
SPECIAL ARTICLE
the stakeholders, and informing the policymakers about the
concerns of stakeholders (Barrett et al 2012; Viinikainen and
Caro 2018). In countries such as El Salvador and Costa Rica, a
CF regulatory framework enables setting up a national body to
guide the CF system (Viinikainen and Caro 2018). The CF Act is
silent in this regard.
Interestingly, however, the Model Act proposed setting up an
official agency at the state level, namely a Contract Farming
and Services (Promotion and Facilitation) Board, to ensure
effective implementation of various provisions of the act.
Among others, the board was required to (i) prepare a stand-
ard operating procedure to facilitate CF; (ii) initiate capacity
building programmes; (iii) take measures to popularise CF;
(iv) promote discussion between stakeholders; and (v) maintain
a management information system (MIS) of CF operations
(MoAFW 2018). In the absence of a broader institutional mech-
anism to effectively implement the provisions of the CF Act,
the chances of firms dominating the farmers remain high.
Importantly, three-fourths of the stakeholders including firms
surveyed by us concurred with the view that setting up of a
dedicated official agency would help the cause of CF in India.
The role of an official agency was found necessary by stake-
holders due to the need for handholding, providing financial
and technical assistance, preventing exploitation, integrating
verticals of agriculture horizontally, building confidence in
the CF practice particularly among farmers, and bridging the
distrust between firms and farmers. The farmers suggested
that it would help if they are provided a representation in the
proposed official body.
It may be a concern that the involvement of an official agency
could result in a rigid system with bureaucratic control over
the working of the CF system thereby resulting in a lack of
flexibility. This is a very valid concern. For instance, the direct
involvement of Punjab Agro Foodgrains Corporation, a nodal
agency set up for promoting and coordinating CF in Punjab,
by way of providing seeds and buy-back arrangement through
its tie-ups with the firms did not benefit the farmers (Kumar
2006). Sharma (2014) also found that farmers in Punjab prefer
no role for the government in the CF system. Therefore, the
role of the official agency should strictly be a facilitator rather
than a promotor of CF system. Interestingly, the powers and
functions of the board specified in the Model Act do not pre-
scribe a direct role for it in the working of the contract. Half of
those who favoured setting up of an official agency in our
survey preferred a facilitative role for it, while the rest were
divided between promoter and both roles. A specific example
of an agency a la National Dairy Development Board (NDDB)
was proposed to play the role of a facilitator. Some of the
specific roles suggested for the facilitator by the stakeholders
include providing training and market opportunity for farmers,
ensuring that the CF processes are rightly followed, horizontal
integration of various vertical of agriculture, and building
trust between farmers and firms. Most importantly, three-
fourths of the stakeholders suggested direct government in-
volvement only when there is a conflict or non-compliance
with the provisions of a CF law. Government was suggested to
44
play a “minimal role,” including by farmers for the expansion
and smooth conduct of the CF system.
Smallholders and NGOs: Internationally, the issue of small-
holder participation in CF has gained attention among the
policymakers aiming at rural development and poverty reduction
(Paglietti and Sabrie 2013; Barrett et al 2012). Though evidence
show that smallholders in developing countries benefit from
CF (Elepu and Nalukenge 2009; Reardon et al 2009), a major
concern is that firms largely ignore such farmers (Kumar and
Kumar 2008). The firms prefer medium and large farmers to
achieve economies of scale and avoid the difficulty of engaging
with many smallholders (Glover and Kusterer 1990). Currently,
more than 86% of agricultural households in India fall under the
S&M farmers category. This is a significant constraint for adopt-
ing CF practice in India.
One viable option to overcome this constraint is to bring
S&M farmers together through a collective mechanism for
engaging with the firms. The CF Act has opened the avenue
for collective engagement among farmers with a provision to
engage aggregators3 including FPOs as a party to the CF agree-
ment. This is a welcome move because farmers could reap sev-
eral benefits by engaging with CF firms through an aggregator
or FPO. They include better access to firms, agri-inputs, train-
ing, institutional credit and technology; greater bargaining
and marketing power; lower transaction cost; greater ability
to challenge contract breach by firms; availability of support in
times of crisis; higher economies of scale, price realisation and
income; and social learning (Shaffer 1968; Barrett et al 2012).
For firms engaging with aggregators and FPOs would be
beneficial in terms of better contract terms and access to farm
produce and lower transaction costs and supply uncertainty
(Bachke 2010; Viinikainen and Caro 2018). Empirical studies
have found that farmer groups and cooperatives can play a
positive role in encouraging smallholder participation in CF
(Ashraf et al 2009).
Over 80% of the stakeholders surveyed in this study were of
the view that collectivisation of farmers, including through
the FPO route, would help S&M farmers to enter into CF system
and perform better under it. Three-fourths of the firms and all
the farmers and government officials concurred with this
view. A majority of the stakeholders (over 60%) opined that
transacting collectively would not be a problem to sell even
specialised crops because ultimately what matters is the un-
derstanding between the farmers constituting the collective. If
they are aligned to a common programme, things would work.
An interesting insight made in favour of promotion of FPOs
was that in their presence, it would be easier to convince the
farmers on government policies and laws relating to the CF.
The support for promoting FPO involvement in CF through a
mechanism under a CF law was huge among the key stake-
holders due to the expected benefits from entering into CF
through the FPO route.
In addition to FPOs, non-governmental organisations (NGOs)
can also facilitate CF practice in some ways (Barrett et al 2012).
First, they can help the farmers with the guidance to enter into
october 1, 2022 vol lVii no 40 EPW Economic & Political Weekly

CF arrangement with firms, the supply of agricultural inputs
and productive assets, and technical training. Second, NGOs
can help the formation of FPOs as seen in many countries such
as India, Nicaragua, Mozambique, and Ghana. Third, NGOs
can identify the poorest farmers and equip them to supply
quality agricultural produce in adequate quantity. Evidence
shows that NGO operation in an area positively influences the
farmers’ decision to stay with FPOs and the firm’s decision to
buy agricultural produce (Bachke 2010). Though the CF Act has
no explicit provisions for NGO involvement in the CF system, it
does not disallow the same. In this regard the act has taken a
more open-ended approach. From our discussion with the
stakeholders, it was evident that most of the NGOs involved in
the farming activities in India are slowly transforming into
FPOs. Therefore as the CF Act has a provision to engage FPOs,
by default, the space for NGO interventions in the CF system
has been provided. Importantly, over 80% of the stakeholders
we surveyed believed that NGOs could help the farmers to
enter into CF and in forming FPOs.
Credit and quality standards: Access to credit and insurance
is one of the important factors determining the feasibility and
attractiveness of CF participation for farmers (Dev and Rao
2005; Barrett et al 2012). The CF Act addresses this requirement
with a provision to cover the CF agreement under an insurance
or credit instrument offered by the government or any financial
service provider. This provision would help the farmers
access credit and mitigate the risks involved in crop failure.
Given that farmers in India face severe credit constraints, we
sought the stakeholder’s views on the inclusion of a provision
in the CF law for advance payment from firms to a certain
percentage of the total contract value. The majority of the
respondents (close to 70%) were not in favour of such a clause
and suggested that the issue should be left to the parties to
decide. Whereas the firms were unanimously against this
proposal, surprisingly, even farmers were equally divided. A
common concern expressed was the uncertainty involved in
the farming activities, which makes it very risky for the firms
to provide advance payments. The other two practical con-
straint highlighted were the difficulty in monitoring the utili-
sation of the advance payments and loss of flexibility to the
parties. Firms are of the strong view that instead of advance
payments, they would prefer supporting farmers by way of
helping them in accessing formal credit and providing better
market access, seed, farm machinery, technology and other
inputs. Considering these ground realities, the CF Act was
appropriate in not making any specific provisions on the issue
of advance payment and leaving such issues to be decided by
the contracting parties.
Refusal by firms to buy back the contracted produce from
farmers on quality grounds is a critical challenge facing the
CF model the world over (Singh 2002; Kumar 2006). Firms may
refuse to buy a part or the whole of the produce if the agreed-
upon quality standards are not met or when the market prices
drop below the agreed price. In such a situation, the farmer’s
option is to sell the produce in the open market or incur a loss
Economic & Political Weekly EPW october 1, 2022 vol lVii no 40
SPECIAL ARTICLE
due to the decay of the produce. This issue can be overcome
by requiring the contracting parties to include a clause relat-
ing to the quality of the contracted produce (Viinikainen and
Caro 2018). This could be done either by referring to the exist-
ing legislation on quality standards or mandate subsidiary
legislation to provide the standards. In countries like Argenti-
na, Cambodia, and Costa Rica, it is prescribed to include qual-
ity-related clauses in the CF legislation.
The CF Act requires the parties to formulate and include in
contract agreements quality standards mutually acceptable to
them or use any other standards set by the union/state govern-
ment agencies, or any other government-approved agency. To
ensure fairness, the quality standards agreed upon shall be
monitored and certified by a third-party quality assayer. The
firm is required to inspect the quality of the contracted produce
before accepting it and in the absence of which the firm cannot
retract from the acceptance of the produce. These provisions
would help to prevent quality-related default in procurement.
Notably, three-fourths of the stakeholders surveyed in this
study were supportive of inclusion of such quality-related
provisions in a CF legislation. However, a majority of them also
suggested establishing an independent “agri-specific” agency
to devise and monitor quality standards and confirm the quality
of CF produce. However, the support for an independent agency
was mixed among firms while farmers and aggregators were
fully in favour of it. Firms are of the view that their quality
requirements are best known to them than an outside agency.
Also, firms suggested a convergence between existing govern-
ment agencies involved in quality assessment and making
them more effective than establishing new agencies. These
suggestions from the stakeholders could be considered while
implementing the CF Act.
There are, however, two lacunae in the quality-related pro-
visions in the CF Act. First, inspection of the farm produce is
one of the most common sources of dispute in CF due to the
possibility of manipulating the quality or weight of the pro-
duce. There could be two ways to reduce the likelihood of such
fraud during product inspection: (i) providing the farmer the
right to be present or represented during the inspection, and
(ii) including a clause for certification or arbitration in the con-
tract for resolving quality-related disputes (Viinikainen and
Caro 2018; UNIDROIT/FAO/IFAD 2015). Close to 90% of the
stakeholders surveyed were in favour of conducting product
inspection in the presence of farmers on the grounds of trans-
parency and making farmers understand the gaps in the quality
of the farm produce. Though inclusion of a clause for certifica-
tion or arbitration was also supported by a majority of the
stakeholders (over 60%), it was cautioned that farmers need to
be educated on this front. Hence, it would be prudent to inc-
lude such mechanisms in the legal framework envisaged under
the act on CF because payments made to farmers is linked to
the quality assessment report. The second lacuna is the ab-
sence of a clause requiring the firms to buy a fixed percentage
of farmers’ produce provided the produce meets the quality
standards as prescribed in the agreement. The inclusion of this
clause would mitigate the farmers from the risk of firms not
45
SPECIAL ARTICLE
accepting the produce citing other reasons. Though firms were
divided on the inclusion of this clause and farmers were fully
supportive of it, on the whole, only 19% of the stakeholders
surveyed by us were against it. The firms are of the view that a
CF arrangement should be based on trust and both the farmers
and firms need to bear the risk.
Prevention of exploitation: In CF practice, firms tend to
exploit the farmers in several ways. They include depriving the
farmers of the decision to determine the price, interconnecting
agreements on agri-inputs and extension services, controlling
power over production, and imposing additional demands (for
example, cutting, weighing, packing) on farmers (Gopala-
krishnan and Sreenivasa 2009). The dominance and power of
the firms decrease the autonomy of the farmer, transfers the
risk to the farmer, and creates an unequal level playing field.
The CF Act has incorporated a few provisions to tackle this
issue. It stipulates that the farmers can enter into an arrange-
ment with firms for a period ranging from one crop season or
production cycle to a period mutually decided by both the
parties. This clause provides the farmers with an option to
choose a short-period agreement, thereby changing their
choice of firms in case they are not satisfied with their contrac-
tual arrangement with a particular firm. This would also put
pressure on the firms to take adequate care of the farmers’ in-
terest. Regarding price fixation, it is suggested that the prices
paid to the farmers may be determined in advance and indicated
explicitly in the agreement. If prices are subject to variation,
the agreement must include a provision for guaranteed price
and reference/benchmark price that shall guide any addition-
al amount to be paid to the farmers over and above the guar-
anteed price. Other provisions included in the CF Act to protect
farmers’ interest are: prohibition on transfer, sale, lease and
mortgage of farmers’ land or premises; tasking the firms to
ensure all preparations for the timely acceptance of produce;
and the prohibition on firms from raising permanent struc-
tures or making any modifications on the farmers’ land or
premises unless it is done with the condition that the firm
would restore the land to its original condition at its expense
at the end of the contract period. These provisions would help
reduce the dominance of firms over farmers in deciding on
various operational aspects relating to CF.
Payment delay: The buyers of the contracted produce at
times tend to delay payments resulting in an implicit subsidy
to the buyers (Kumar and Kumar 2008; Dev and Rao 2005;
Sartorius and Kirsten 2002). Payment delays would increase
the credit crunch facing farmers and their dependence on
informal moneylenders. To prevent this situation, in many
countries, namely France, Cambodia, Spain, Morocco, Belgium,
El Salvador, Brazil, Turkey, and Costa Rica, the contracts
entered under CF are required to establish a method of payment
(Viinikainen and Caro 2018).
The CF Act stipulates that the payment for contracted produce
has to be made to the farmers at the time of delivery. In the
case of seed production, the quality of which can be assessed
46
only later, the firms are required to pay no less than two-thirds of
the agreed amount upon delivery and the remaining within
30 days of receipt of quality certification. However, the mode
and manner of payment are not specified in the act and is left to
the discretion of the state governments. To ensure transparency
and accountability, the firms should be required to make the
payment through bank or electronic clearance. Also, the specific
provision dealing with consequences of delayed payment has
to be incorporated in the act. For instance, provisions for
charging a penal interest for late payment and for automati-
cally recovering the payments in case of default can be included.
Importantly, the Model Act (in Section 27) has incorporated
these additional safeguards for farmers.4
Dispute settlement: In the CF practice, the opportunities for
the breach of contract and disputes among contracting parties
are many due to the multidimensional natures of contracts
and time lags involved (Barrett et al 2012; Sartorius and
Kirsten 2002). For instance, farmers might break away from
the contract due to failure to grow the produce as per require-
ments and higher prevailing market price than the contract
price (Glover 1987). Firms also default if the market price beco-
mes less than the contract price or if they are not satisfied with
the produce (Singh 2002). Therefore, absence of an effective
dispute resolution mechanism causes enormous damage to the
contracting parties in terms of time and resources.
Though the CF Act allows the contracting parties to alter or
terminate the contract by mutual agreement, to settle the
dispute between the contracting parties, it has proposed a
detailed mechanism. To begin with, the parties shall attempt
to settle their dispute within 30 days by way of an amicable
process of alternative dispute resolution (ADR) mechanism
called as conciliation board consisting of representatives of all
the parties to the contract. If this process fails, the matter may
be brought before sub-divisional magistrate (SDM) who shall
pass an order for the recovery of the disputed amount with
penalty and interest within 30 days. The penalty to be paid by
the firm could be up to one and a half times the amount due. In
the case of the farmer, it cannot be more than the actual
amount due. The amount payable under orders passed by the
SDM may be recovered as arrears of land revenue. However, to
protect the farmers, the CF Act contains two provisions. First,
it provides statutory protection that no action for recovery
would be initiated against the agricultural land of the farmer.
Second, if there is any default by farmers due to events that are
not within their control, no recovery proceedings can be initi-
ated against them. An appeal against the order of the SDM may
be filed before the appellate authority (AA). The AA presided
over by the district collector or additional collector shall declare
its verdict within 30 days. The orders passed by SDM and AA
have the power of the ruling of a civil court.
The penalty clause could go a long way in improving the
compliance of the contract. Though this clause finds support
among three-fourths of our survey respondents, close to half
held the view that seeking penalty from farmers is an extreme
measure. Considering this sentiment, the inclusion of two
october 1, 2022 vol lVii no 40 EPW Economic & Political Weekly

safeguard provisions for farmers in the penalty clause of the CF
Act is welcome. Some of the alternative mechanisms suggested
by the stakeholders to implement penalty clause by safeguard-
ing farmers’ interest are making use of a risk fund with contri-
bution from stakeholders, including government, recovery on
instalment basis, exempting S&M farmers from penalty provi-
sion, implementation of CF practice through FPOs, time-bound
ban from participating in CF, and organising meetings and
workshops for farmers to understand contract terms (to avoid
contract breaks).5
The emphasis on the amicable settlement of disputes through
ADR would help to solve the majority of the matters without
lengthy adversarial procedures. Legislations dealing with
supplier–buyer relations in agriculture contracts usually encour-
age the recourse to ADR methods (Viinikainen and Caro 2018).
Generally, ADRs offer better, faster, and cost-effective solutions
compared to the routine judicial system in addressing the dis-
putes related to the CF arrangement. The SDM would act as a
fallback option for the parties in case the conciliation process
fails and hence worth experimenting. However, only 19% of
the stakeholders surveyed were sure that the institution of
SDM would be able to resolve the disputes without delay due to
red-tapism and additional administrative burden. One major
concern expressed about SDM was that CF arrangement involves
technical aspects and since there is a need for settling disputes
before the start of the subsequent crop season, it would be
more effective if a specialised team of people or forum handle
CF-related disputes.
In this regard, the specific examples of bodies dealing with
disputes relating to CF in sugar cane cultivation, namely South
Indian Sugar Mills Association (in southern region) and Com-
missioner of Sugar (in northern region) was provided. There-
fore, when given an alternative policy option of establishing a
dispute settlement authority (DSA) at the district/block/taluk
level to deal only with disputes relation to CF, the approval
rate increased significantly to 69%. Therefore, in case the
SDM–AA mechanisms fail to deliver the desired results, the
CF-specific DSA mechanism could be explored as an alternative
policy option. It would also help if a provision to organise
meetings and workshops by a dedicated official agency involv-
ing both the farmers and firms is included to assist the farmers
in understanding the contracts before they enter into a con-
tract agreement. Close to 90% of the stakeholders agreed that
such an initiative would prevent or minimise the possibility
of contract-breaking.
Written contracts: There has been a high prevalence of verbal
contracts in the current CF regime in India, which might
increase the chances of contract breach and also makes legal
enforcement tedious (Dev and Rao 2005; Gopalakrishnan and
Sreenivasa 2009). Formal contracts would provide both parties
with superior enforcement options (Platteau 2015). Without
written contracts, “the clarity, completeness, enforceability and
effectiveness” (Viinikainen and Caro 2018) of the agreements
are doubtful. Moreover, the emphasis on a written contract would
equip the farmers to understand the legal implications of
Economic & Political Weekly EPW october 1, 2022 vol lVii no 40
SPECIAL ARTICLE
the contract clause (Pultrone 2012). Existing literature points
towards the failure in enforcing verbal contracts as both farmers
and firms commonly fail to fulfil the terms of agreed contracts
(Barrett et al 2012). Also, the party that suffers the most in
verbal contracts is smallholders as they are bound to bear the
bulk of the downside risks associated with verbal contracts.
Many countries such as Argentina, Belgium, Brazil, Chile,
Cambodia, the European Union, Spain, Tanzania, and the US
(in the state of Minnesota) have incorporated a requirement
for written or registration of the contracts in their CF laws
(Viinikainen and Caro 2018).
The CF Act proposes the establishment of a registration
authority by the state governments for electronic registration
of the CF agreement. Though this is welcome, registration is
not made mandatory. Compulsory registration of the contract
would encourage written contracts and the entry of only seri-
ous players into the CF system. In the absence of mandatory
registration, as proposed in the Model Act, the CF agreement
signed by the parties should be made legally invalid. Another
aspect that needs to be made compulsory, as in the case of the
Model Act, is the writing of the contract in the local language
and in a manner clearly understandable to the farmers. This
provision would help the farmers to sign the contracts with a
full understanding of its terms and conditions. Three-fourths of
our survey respondents including firms and farmers supported
mandatory registration of the CF agreement due to reasons
such as traceability and legal validity of contract, increased
accountability and confidence among contracting parties, and
quicker resolution of disputes. The mandatory recording of the
contract could, however, drive up the transaction cost for par-
ties, particularly farmers (Viinikainen and Caro 2018) and this
concern was shared by 44% of our survey respondents. The
important suggestions provided by stakeholders to reduce the
transaction cost include making the registration process sim-
ple (for example, electronic registration, usage of non-judicial
stamp paper of smaller denomination) and mandatory only for
large farmers or large value contracts; insisting firms to bear
the cost and administrative burden associated with registra-
tion;6 and providing legal assistance to farmers through an
official agency. The act (in Chapter II) specifies that “for the
purposes of facilitating farmers to enter into written farming
agreements, the union government may issue necessary guide-
lines along with model farming agreements.” The above sug-
gestions emanating from stakeholder consultation could be
considered for drafting the guidelines.
Corporate commitment: Although several studies have found
a positive impact of CF on rural incomes (Sartorius and Kirsten
2002; Barrett et al 2012; Singh 2000), the level of commitment
of the corporates/firms in rural development is generally low.
For instance, firms might provide extension services only in
the initial years as demonstrated in Punjab (Sharma 2014). On
this front, the CF Act placates corporate interest as it contains
no provision to address this crucial issue. On the other hand,
the Model Act (in Section 26) contained a clause to address
this concern by way of levying a facilitation fee on the firms at
47
SPECIAL ARTICLE

a rate not exceeding 0.3% ad valorem on contracted farm pro-
duce and spend not less than 50% of the fee thus collected on
activities such as training and capacity-building programmes.
In the event of any windfall gains accruing to the firms, the
Model Act has a provision for them to share, suo motu, a por-
tion of such gains with the farmers in the form of a bonus to
sustain the latter’s interest in CF. Public policy could support
CF operations by way of assisting the farmers in developing
their skills and capacity, which in turn would improve their
bargaining power and enhance the acceptability of CF prac-
tice. Experiences from the field suggest that extension and
training services provided by the government and private sec-
tors complement each other (Viinikainen and Caro 2018).
Therefore, a provision for levying facilitation fee and sharing
of windfall gains should be included in the CF Act. In this con-
text, it is important to note that the Agricultural Development
Policy, 2015 of the Government of Kerala advocated a similar
policy prescription. To sustain the farmers’ interest in farming
and to provide them a share of economic prosperity, the policy
proposed the implementation of an actio apportum7 policy in
Kerala under which farmers are assured of a legal right to the
share of revenue/profit generated out of their farm produce
traded in the market (GoK 2015). For instance, every farmer
who gives their share of paddy to the state become eligible to
receive `5 per kg of paddy as actio apportum. The scheme was
proposed to be financed by levying a nominal cess on agricul-
tural commodities traded within the state.
We probed if firms should be made to share suo motu a por-
tion of windfall gains to farmers and found that the majority of
stakeholders (75%), including the firms (75%), agreed to the
same and opined that it would strengthen the relationship be-
tween firms and farmers, make farmers attached to firms and
enable farmers to benefit out of an unforeseen increase in prices of
the contracted produce. One major concern expressed was, if
not made compulsory, firms would not come forward to imple-
ment this proposal. The support for levying a facilitation fee
was also overwhelming with three-fourths of the respondents
favouring it on the grounds that firms have a responsibility to
fund activities aimed at educating, empowering and motivat-
ing the farmers. However, firms were divided on this issue.
The firms which doubted the veracity of this proposal are con-
cerned about the efficiency of public spending programme
based on facilitation fee. They also pointed out that firms are
already helping farmers by providing inputs and technology as
part of the CF agreement.
Conclusions and Recommendations
This paper critically examined India’s recently enacted CF Act
from the perspective of its potential to mitigate the drawbacks
of adopting CF practice, thereby safeguarding farmers’ inter-
ests. The approach followed involved a systematic analysis of
the key provisions contained in the CF Act in consultation with
the stakeholders associated with the CF system in India. It is
found that the CF Act encompasses provisions to address the
various practical problems that may emerge over the course of
implementing CF. The provisions include engagement of FPOs
to accommodate smallholders; access to credit and crop insur-
ance; options for fixing quality assessment standards in a fair
manner; requirement for firms to inspect product quality prior
to buying from farmers; mechanism to fix prices and to prevent
exploitation of farmers and payment delay; hassle-free exit
option; well-defined institutional arrangement to resolve
disputes; provision for recovery of the disputed amount from
contracting parties; and electronic registration of the contract.
Yet, some concerns remain about the CF Act including absence
of provisions to establish an official agency for facilitating and
guiding the CF system; insist writing of contract in local and sim-
ple language; prevent fraud during product inspection; avoid
payment delay; ensure guaranteed purchase by firms, trans-
parency in payment and compulsory registration of the contact
agreement; and promote corporate contribution to rural de-
velopment. The other important suggestions that came up in

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 SPECIAL ARTICLE

our discussion with the stakeholders include minimum govern-
ment intervention in the working of CF system, setting up of an
independent quality assessment agency, creation of a risk
fund, organising awareness and counselling programmes for
farmers, establishing CF-specific DSA at the local level and
exempting smallholders from penalty provision and compul-
sory registration. The scope of the CF Act could be expanded
and improved by including provisions addressing these perti-
nent concerns and suggestions provided by the stakeholders.
Despite certain shortcomings, the CF Act provides a viable
legal framework for promoting CF practice in India by balanc-
ing the interests of the stakeholders involved. Importantly,
several provisions in the act conform with the laws governing
agricultural production contracts in other countries. Although
the framework envisaged in the CF Act will have to evolve for
providing solutions to all the ground-level difficulties in prac-
tising CF, at least it deserves to be experimented. Alternatively,
fine-tuning of the legislative framework could be done on the
experience of implementation of the act. After correcting for
endogeneity, the majority of the empirical studies conducted
across the world established that CF practice influences farm
performance in a positive and significant manner (Briones
2015). Therefore, adoption of CF under the framework of the
CF Act could be a right step for building a win-win situation for
the two principal parties, namely farmers and firms to the
CF agreement.

Notes
1 Following international literature, throughout
this paper we use the nomenclature “firm” to
describe the buyer in the CF arrangement.
2 For the full act, see http://dmi.gov.in/Docu-
ments/Marketing.pdf.
3 According the CF Act an aggregator is the one
who acts as an intermediary between farmers
and firms and provides aggregation-related
services to both parties.
4 As per the Model Act a penal interest would be
levied for the late payment up to 30 days. If pay-
ment is not made even after 30 days, it would
be paid to the farmer by recovering as an arrear
of land revenue with interest (MoAFW 2018).
5 Close to 90% of the stakeholders surveyed
agreed that awareness and counselling pro-
grammes for farmers would prevent or mini-
mise the possibility of contract-breaking.
6 Some of the firms we interviewed claimed that
they are already following this practice.
7 Actio apportum is a Latin word where actio
stands for a legal demand of right and appor-
tum implies profit or revenue.
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