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 recent order of the ministry of environment and forests (MoE&F) rejecting the application for grant of forest clearance to the Orissa Mining Company (the Vedanta project) has raised a number of important questions. The order cited the company’s non-compliance with a number of laws. But the Vedanta case is just one example. There are several projects in the country where similar issues are relevant. The question really is, are the multiple laws that are applicable in such cases in harmony with each other or are they working at cross purposes? In a sector such as mining, doing business is inherently complicated. There are at least four broad aspects that need to be addressed—obtaining mining licences, securing environmental clearances, acquiring land, and rehabilitation of people affected by such projects. We take a look at each of the four broad areas, to understand how the applicable laws interact with one another. Obtaining mining licences Doing business in the mining sector first entails obtaining a licence for activities such as prospecting and mining. The Mines and Minerals (Development and Regulation) Act, 1957, lays down the framework for any prospecting, leasing or mining activity to be carried out for specified minerals, and the licences that need to be obtained. The Act allows the central government to frame the rules and conditions applicable both for grant of licences and for the actual activity carried out by enterprises. The licensing authority for mining activities is the state government. Securing environment clearances Environmental clearances for industrial activities are governed by a number of laws. Most activities require clearances under the Environment (Protection) Act, 1986. Additionally, for activities in forest areas, clearance is also required under the Forest (Conservation) Act, 1980. Acts pertaining to wildlife protection, bio-diversity and the quality of air and water may also be applicable. The Environment (Protection) Act, 1986, enables the central government to take measures for “protecting and improving the quality of the environment and preventing, controlling and abating environmental pollution”. These measures may include (among others) (a) laying down standards for the quality of the environment, (b) areas in which industries or operations may not be carried out, or carried out subject to certain safeguards. The rules framed under the Act make it compulsory for all new projects to take prior environmental clearance. For a specified category of activities clearance has to be obtained from the MoE&F, while for others, clearance has to be obtained from State Environment Impact Assessment Authorities (SEIAAs). The Forest (Conservation) Act, 1980, prohibits state governments and other authorities from any unauthorised change in the status of areas declared to be reserved forests, and any diversion of forests for non-forest purposes. It prohibits felling of trees within forest areas. Any such action has to be undertaken with the prior permission of the central government. To divert any forest area for non-forest purposes, state governments have to submit formal proposals to the Centre. State governments also have to show proposals for compensatory afforestation. Acquiring land for the project Acquiring land for projects has become increasingly contentious in recent years. The Land Acquisition Act of 1894 appears to have outlived its utility, which led the UPA-1 to introduce a Bill in the Parliament to bring a new legal framework to facilitate land acquisition. The Bill tried to address several critical aspects of land acquisition. It tried to redefine ‘public purpose’ somewhat more strictly than in the existing Act. ‘Public purpose’ was redefined to include defence purposes, infrastructure projects or for any project useful to the general public where 70% of the land has already been purchased. For acquisitions by companies, the Bill mandated that 70% of the land will have to be acquired directly from the land owners at market prices and that the government would step in under the Act to acquire the remaining 30% for the project. The Bill also aimed to provide for cases resulting in large-scale displacement. It stated that in such cases a social impact assessment study must be conducted. Tribals, forest dwellers and those with tenancy rights were also made eligible for compensation. It also mandated that the intended use of the land being acquired and the current market value of the land would have to be considered for determining compensation. The Bill lapsed when the Lok Sabha was dissolved in 2009. It is not known when the government proposes to reintroduce a Bill in the Parliament to address this issue of land acquisition. Rights of project-affected people When large projects are planned and land is acquired for those, people are often displaced from the project areas and need to be rehabilitated appropriately. The UPA-1 had introduced a Bill in the Parliament to create a legal framework for rehabilitation of project-affected people. However, the proposed Rehabilitation and Resettlement Bill, 2007, lapsed when the Lok Sabha was dissolved before the last general elections. But the UPA-1 government managed to pass a highly contested Bill that recognised the rights of scheduled tribes and other traditional forest dwellers. The Scheduled Tribes and Other Traditional Forest Dwellers (Recognition of Forest Rights) Act passed in 2006 focuses on the rights of forest-dwelling Scheduled Tribes and traditional forest dwellers. The Act seeks to recognise and vest forest rights in forest dwelling Scheduled Tribes with respect to forest land and their habitat. The Act mentions 13 separate rights given to forest dwellers. These include (a) living in the forest for habitation or for self-cultivation for livelihood, (b) right to own, use or dispose of minor forest produce, (c) right to protect and conserve any community resource that they have been traditionally protecting and (d) individual and community rights of habitat for primitive tribal groups. These rights have to be formally recorded/recognised by state governments. The Act also prevents any modification of forest rights or the resettlement of forest dwellers unless the Gram Sabha of the village consents to the proposal in writing. There are additional requirements to be met if developmental activities are to be undertaken in tribal dominated areas (defined as Scheduled Areas in the Constitution). The Panchayat (Extension into Scheduled Areas) Act, 1996, extends the part of the Constitution providing for Panchayati Raj in rural areas to Scheduled Areas. The Act requires that government authorities consult the Panchayat or the Gram Sabha before acquiring land for development projects and for rehabilitating persons affected by such projects. At a conceptual level, there is no apparent contradiction in the applicable laws and each of the laws mentioned above appear to be necessary to ensure that there is fairness for all stakeholders involved. However, a distinction has to be made between the legal principles these laws seek to enforce, and procedural formalities that need to be complied with to be on the right side of the law. Also, a closer look at these individual laws and their implementation will reveal a number of loopholes that need to be plugged to ensure that the spirit and basic principles enshrined in each law are enforced efficiently. From the point of view of the company that intends to do business in India, all this adds up to a lot of time-consuming process. This is perhaps why the Doing Business index published annually by the World Bank group ranks India at 133 out of 183 counties in terms of ease of doing business. The challenge, going forward, is for us to strengthen processes that are fair to all stakeholders, but at the same time are not unduly burdensome on the company that seeks to make investments in the mining sector. By CV Madhukar and Anirudh Burman This was published as an article in Financial Express on September 2, 2010
