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Economics

Contract Farming in India

 

Contract farming is a win-win

 

Sushil Bhan suggests ways by which fragmented farms can yield more for the fork

 

 

AGRICULTURE EMPLOYS

 

65 percent of Indian’s working population and contributes 18 percent to the Gross Domestic Product by value. At a time when India is looking at the second Green Revolution to feed its ever rising population, yield improvement is most important aspect to script the gargantuan socio-economic progress for the nation. However to achieve this, India will need to significantly up its farm production. Reasons why Indian farms produce below par is simple and elucidated below.

Of the total arable land in the country, nearly 21 percent farms measure a miniscule 1-2 hectares, while 8.25 percent of the farms measured were 0.5 percent or less. Smaller farms lead to smaller yields which in turn leads to even smaller cash generation. Power, pumped irrigation, farm implements cost money that our small farms just cannot afford. Instead, a large population of farmers still uses traditional means to farm which is not only cost ineffective, but leads to waste of man-hours. Besides that, small tracts of farm cannot be mechanised to any useful degree. I mean you can’t have a tractor or a harvester run on a lot which is all of two hectares or less. The fragmentation of land holding, as it has happened over generations, is the root and primary cause of poor farm yield. I might add that unrealised yield is money that the economy needs but does not get to see.

What’s more, land fragmentation is a natural process and will continue as land titles are transferred from parents to their children. You simply cannot stop this from happening and nor should anybody attempt to stop this custom. However, as all this continues, India’s yields will continuously plummet and this is as an aspect that needs to be fixed. India’s rural wallet needs to have more income in it. The nation cannot attain a quality economy or meaningful human development unless yields are improved. For more rural income generation to happen, yields have to increase manifold, which cannot be questioned.

New high-yield seeds and fertilisers can be researched and developed. They can help but they cannot singularly create the yield bonanza India needs at this time. Therefore, all things considered, mechanised farming over aggregated land is the only true answer for improving yields. But how does India solve this puzzle? Who can guide the marginal farmers in the country and make them see reason?

Can contiguous land tracts be created without jeopardising land ownership? This happens to be the cause of huge insecurity among our farmers. The truth is that it is fairly simple to achieve both — aggregation and ownership — without mutual interference. India must discuss and draft a simple contractual framework that makes farm leasing through aggregation a secure proposition for the farm owner. This will help the farmer perceive less risk in offering his land for lease.

Hammer out a middle-of-the-road legal charter which protects interests of the farmer as well as the consolidator entrepreneur. This has been tried and tested albeit in a completely different but much more challenging industry. To illustrate the point, let me cite how the shipping industry created a consolidated charter that is globally accepted and is the standard document for all freightrelated contracts. Total ship freight booked all over the world in a single day is worth $2 billion. The shipping industry realised centuries ago that for freight contracting business to thrive, universal charter agreements need to be drawn up. That is what the industry did and it has worked like magic. Today, with no more than a handful of charter agreements, two complete strangers can enter into freight deals across the globe, across borders and cross-intercultural divides. Was it impossible? No. The Federation of Shipowners created a universally acceptable charter for themselves and it is working fine.

Therefore, with the standard charter platform as the binding reference, you agree on a rate, a timeframe, the nature of cargo and few other variables and you got yourself a ship to carry your cargo. You don’t have to hammer out a newly authored contract from the ground up every time you want to hire a ship. That has been done and done well by the standard wordings of the charter party document. You could fix very big business in under one hour.

THAT IS

the power of standard contracting formats. This is why the industry does $2 billion worth of contracts everyday. In absence of a standard platform, very little business will be transacted. With complexity and contingency covered in a time-tested standard charter, the things left to agree on are very few. That gives you speed and safety. You do not need lawyers and legal teams upfront. There are misgivings but they are too few to deter people from doing business. People combine to create. People do not combine to fight each other.

It would be great if the government authors such a contract document for farmers and entrepreneurs to come together for business. I think it should be a single document for agriculture and there should be others for horticulture, fishery or cattle farming. The idea is to create simplicity and transparency. I think this would be great for India. The benefits are so vast that it promises to be the most strategically useful enablement the Parliament would have initiated after they gave this great nation its Constitution. There is no doubt that a charter of this nature will ignite a huge blaze of yield-driven prosperity for the farming sector.

The sector stakeholders will lap it up like blind men scurry for a chance to regain sight. This is because farmers are currently dying to make ends meet; that they will come forward is guaranteed. The opportunity that it will create is so immense that consolidation entrepreneurs will dash for rural India like a bat out of hell. With a document like this, impossibility will transform into an opportunity. That is the power of root cause determination and that is the power of strategy.

It is a win-win situation. The farmers, consolidators and the markets, everybody is assured of gains. Because when you create more yields, you are bringing more cash into the system and hence everybody benefits. But pitfalls need to be prevented, as the following story will illustrate.

Russia and China embarked on militarised strategies to assemble land and it was pure disaster. The state itself got involved in aggregating farms and did this by erasing rights of individuals to own land. India should not even think on those lines. India must be aware not to repeat the mistake Communists made with agriculture.

Instead, the government must spend its time, energy and power in creating an enabling atmosphere for public-private partnerships in farming as is being done in the infrastructure sector which is in need of over a trillion dollars for creation of assets for India to cross over from ‘developing’ to a developed nation.

Sushil Bhan, a strategy and technical operations veteran of 25 years, is a columnist

.

captbhan@yahoo.com

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