Contract Farming in India

By BYJU'S Exam Prep

Updated on: September 13th, 2023


  • Contract farming can be defined as an agreement between farmers and processing and/or marketing firms for the production and supply of agricultural products under forward agreements, frequently at predetermined prices.
  • The arrangement also invariably involves the purchaser in providing a degree of production support through, for example, the supply of inputs and the provision of technical advice.
  • The basis of such arrangements is a commitment on the part of the farmer to provide a specific commodity in quantities and at quality standards determined by the purchaser and a commitment on the part of the company to support the farmer’s production and to purchase the commodity.
  • In the recent scenario, contract farming is emerging as one of the preferred mechanism through which agri-businesses can directly engage with the farmers. The urban middle class and increasing commercial investment in agricultural retailing and processing are creating demand for more standardized and higher-quality agricultural produce. But due to underdeveloped supply chains and small farm sizes, sourcing of such products is difficult.
  • PepsiCo is regarded as one of the earliest promoters of the contract farming model in India. It set up a tomato processing plant in Punjab in 1997, which was not a traditional tomato growing area
  • It then started joining hands with the local farmers to grow various varieties of tomato which was needed for ketchup. Although PepsiCo has exited tomato processing business but it still works with thousands of farmers primarily to procure potatoes for potato chips.

Objectives of the contract farming:

  • To reduce the load on the central & state level procurement system by increasing private sector investment in agriculture and related sector. 
  • To bring about a market focus in terms of crop selection by Indian farmers and promote processing & value addition of farm product.  
  • To generate a steady source of income at the individual farmer level and gainful employment in rural communities particularly for the landless agricultural labour. 
  • To reduce migration from rural to urban areas and promote rural self-reliance in general by pooling locally available resources to meet the existing challenges.

Advantages of Contract Farming:

To the farmers:

  • It helps in skilling of farmers as they learn to use various resources efficiently like fertilizer, pesticides and get in touch with new technology in some cases.
  • Farmers get the opportunity for diversification of crops.
  • Price risk is drastically reduced as many contracts specify prices in advance.
  • Contract farming can open up new markets which would otherwise have been unavailable to small farmers. The farmers can also get easy credit from the Bank under contractual agreements.
  • In the case of agri-processing level, it ensures a consistent supply of agricultural produce with quality, at the right time and lesser cost.

To the Client:

  • They get uninterrupted & regular flow of raw material of high quality which helps in protection from fluctuation in market pricing.  
  • Long term planning of business is possible as they have a dedicated supplier base of raw material.
  • Concept of contract farming can be extended to other crops also which helps to generate goodwill for the organisation.

Disadvantages of contract farming:

  • Contracting agreements are often verbal or informal in nature and even written contracts often do not provide the legal protection in India.
  • Farmers tied to a contract are unable to benefit from high prices on the open market. 
  • Most of the crops grown under contract agreement are cash crops which give more income to farmers but at the same time due to this profit motive food crops are being neglected.
  • Seeds of generally modified crops to get maximum output are sold by the MNCs but the problem is that the seeds once used cannot be regenerated as is the case of BT cotton.
  • When the farmers grow new crops, they face the risks of both market failure and production problems
  • The farmers investing in crops with a long growing period receive no income until the crops bear fruit. For most of the small farmers, such investments are not possible without funding from Sponsors or a development bank. Even if such funding is available it is very unlikely to come without and condition and thus farmers become more indebted.
  • There are no standard legal procedures in resolving disputes arising under contract agreements.
  • It can also lead to the greater casualisation of labour as well as the use of female and child labour.

Success Stories of Contract farming in India:

  • There are few success stories on contract farming like that of Pepsico India in Madhya Pradesh and Andhra Pradesh which helped the farmers in the realization of better returns for their agri-produce.
  • Amul and National Dairy Development Board (NDDB) are excellent examples of milk procurement and sugarcane cooperative in Maharashtra.

Measures taken by India:

  • In India, contract farming is regulated under the outdated Indian Contract Act, 1872. The Act has many provisions that are relevant to contract farming.
  • In addition to the Indian Contract Actthe model APMC (agricultural produce market committee) Act, 2003 provides specific provisions for contract farming like compulsory registration of contract farming sponsors and dispute settlement.
  • The department of agriculture and farmers welfare has drafted a model contract farming Act, 2018 which intends to establish a win-win framework for both farmers and sponsors.

Salient Features of the Model Contract Farming Act 2018:

  • The Act lays emphasis on protecting the interests of the farmers while considering them as weaker of the two parties entering into the contract.
  • Services contracts all along the value chain including pre-production, production and post-production have also been included.
  • Appointment of an “Officer” for this purpose at various level for online registration of sponsor and recording of the agreement is provided.
  • Contracted produce will be covered under the crop/livestock insurance in operation.
  • Contract framing should be outside the ambit of the APMC Act.
  • No permanent Infrastructure can be developed on farmers’ land.
  • No right over the land of the farmer shall vest to the sponsor.
  • Promotion of Farmer Producer Organization (FPOs) or Farmer Producer Companies (FPCs) to mobilize small and marginal farmers has also been provided in the act.
  • FPO or FPC can be a contracting party if they are authorized by the farmers.

Significance of the contract farming Act 2018:

  • The Act will provide for a state-level agency namely the Contract Farming Development and Facilitation Authority which will put contract farming outside the ambit of the APMC.
  • It requires the sponsor and the farmers to register the contracts with a registering and agreement recording committee.
  • Registration imposes additional procedures and costs on the parties which is difficult for small and medium farmers as they cannot easily afford these costs.
  • The Act will also consist of a price protection mechanism for farmers by determining a pre-agreed price.

Way Forward:

  • The trust deficit between millions of Farmers on one side and politicians, bureaucrats and corporates on the other has to be bridged.
  • Integration of farmers with agro-processing units for better price realisation and reduction of post-harvest losses.
  • Facilitate the import of hybrids seeds for contract farmers
  • A quasi-judicial system of contract enforcement is also needed
  • No taxes should be collected from food processors involved in contract farming. In fact the govt. should encourage them to invest in rural infrastructure.
  • Similarly, no taxes or duties should be imposed on the import of Agri equipment to be used in a registered contract farming program.
  • The diverse agro-climatic zones in India can help India to be a competitive producer of a large number of crops. Contract farming can become one possible solution.
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