India's central government releases new model act on contract farming

On May 22, 2018, Shri Radha Mohan Sing, the Indian Union Minister of Agriculture & Farmers Welfare, released “The------State/UT Agricultural Produce & Livestock Contract Farming and Services (Promotion & Facilitation) Act, 2018” (“2018 Model Act”)[1].

The 2018 Model Act[2] is the work of a Committee constituted on February 2017 and comprising of members from different departments and ministries of both the Indian Government and select states.

According to the Indian Ministry of Agriculture and Farmers’ Welfare, more than 86% of all Indian agricultural households are either “small” (defined as less than or equal to 2 ha. of cultivable land) or “marginal” (defined as less than or equal to 1 ha. of cultivable land). As these small-sized farms are affected by operational inefficiency, the need to improve the efficiency of input and output management at farm level arose. Also according to the Indian Ministry of Agriculture and Farmers’ Welfare, this improvement can be achieved by mobilizing smallholders into “collective operational units”, so as to take advantage of economies of scale, and by promoting the conclusion of contract farming agreements with sponsors.

Consequently, the rationale behind the introduction of the 2018 Model Act is to balance the interests and needs of the two main parties in a contract farming agreement: farmers (small and marginal ones in particular) and sponsors. In fact, while the 2018 Model Act aims at protecting and promoting the interests of small and marginal farmers on one side, it also incentivizes sponsors to invest in contract farming operations on the other, so as to make it convenient for the latter to assume the market risks of the former.

The Government of India first extensively provided for contract farming in 2003, when it enacted “The _____________State Agricultural Produce Marketing (Development and Regulation) Act, 2003” ( “2003 APMC Model Act”), thereby suggesting that states inserted contract farming provisions in their respective Agricultural Produce Market Committee (“APMC”) Acts. With the exception of Punjab, which adopted its own separate Contract Farming Act in 2013, a number of Indian states followed the central government’s suggestion and introduced contract farming provisions in their existing APMC Acts, thereby expanding the competencies of the Agricultural Produce Market Committees (“APMCs”)[3] to also include contract farming operations.

In the following years, expert bodies identified a series of critical issues connected to having contract farming within the purview of the APMCs at state level, mostly because of a perceived conflict of interest in the role of the APMCs, which were often designated both as authorities for registration of contractual agreements and for dispute settlement. Further issues affecting contract farming involved provisions of stockholding limits on produce - deterring contractors from entering into contracts to aggregate the contracted produce - as well as long and complex registration/recording procedures.

As evidenced by the considerations laid out in the 2017-2018 draft Report of the Committee on Doubling Farmers’ Income, the Indian Ministry of Agriculture & Farmers Welfare also came to recognize the above-mentioned issues connected to having contract farming within the purview of local APMCs, and further addressed the need to tackle the “complex and long procedures for registration and recording of agreement” as well as the “poor publicity of contract farming among the farmers about its benefits”. Accordingly, the 2018 Model Act mainly differs from the 2003 APMC Model Act in that it takes contract farming out of the local APMCs competences. Other key points are:

• the set-up of a state-level agency to carry out the assigned mandates related to contract farming and with a view to promote this contract model among the stakeholders or, alternatively, recognition of an existing state organization/institution to take on the same role;
• the establishment of a separate committee or officer for mandatory registration of contractors (called “sponsors”) and recording of contract farming agreements;
• the enablement of production support in the form of inputs, know-how and credit;
• the imposition of mandatory insurance covering the contracted produce;
• the prohibition for sponsors to raise permanent structures on the land and premises belonging to producers and devoted to contract farming;
• the promotion of Farmer Producer Organizations (“FPOs”) and of Farmer Producer Companies (“FPCs”) to involve smallholders, with the possibility to have FPOs/FPCs as direct contracting parties if so authorized by farmers;
• the prohibition for any title, right, ownership or possession being transferred, alienated or vested in the sponsor;
• the provision of Contract Farming Facilitation Groups (“CFFGs”) at village or panchayat levels, with a view to facilitate and assist the contracting parties with production and post-production activities connected to their contract farming agreement;
• the set-up of dispute settlement mechanisms at the lowest possible level “for quick disposal of disputes arising out of the breach of contract or contravention of any provision in the Act”.

The 2018 Model Act presents itself as a “comprehensive, promotional, facilitative and soft model law on contract farming”, capable of encompassing all categories of crop, livestock, dairy, poultry and fishery product. Since Entry 14 of List-II (State List), Seventh Schedule (Article 246) of the Constitution of India identifies agriculture as a state matter over which the central government only exercises indirect influence, the 2018 Model Act will have to be adopted by the individual states via the introduction or amendment of state legislation on contract farming.

It therefore remains to be seen whether the central government’s most recent endeavor on reforming contract farming in India will be well received by state legislators. The risk is that, as it already happened with the 2003 APMC Model Act before it, only a handful of states will fully adopt the 2018 Model Act, while others could limit themselves to adopting parts of it or even outright refuse to amend their legislation on the topic.

[1] For the press release, please see http://pib.nic.in/newsite/PrintRelease.aspx?relid=179462.

[2] Available in its March 2018 draft version here: The -----------State /UT Agricultural Produce & Livestock Contract Farming and Services (Promotion & Facilitation) Act, 2018.

[3] APMCs are statutory market committees constituted by Indian State Governments to supervise the trading of various agricultural, livestock, and horticultural products.