Contract farming and food processing sector in India

Context:

  • Contract farming in India has huge investment opportunities for global super-market chains considering India as a major outsourcing hub.

Introduction:

  • At World Food India 2017, Prime Minister of India asked the private sector to invest more in the contract farming, raw material sourcing and creating agri linkages.
  • During three-day mega event from 3rd November 2017 to 5th November 2017, MoU worth $ 11 billion is to be signed.

What is Contract farming:

  • The contract farming allows buyers and sellers to transact without routing through mandis.
  • Under contract farming, farmers can be given seeds, credit, fertilizers, machinery and technical advice so that their produce is tailor made for the requirements of the companies.
  • There would be no middlemen involved and farmers would get a predetermined sale price from the companies.
  • The farmer does not have to make trips to the mandis nor worry about getting seeds and credit for farming operations.
  • By entering into a contract, the farmer reduces the risk of fluctuating market demand and prices for his produce and the companies reduce the risk of non-availability of raw materials.
  • Contract farming can fill the gap of lack of investment and land improvement by supplying quality inputs, giving technical guidance and management skills.
  • Punjab has had corporate faming for over 15 years and success stories range from Pepsico India in tomatoes, potatoes, groundnut and chilli, safflower in Madhya Pradesh, palm oil in Andhra Pradesh and seed production contracts for hybrid seed companies which helped growers in realising better returns for their produce. 

Advantages of Contract farming:

  • The farmers get the high remunerative price for their farm product.
  • The farm grower benefit from the agro extension program of the agro processor.
  • The wastage of the farm produces now between 35 and 40 percent largely eliminated as the farm processing factory situated next to cluster of farms.
  • It promotes best agri practices from different parts of the worlds.
  • It will free farmer from middlemen and money lenders.
  • Farmers income security through guaranteed price and access to quality inputs.
  • Encourages new generation to take farming as new business venture instead of migrating to cities for search of jobs.

Problems related with Contract farming in India:

  • Very small and marginal farmers may not be roped in for this form of farming because companies may want a particular size of the crop which small farmers with their small parcels of land may not be able to produce. So, this will leave out the most vulnerable farmers from the ambit of corporate farming.
  • The medium size farmer may not be literate enough to understand the nitty gritty of the contract and all the clauses, and if the produce does not meet the standards of the company, he may face mass rejection.
  • The farmer may be forced to produce only tomatoes or onions year after year which will lead to monoculture and he will have no options left to produce whatever mix of crops which he may think is good for his farm.
  • Predetermined prices do not take care of food inflation and in case there is a price rise of the product, the farmer cannot take advantage and make a windfall profit because he is under contract to sell at the price agreed upon beforehand.
  • The average farmer being poor and semi-literate has little bargaining power vis-à-vis big corporations and hence there is little chance of his getting a fair price for his produce.
  • The corporate sector takes over our agricultural operations. It may affect the food security of the country.
  • Contract farming is best suited to special types of crops and not all farming activities. In China, only specific agricultural produce is under contract farming.
  • The Niti Ayog thinks a model law is needed to streamline the contract farming system and make it more uniform across the States.
  • Presently, contract farming has been co-opted by 22 States but there is no uniformity or homogeneity regarding the kinds of produce that can come under it and the conditions under which contract farming should be allowed.

Status of Food Processing Industries of India:

  • In India, the food sector has emerged as a high-growth and high-profit sector due to its immense potential for value addition, particularly within the food processing industry.
  • Accounting for about 32 per cent of the country’s total food market, The Government of India has been instrumental in the growth and development of the food processing industry.
  • The government through the Ministry of Food Processing Industries (MoFPI) is making all efforts to encourage investments in the business. It has approved proposals for joint ventures (JV), foreign collaborations, industrial licenses, and 100 per cent export oriented units.
  • The Indian food and grocery market is the world’s sixth largest, with retail contributing 70 per cent of the sales.
  • The Indian food processing industry accounts for 32 per cent of the country’s total food market, one of the largest industries in India and is ranked fifth in terms of production, consumption, export and expected growth.
  • It contributes around 8.80 and 8.39 per cent of Gross Value Added (GVA) in Manufacturing and Agriculture respectively, 13 per cent of India’s exports and six per cent of total industrial investment.
  • The Indian gourmet food market is currently valued at US$ 1.3 billion and is growing at a Compound Annual Growth Rate (CAGR) of 20 per cent. India’s organic food market is expected to increase by three times by 2020.
  • The online food ordering business in India is in its nascent stage, but witnessing exponential growth. With online food delivery players like FoodPanda, Zomato, TinyOwl and Swiggy building scale through partnerships.
  • The organised food business has a huge potential and a promising future. The online food delivery industry grew at 150 per cent year-on-year with an estimated Gross Merchandise Value (GMV) of US$ 300 million in 2016.
  • According to the data provided by the Department of Industrial Policies and Promotion (DIPP), the food processing sector in India has received around US$ 7.54 billion worth of Foreign Direct Investment (FDI) during the period April 2000-March 2017.
  • The Confederation of Indian Industry (CII) estimates that the food processing sectors have the potential to attract as much as US$ 33 billion of investment over the next 10 years and also to generate employment of nine million person-days. 

Obstacle in growth of food processing sector in India:

  • Indians prefer freshly cooked products as compared to packaged products.
  • Since unit production cost is high, he can’t sell his products cheap unlike a big MNC, and Indian consumers are price sensitive.
  • Most of Indian food processing units/companies/enterprises/factories are small sized meaning poor economies of scale.
  • Agriculture/Dairy production yield levels are among the lowest amongst the BRIC countries.
  • Land holdings is small, fragmented. Area under cultivation is decreasing due to urbanization, real-estate development, industrialization.
  • There is no common policy on contract farming throughout India.
  • High cost of raw material (driven by low productivity and poor agronomic practices)
  • Presence of intermediaries.
  • High cost of packaging, finance, transport and distribution.
  • Lack of organized retail.
  • Logistics cost i.e. transportation, warehousing, material handling etc. This cost is significantly higher as compared most developed countries.
  • Inadequate infrastructure of storage, sorting, grading and post-harvest management.
  • Taxes on processed food in India are among the highest in the world.
  • Except India, no country distinguishes between branded and unbranded food sectors for taxation.

Government initiative to improve food processing sector:

  • The Government of India aims to boost growth in the food processing sector by leveraging reforms such as 100 per cent foreign direct investment (FDI) in marketing of food products and various incentives at central and state government level along with a strong focus on supply chain infrastructure.
  • In Union Budget 2017-18, the Government of India has set up a dairy processing infra fund worth Rs 8,000 crore (US$ 1.2 billion).
  • The Government of India has relaxed foreign direct investment (FDI) norms for the sector, allowing up to 100 per cent FDI in food product e-commerce through automatic route.
  • The Food Safety and Standards Authority of India (FSSAI) plans to invest around Rs 482 crore (US$ 72.3 million) to strengthen the food testing infrastructure in India, by upgrading 59 existing food testing laboratories and setting up 62 new mobile testing labs across the country.
  • The Indian Council for Fertilizer and Nutrient Research (ICFNR) will adopt international best practices for research in fertiliser sector, which will enable farmers to get good quality fertilisers at affordable rates and thereby achieve food security for the common man.
  • The Ministry of Food Processing Industries announced a scheme for Human Resource Development (HRD) in the food processing sector. The HRD scheme is being implemented through State Governments under the National Mission on Food Processing. The scheme has the following four components:
  1. Creation of infrastructure facilities for degree/diploma courses in food processing sector
  2. Entrepreneurship Development Programme (EDP)
  3. Food Processing Training Centres (FPTC)
  4. Training at recognised institutions at State/National level

Way forward for contract farming in India:

  • To make contract farming inclusive, farming groups like cooperatives should be encouraged.
  • Food processing industries may also consider small farmers because there is benefit of low cost of production as these farmers have access to cheaper family labour who work more conscientiously than hired labour.
  • The best practices from the most successful cases of contract farming should be taken into account when drafting the model law.
  • There should be provisions for quick and just dispute settlement between the big corporations and small and medium farmers.
  • companies and States should promote group contracts with the intermediation of local NGOs and other organisations and institutions so that contractual relationships are more durable and fair.
  • Insurance component is a must to protect contract famers’ interests. There is thus the need for collective action through cooperative process to be able to buy and sell at better prices.
  • There has to be a system which monitors contracts to facilitate its smooth functioning in the context of small farmers.
  • According to Niti Ayog, “The law that shall be formulated will be a general one for all commodities and will aim at laying down a uniform set of terms and conditions that will significantly reduce conflicts. It is quite clear that such a law will be positive and a good move.”
  • The idea of a model Act is to vertically integrate farmers producing fruits and vegetables with agro processing units for better price realization and post-harvest losses.

Suggestion on Contract farming and Food Processing Sector at World Food India 2017:

  • Prime Minister suggested to link India’s potential in food processing with world requirement, and India’s farmers with world and also the India’s tradition with future of mankind.
  • Prime Minister stressed investment potential of fruit juice based drinks and nutrition rich agro climate smart crops to boost production and supply of India’s coarse grains and millets that ‘not only have high nutritional value, but can also withstand adverse agro-climatic conditions’
  • Private sector participation has been increasing in many segments of the value chain. However, more investment is required in contract farming, raw material sourcing and creating agri-linkages.
  • There were opportunities in post-harvest management, including in primary processing and storage, preservation infrastructure, cold chain, and refrigerated transportation.
  • There was immense potential for food processing and value-addition, especially in niche areas such as organic and fortified foods.
  • Focus on Sweet Revolution to boost India’s production and export of honey. Presently India ranks six in production and export in the world.
  • Each State of India to identify at least one food product for specialisation. Similarly, each district can also select some food items for production, and one item for specialisation.
  • The combination of traditional Indian food, with modern technology, processing and packaging, can help the world rediscover the health benefits, and refreshing taste of Indian food ingredients such as turmeric, ginger, and tulsi etc.

For increasing India’s farmer income, the food industry and government may focus the following area:

  1. Increasing production levels of multiple products based on milk,
  2. To make a big leap in the ocean economy through the ‘blue revolution’ and development of untapped areas, such as ornamental fisheries and trout farming.
  3. To explore new areas, like pearl farming. the entire north-east offers opportunities to create functional infrastructure for organic produce.
  4. To double the farm income within 5 year, the Pradhan Mantri Kisan Sampada Yojana, which aims to create world-class food processing infrastructure, is expected to leverage investment of $5 billion, benefit two million farmers and generate more than half a million jobs over the next three years.
  5. The creation of Mega Food Parks is a key component of Pradhan Mantri Kisan Sampada Yojana – At present Nine such parks are already operational, and more than thirty others are in the process of coming up across the country. 

Conclusion:

Government need to take long-term steps to ensure the economic viability of farming. Raising productivity, reforming land policies and solving remunerative price mess will require massive amount of public investment and political will.

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