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Recently, the Ministry of Agriculture released a draft Model Contract Farming Act, 2018. The draft Model Act seeks to create a regulatory and policy framework for contract farming. Based on this draft Model Act, legislatures of states can enact a law on contract farming as contracts fall under the Concurrent List of the Constitution. In this context, we discuss contract farming, issues related to it, and progress so far.
What is contract farming?
Under contract farming, agricultural production (including livestock and poultry) can be carried out based on a pre-harvest agreement between buyers (such as food processing units and exporters), and producers (farmers or farmer organisations). The producer can sell the agricultural produce at a specific price in the future to the buyer as per the agreement. Under contract farming, the producer can reduce the risk of fluctuating market price and demand. The buyer can reduce the risk of non-availability of quality produce.
Under the draft Model Act, the producer can get support from the buyer for improving production through inputs (such as technology, pre-harvest and post-harvest infrastructure) as per the agreement. However, the buyer cannot raise a permanent structure on the producer’s land. Rights or title ownership of the producer’s land cannot be transferred to the buyer.
What is the existing regulatory structure?
Currently, contract farming requires registration with the Agricultural Produce Marketing Committee (APMC) in few states. This means that contractual agreements are recorded with the APMCs which can also resolve disputes arising out of these contracts. Further, market fees and levies are paid to the APMC to undertake contract farming. The Model APMC Act, 2003 provided for contract farming and was released to the states for them to use this as reference while enacting their respective laws. Consequently, 20 states have amended their APMC Acts to provide for contract farming, while Punjab has a separate law on contract farming. However, only 14 states notified rules related to contract farming, as of October 2016.
What are the issues with the current structure, and how does the draft Model Act seek to address them?
Over the years, expert bodies have identified issues related to the implementation of contract farming. These include: (i) role of APMCs which are designated as an authority for registration and dispute settlement in most states, (ii) provisions of stockholding limits on produce under contract farming, and (iii) poor publicity of contract farming among the farmers about its benefits.
Role of Agricultural Produce Marketing Committees/Marketing Boards
The NITI Aayog observed that market fees and other levies are paid to the APMC for contract framing when no services such as market facilities and infrastructure are rendered by them. In this context, the Committee of State Ministers on Agricultural Reforms recommended that contract farming should be out of the ambit of APMCs. Instead, an independent regulatory authority must be brought in to disengage contract farming stakeholders from the existing APMCs.
In this regard, as per the draft Model Act, contract farming will be outside the ambit of the state APMCs. This implies that buyers need not pay market fee and commission charges to these APMCs to undertake contract farming. Further, the draft Model Act provides for establishing a state-level Contract Farming (Promotion and Facilitation) Authority to ensure implementation of the draft Model Act. Functions of the Authority include (i) levying and collecting facilitation fees, (ii) disposing appeals related to disputes under the draft Model Act, and (iii) publicising contract farming. Further, the sale and purchase of contracted produce is out of the ambit of regulation of the respective state/UT Agricultural Marketing Act.
Registration and agreement recording
The Model APMC Act, 2003 released to the states provides for the registration of contract farming agreements by an APMC. This was done to safeguard the interests of the producer and the buyerthrough legal support, including dispute resolution. The procedures for registration and recording of agreements vary across states. Currently, registration for contract farming has been provided with the APMC in few states, and with a state-level nodal agency in others. Further, market fee on purchases under contract agreements is completely exempted in few states and partially exempted in others. The Committee of State Ministers on Agricultural Reforms recommended that a instead of a APMC, district-level authorities can be set-up for registration of contract farming agreements. Further, any registering authority should verify the details such as the financial status of the buyer.
Under the draft Model Act, every agreement should be registered with a Registering and Agreement Recording Committee, which will be set up consisting of officials from departments such as agriculture, animal husbandry, marketing, and rural development. Such a Committee can be set up at the district, taluka or block levels.
Disputes between the producer and the buyer
The Ministry of Agriculture and Farmers Welfare observed certain risks related to upholding the contract farming agreement. For example, producers may sell their produce to a buyer other than the one with whom they hold a contract. On the other side, a buyer may fail to buy products at the agreed prices or in the agreed quantities, or arbitrarily downgrade produce quality. The Committee of State Ministers on Agricultural Reforms recommended that dispute redressal mechanism should be at block, district or regional-level state authorities and not with an APMC.
Under the draft Model Act, in case of disputes between a producer and a buyer, they can: (i) reach a mutually acceptable solution through negotiation or conciliation, (ii) refer the dispute to a dispute settlement officer designated by the state government, and (iii) appeal to the Contract Farming (Promotion and Facilitation) Authority (to be established in each state) in case they are not satisfied by the decision of the dispute settlement officer.
Stockholdings limits on contracted produce
Stockholding limits are imposed through control orders as per the Essential Commodities Act, 1955. Such provisions of stockholding limits can be restrictive and discourage buyers to enter into contracts. It was recommended that the buyers can be exempted from stock limits up to six months of their requirement in the interest of trade. Under the draft Model Act, limits of stockholding of agricultural produce will not be applicable on produce purchased under contract farming.
Other recommendations
While contract farming seeks to provide alternative marketing channels and better price realisation to farmers, several other marketing reforms have been suggested by experts in this regard. These include: (i) allowing direct sale of produce by farmers, (ii) removing fruits and vegetables out of the ambit of APMCs, and (iii) setting-up of farmer-consumer markets, (iv) electronic trading, and (v) joining electronic National Agricultural Market for the sale of produce.
The percentage of the population living below the poverty line in India decreased to 22% in 2011-12 from 37% in 2004-05, according to data released by the Planning Commission in July 2013. This blog presents data on recent poverty estimates and goes on to provide a brief history of poverty estimation in the country. National and state-wise poverty estimates The Planning Commission estimates levels of poverty in the country on the basis of consumer expenditure surveys conducted by the National Sample Survey Office (NSSO) of the Ministry of Statistics and Programme Implementation.
The current methodology for poverty estimation is based on the recommendations of an Expert Group to Review the Methodology for Estimation of Poverty (Tendulkar Committee) established in 2005. The Committee calculated poverty levels for the year 2004- 05. Poverty levels for subsequent years were calculated on the basis of the same methodology, after adjusting for the difference in prices due to inflation. Table 1 shows national poverty levels for the last twenty years, using methodology suggested by the Tendulkar Committee. According to these estimates, poverty declined at an average rate of 0.74 percentage points per year between 1993-94 and 2004-05, and at 2.18 percentage points per year between 2004-05 and 2011-12. Table 1: National poverty estimates (% below poverty line) (1993 - 2012)
Year |
Rural |
Urban |
Total |
1993 – 94 |
50.1 |
31.8 |
45.3 |
2004 – 05 |
41.8 |
25.7 |
37.2 |
2009 – 10 |
33.8 |
20.9 |
29.8 |
2011 – 12 |
25.7 |
13.7 |
21.9 |
Source: Press Note on Poverty Estimates, 2011 – 12, Planning Commission; Report of the Expert Group to Review the Methodology for Estimation of Poverty (2009) Planning Commission; PRS. State-wise data is also released by the NSSO. Table 2 shows state-wise poverty estimates for 2004-05 and 2011-12. It shows that while there is a decrease in poverty for almost all states, there are wide inter-state disparities in the percentage of poor below the poverty line and the rate at which poverty levels are declining. Table 2: State-wise poverty estimates (% below poverty line) (2004-05, 2011-12)
State |
2004-05 |
2011-12 |
Decrease |
Andhra Pradesh |
29.9 |
9.2 |
20.7 |
Arunachal Pradesh |
31.1 |
34.7 |
-3.6 |
Assam |
34.4 |
32 |
2.4 |
Bihar |
54.4 |
33.7 |
20.7 |
Chhattisgarh |
49.4 |
39.9 |
9.5 |
Delhi |
13.1 |
9.9 |
3.2 |
Goa |
25 |
5.1 |
19.9 |
Gujarat |
31.8 |
16.6 |
15.2 |
Haryana |
24.1 |
11.2 |
12.9 |
Himachal Pradesh |
22.9 |
8.1 |
14.8 |
Jammu and Kashmir |
13.2 |
10.4 |
2.8 |
Jharkhand |
45.3 |
37 |
8.3 |
Karnataka |
33.4 |
20.9 |
12.5 |
Kerala |
19.7 |
7.1 |
12.6 |
Madhya Pradesh |
48.6 |
31.7 |
16.9 |
Maharashtra |
38.1 |
17.4 |
20.7 |
Manipur |
38 |
36.9 |
1.1 |
Meghalaya |
16.1 |
11.9 |
4.2 |
Mizoram |
15.3 |
20.4 |
-5.1 |
Nagaland |
9 |
18.9 |
-9.9 |
Odisha |
57.2 |
32.6 |
24.6 |
Puducherry |
14.1 |
9.7 |
4.4 |
Punjab |
20.9 |
8.3 |
12.6 |
Rajasthan |
34.4 |
14.7 |
19.7 |
Sikkim |
31.1 |
8.2 |
22.9 |
Tamil Nadu |
28.9 |
11.3 |
17.6 |
Tripura |
40.6 |
14.1 |
26.5 |
Uttar Pradesh |
40.9 |
29.4 |
11.5 |
Uttarakhand |
32.7 |
11.3 |
21.4 |
West Bengal |
34.3 |
20 |
14.3 |
All Inda |
37.2 |
21.9 |
15.3 |
Source: Review of Expert Group to Review the Methodology for Estimation of Poverty (2009) Planning Commission, Government of India; Press Note on Poverty Estimates, 2011 – 12 (2013) Planning Commission, Government of India; PRS. Note: A negative sign before the number in column four (decrease) indicates an increase in percentage of population below the poverty line. History of poverty estimation in India Pre independence poverty estimates: One of the earliest estimations of poverty was done by Dadabhai Naoroji in his book, ‘Poverty and the Un-British Rule in India’. He formulated a poverty line ranging from Rs 16 to Rs 35 per capita per year, based on 1867-68 prices. The poverty line proposed by him was based on the cost of a subsistence diet consisting of ‘rice or flour, dhal, mutton, vegetables, ghee, vegetable oil and salt’. Next, in 1938, the National Planning Committee (NPC) estimated a poverty line ranging from Rs 15 to Rs 20 per capita per month. Like the earlier method, the NPC also formulated its poverty line based on ‘a minimum standard of living perspective in which nutritional requirements are implicit’. In 1944, the authors of the ‘Bombay Plan’ (Thakurdas et al 1944) suggested a poverty line of Rs 75 per capita per year. Post independence poverty estimates: In 1962, the Planning Commission constituted a working group to estimate poverty nationally, and it formulated separate poverty lines for rural and urban areas – of Rs 20 and Rs 25 per capita per year respectively. VM Dandekar and N Rath made the first systematic assessment of poverty in India in 1971, based on National Sample Survey (NSS) data from 1960-61. They argued that the poverty line must be derived from the expenditure that was adequate to provide 2250 calories per day in both rural and urban areas. This generated debate on minimum calorie consumption norms while estimating poverty and variations in these norms based on age and sex. Alagh Committee (1979): In 1979, a task force constituted by the Planning Commission for the purpose of poverty estimation, chaired by YK Alagh, constructed a poverty line for rural and urban areas on the basis of nutritional requirements. Table 3 shows the nutritional requirements and related consumption expenditure based on 1973-74 price levels recommended by the task force. Poverty estimates for subsequent years were to be calculated by adjusting the price level for inflation. Table 3: Minimum calorie consumption and per capita consumption expenditure as per the 1979 Planning Commission task force on poverty estimation
Area | Calories | Minimum consumption expenditure (Rs per capita per month) |
Rural | 2400 | 49.1 |
Urban | 2100 | 56.7 |
Source: Report of the Expert Group on Estimation of Proportion and Number of Poor, 1993, Perspective Planning Division, Planning Commission; PRS Lakdawala Committee (1993): In 1993, an expert group constituted to review methodology for poverty estimation, chaired by DT Lakdawala, made the following suggestions: (i) consumption expenditure should be calculated based on calorie consumption as earlier; (ii) state specific poverty lines should be constructed and these should be updated using the Consumer Price Index of Industrial Workers (CPI-IW) in urban areas and Consumer Price Index of Agricultural Labour (CPI-AL) in rural areas; and (iii) discontinuation of ‘scaling’ of poverty estimates based on National Accounts Statistics. This assumes that the basket of goods and services used to calculate CPI-IW and CPI-AL reflect the consumption patterns of the poor. Tendulkar Committee (2009): In 2005, another expert group to review methodology for poverty estimation, chaired by Suresh Tendulkar, was constituted by the Planning Commission to address the following three shortcomings of the previous methods: (i) consumption patterns were linked to the 1973-74 poverty line baskets (PLBs) of goods and services, whereas there were significant changes in the consumption patterns of the poor since that time, which were not reflected in the poverty estimates; (ii) there were issues with the adjustment of prices for inflation, both spatially (across regions) and temporally (across time); and (iii) earlier poverty lines assumed that health and education would be provided by the State and formulated poverty lines accordingly.[1] It recommended four major changes: (i) a shift away from calorie consumption based poverty estimation; (ii) a uniform poverty line basket (PLB) across rural and urban India; (iii) a change in the price adjustment procedure to correct spatial and temporal issues with price adjustment; and (iv) incorporation of private expenditure on health and education while estimating poverty. The Committee recommended using Mixed Reference Period (MRP) based estimates, as opposed to Uniform Reference Period (URP) based estimates that were used in earlier methods for estimating poverty.[2] It based its calculations on the consumption of the following items: cereal, pulses, milk, edible oil, non-vegetarian items, vegetables, fresh fruits, dry fruits, sugar, salt & spices, other food, intoxicants, fuel, clothing, footwear, education, medical (non-institutional and institutional), entertainment, personal & toilet goods, other goods, other services and durables. The Committee computed new poverty lines for rural and urban areas of each state. To do this, it used data on value and quantity consumed of the items mentioned above by the population that was classified as poor by the previous urban poverty line. It concluded that the all India poverty line was Rs 446.68 per capita per month in rural areas and Rs 578.80 per capita per month in urban areas in 2004-05. The following table outlines the manner in which the percentage of population below the poverty line changed after the application of the Tendulkar Committee’s methodology. Table 4: Percentage of population below poverty line calculated by the Lakdawala Committee and the Tendulkar Committee for the year 2004-05
Committee |
Rural |
Urban |
Total |
Lakdawala Committee |
28.3 |
25.7 |
27.5 |
Tendulkar Committee |
41.8 |
27.5 |
37.2 |
Source: Report of the Expert Group on Estimation of Proportion and Number of Poor, 1993, Perspective Planning Division, Planning Commission; Report of the Expert Group to Review the Methodology for Estimation of Poverty, 2009, Planning Commission; PRS The Committee also recommended a new method of updating poverty lines, adjusting for changes in prices and patterns of consumption, using the consumption basket of people close to the poverty line. Thus, the estimates released in 2009-10 and 2011-12 use this method instead of using indices derived from the CPI-AL for rural areas and CPI-IW for urban areas as was done earlier. Table 5 outlines the poverty lines computed using the Tendulkar Committee methodology for the years 2004-05, 2009-10 and 2011-12. Table 5: National poverty lines (in Rs per capita per month) for the years 2004-05, 2009-10 and 2011-12
Year |
Rural |
Urban |
2004-05 |
446.7 |
578.8 |
2009-10 |
672.8 |
859.6 |
2011-12 |
816.0 |
1000.0 |
Source: Report of the Expert Group to Review the Methodology for Estimation of Poverty (2009) Planning Commission; Poverty Estimates 2009-10 and Poverty Estimates 2011-12, Planning Commission; PRS Rangarajan Committee: In 2012, the Planning Commission constituted a new expert panel on poverty estimation, chaired by C Rangarajan with the following key objectives: (i) to provide an alternate method to estimate poverty levels and examine whether poverty lines should be fixed solely in terms of a consumption basket or if other criteria are also relevant; (ii) to examine divergence between the consumption estimates based on the NSSO methodology and those emerging from the National Accounts aggregates; (iii) to review international poverty estimation methods and indicate whether based on these, a particular method for empirical poverty estimation can be developed in India, and (iv) to recommend how these estimates of poverty can be linked to eligibility and entitlements under the various schemes of the Government of India. The Committee is expected to submit its report by 2014.
[1] While private expenditure on education and health was covered in the base year 1973-74, no account was taken of either the increase in the proportion of these in total expenditure over time or of their proper representation in available price indices.
[2] Under the URP method, respondents are asked to detail consumption over the previous 30 days; whereas under the MRP method five low-frequency items (clothing, footwear, durables, education and institutional health expenditure) are surveyed over the previous 365 days, and all other items over the previous 30 days.