Analyzing Model Contract Farming Act

The agriculture ministry on 22nd May released the Model Contract Farming Act, 2018. Mr. Ashok Dalwai, CEO, National Rainfed Area Authority has chaired the committee that drafted the model law.

Contract Farming: Contract farming is a container concept that covers a wide range of contractual arrangements, which makes it difficult to draw overly general conclusions. Under contract farming, agricultural production (including livestock and poultry) can be carried out based on a forward agreement between buyers (such as food processing units and exporters), and producers (farmers or farmer organisations) frequently at predetermined prices.

The Model APMC Act, 2003 provided for contract farming however, only 14 states notified rules related to contract farming, as of October 2016. Only Punjab has a separate law on contract farming. 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. (Reference)

Salient features of Model Contract Farming Act, 2018

1. In addition to contract farming, services contracts all along the value chain including pre-production, production and post-production have been included.
2. “Registering and Agreement Recording Committee” or an “Officer” for the purpose at district/block/ taluka level for online registration of sponsor and recording of agreement provided.
3. Contracted produce is to be covered under crop / livestock insurance in operation.
4. Contract framing to be outside the ambit of APMC Act 2003.
5. No permanent structure can be developed on farmers’ land/premises
6. No rights, title ownership or possession to be transferred or alienated or vested in the contract farming sponsor etc.
7. FPO/FPC can be a contracting party if so authorized by the farmers.

Policy Analysis by Experts:

1. As per Professor Sukhpal Singh of IIMAhmedabad: The new model Act 2018 opens up agricultural markets to contracting agencies without adequate safeguards for farmers.

2. Opinion Piece by Smriti Sharma, Policy Analyst with the National Institute of Public Finance and Policy on role of the government in Contract Farming Act

3. Opinion Piece by Jayshree Sengupta, Senior Fellow (Associate) with ORF's Economy and Development Programme on making contract farming suitable for Indian farmers.

Policy Analysis and Suggestions:

1. FPOs as aggregators: From the draft Model Act, it is not clear whether FPOs can also be contract farming sponsor. There may be a situation where FPOs would like to expand the cultivated area without increasing number of the farmers as members. The model law should clarify that how can FPO will be able to expand farming activities adhering to contract farming route.

2. Pro Farmer Policy: The Act lays special emphasis on protecting the interests of the farmers, considering them as weaker of the two parties entering into a contract and has been provided for reasonable protection to the weaker party to the contract, i.e., the producer, the pre-agreed price, category wise as under Section 18(2). Where no price premium exists, and a competitive price is paid on local markets, the intermediary role of FPOs may become more important for enabling higher income effects of the contract farming arrangement.

3. Capacity of State: The model contract farming Act proposes a state-level agency, the Contract Farming (Development and Facilitation) Authority, which would put contract farming outside the scope of the APMC. There is already acute shortage of extension services in Agriculture Department and current Act is proposing for an officer at the district/block/taluka level.

4. Corruption and Transaction Cost: More the responsibilities taken by the government staff, there is a higher chances of bribery for the online registration of sponsor and recording of agreement with a registering and agreement recording committee. Registration imposes extra procedure mechanism and costs on the parties, while small and marginal farmers cannot easily afford these transaction costs. Transaction costs embedded in contract farming need to be outweighed by the benefits, both for sponsoring corporates and farmer.

5. Monopoly, Fraud and& Settlement of disputes: Sponsoring agri business companies will exploit the monopoly position and similarly farmers will sell outside the contract (extra-contractual marketing) and divert inputs supplied on credit to other purposes, thereby reducing yields. There is no provision of budget for the establishment of body for dispute settlement mechanism at the lowest level possible required for quick disposal of disputes.

6. Insurance and Risk Management:  Agricultural investments always involve risk. The five most likely reasons for investment failure in agriculture are poor crop management, climatic disasters, pest epidemics, market failure and price volatility. The standard approach in agribusiness to compensate the farmer against quantity shortfalls is crop insurance. The contracted produce will also be covered under crop/livestock insurance in operation. But the government-run crop insurance schemes are proving to be unsatisfactory

7. Price Discovery and Market: Normally, contract farming does not work in an ecosystem when either party is looking to fetch a better price without any product differentiation. This is where derivative market integration with farm sector can help. This will eventually lead to both party trying to get the best price from the market instead of the each other. Where there are fixed price contracts there is no apparent risk to farmers with regard to payment for their crops. If a market collapses, the sponsor should automatically shoulder the loss. However, if the sponsor becomes bankrupt, farmers could be permanently affected. Where contracts are on a flexible or spot-price basis the stability of farmers' incomes is always at risk.

8. Farm income varies between commodities: The costs associated with contracting is high hence, it tends to be limited to high-value commodities (including meat, milk, fish, fruits, vegetables, and cash crops) being grown for processors and exporters who sell into quality-sensitive markets. An apple grower benefit from higher yields (presumably due to technical assistance), while contract green onion growers receive higher prices (presumably due to better quality).

9. Establishment of Forum: A major feature for market to work is a "market matching" exercise. This can be done by organizing forums where agribusiness entrepreneurs could meet FPO/ farmers' representatives to discuss their requirements. The forums can be followed by more detailed discussions between individual sponsors and individual cooperatives or farmer organizations.

10. Literature Review: All studies report at least one case of contract farming that has a positive and statistical significant income effect. The lack of studies on ‘failed treatments’ leads to an overestimation of the effectiveness of contract farming. The practitioner-oriented literature indicated the high risk of failure in the first years and stressed the need for adaptive management and mechanisms to settle disputes. Apart from food security effects, the role of contract farming in rural development, such as (sector-wide) innovation, and livelihood resilience, will need more research.

Conclusion: Modest expectations and careful planning are needed for contract farming to be effective and sustainable. However, it is important for policymakers to be realistic about the potential scope of contract farming. Thus, policymakers should not think of contract farming as a solution to the problems of credit, information, and market access for all small and marginal farmers . Model Contract Farming Act should be a promoting and facilitating Act as is intended, and should not end up as a over-regulating act distorting the market for both players.

Good Governance & Public Policy

What is Public Policy ? Public policy focuses on the processes by which various types of policies and regulations that affect members of the public are created and enforced. Public Policy deals with public goods delivery – political economy, taxation, law and order, good social and physical infrastructure, including better education and health facilities – and facilitate provision of private goods (cheaper power, flexible labour laws and other subsidies). The guiding principles for better public policy include building people’s ownership and participation in the governance and decisions affecting their lives. Regulation, Redistribution and Equity came to the forefront of policymaking.

Resources be it human, natural or financial are limited in a country and a government must utilize them in the most productive manner can achieve the best possible growth. That is the essence of good governance. The first and foremost requirement of good governance is broadly distributed political rights among citizens and the government accountability and and transparency in public administration. An ideal public service institutions will be decentralized, professional and autonomous management structures.

The theoretical framework however doesn't work smoothly in the real world. Governments in many developing & underdeveloped countries are corrupt and never work in favor of the people. They work for the interests of specific groups. It would be naive to think that governments work for the public all the time. Economics works alongside and interacts with social and political forces framing the policy. Politically motivated decisions, the undisclosed profiteering, the conflicts of interest, the vested interests, & the bad experiments with good intentions can lead to the flawed policy making process. So how the end objective is achieved ?

Policy makers must be open-minded and open-armed to combat such conflicting interests arising due to potentially corrupt motivation. They must have sound knowledge of the local context of a community – its history, politics, social structure, and culture, along with its economics. More the diverse the stakeholders in policy making, the probe in the issue will examine ground realities, re-validate assumptions on which our policies rest, and evaluating  new initiatives. The real impact of policy decisions are measured by three factors:

* Number of beneficiaries covered under the policy
* Number of beneficiaries who experience a positive change with the implementation
* Participation of the people and innovation springing from the outcomes.

Public opinion is varied and contested space, continually shaped and reshaped over time. Popular opinion in India generally overlook corrupt vested interests or don't want to go for long term reform. Hence, Indian state has always insulated public policy from open debate. The bureaucracy in India has never let the control of policy shifts to an autonomous institutions and public has suffered the ill results of lack of knowledge among civil servants. Bureaucracy seldom promotes creativity and, under the cover of neutrality, preserves the advantages of the powerful by dominating the weak. In the government systems, professionals are always crowded out by the imprisoning logic of bureaucracy. As described aptly by Prof Ajay Shah: In the West, leaders choose the direction of public policy. Government is like a car, which goes where the leader directs. But in India, the car is broken, and just turning the steering wheel is ineffective. To do public policy in India, the skill required is that of an engineer and not the driver. It is about opening the hood, understanding what is wrong with the institution, and fixing it.

Each policy must face several test: Are the policies realistic? How will they be implemented? What results will they produce in the long run? Were there more reasonable, less risky, cost effective, user friendly, & more inclusive policy measures that would have yielded as much benefit as the rolled out one ? There is no ultimate policy measure but always a solutions-oriented approach means more innovative outreach and trade-offs in a wiser way. I will be putting more on the non academic and self learned diagnosis of public policy in coming days. Watch this space and hear buzz words like committees, accountability, check and balances, transparency. Have I lost you yet? I will.

Why Government Schemes Fail? - 2

India's new prime minister, Narendra Modi's slogan "minimum government, maximum governance" is a serious goal. Its implementation on the grass root level will be tried and tested, and that is where most of the government’s schemes fail. There are myriad of difficulties faced by the government in properly designing and implementing of the public policy. Continuing from the previous article: 'Why Government Schemes Fail?', I will examine same question from another angles.

Design: Let us start with the design of the government schemes. What works well in the coastal belt of Kerala is unlikely to work in the Terai region of Uttar Pradesh, or for that matter, hilly lands of Garhwal. Hence, one size fits all schemes must be carefully reviewed. There is a strong tendency for planners to go in for prestige and grand projects. Through this they can leave monuments to their activity, even if defunct. The visibility is major emphasis than actual proposed work. It helps every level of government machinery to justify their budget and performance.

Most of the schemes even if redesigned are just shadows of past failed schemes. Reforms exclusively based on experience of the past suffer from another infirmity as it fails to factor in the innovations and transformations of the relevant sector. Any government scheme should be designed as a business model with incentives built for each stakeholder. Illegality in transaction slowly crumbles the scheme merely from the fact that the policy was not right from the beginning.

Involvement and Access: More democracy is required in making designs for the schemes! Currently, the only option left with people is of protest on bad implementation of schemes. There must be welcome and feel comfortable atmosphere for non-IAS experts with domain expertise to operate in regulatory bodies and government-run organisations. Advisers from the NGO sector like CRHP, Pradan had helped in shaping better schemes in the past.

Our huge ignorance to understand the functioning of the government and the local institutions is barrier to good governance. There is need for proper channel so that people can mobilize for effective political action to prevent mismanagement of resources by government. A small time broker and politician help poor to navigate a system that gives them so little access. Hence, the complex web of subsidy, entitlements and schemes in a very well intention-ed and well designed scheme hit the rock solid wall of the gargantuan system.

Political Interference: Government ministers announces huge scheme without having a concrete plan. It ends up similar to attempting to build a house without a blueprint. Political parties whenever come to power in central/state governments try to adopt developmental plans to suit their manifestos. This jeopardizes the future trajectory and intensity of implementation of schemes. The politically motivated decisions of fund allocation led by the relationship of the incumbent State and Central governments hinder welfare schemes and huge investments. Most of the time old developmental projects are either ignored or rejected in favour of new political discourse. There is always misalignment between financing of scheme, condition of economy and political campaign promises. This can go hugely wrong and ours current government current fight to hold Fiscal Deficit is one such glaring example. When a subsidy scheme becomes a non-viable financially, no matter how well-meaning, it must be restructured or abolished to extinction.

Planning and Coordination: Planning is done in ad-hoc manner and is generally a mere collection of schemes. This is an under-discussed problem of coordination between the intra- and inter- government departments. The right word is Convergence. Each scheme is being implemented by the respective department in isolation. Hence, it is imperative to make directed and organized efforts for converging such schemes. Convergence improves the deliver-ability of the benefits and services, it also gives better value to the public money. The Perpetuating Problem of Coordination will explain intrinsic details of the issue. The lack of reliable data for planning also causes failure of policies. With many of our allocations in schemes based on unreliable secondary data. There is dire need for collecting relevant data pertinent to all sectors, updating it periodically and planning and allocating financial and human resources based on this data. A new type of public good, Open data banks must be promoted among public, among companies and other non-government entities. With the availability of massive, publicly-held data sets in machine-readable “liquid” form can unlock the potential to spur innovation in all sectors.

Regulating and Implementation: How do you prevent abuse? The old mindset in which the command and control instinct dominated with emphasis to restrict, stifle, manipulate, control and micro-manage with new rule curb both private and public sector.A rule of thumb for efficiency standards is that they should be 'tough' but not panic inducing'. Time and space is needed to react with new initiatives.  There is heavy scrutiny of projects in implementation when problem arises due to poor design. The problem of implementation without clearly defined or sometimes ill-defined rules creates a lot of room for manipulation and hence make it inconsistent and unfair.

If you want to understand how the government functions, you must understand movement of files. All decisions in the government are taken on files through office orders. If projects/ schemes are not moving on file, then all public policy is waste. No person in bureaucracy want to take a decision without any political support and risk career damage. It eventually led to stalled projects and failure of the scheme.

Budgeting and Auditing: Why Development is considered in Terms of Expenditure Done? I am still looking for answers. Nobody is looking for the quality in government and this task has been left to the social audit. The delay in releasing funds and issuing UC (Utilization certificate) deter all the stakeholders involved in the scheme. There is always difference between fund requirement and allotment in budget. Even unimaginative funds required are just 10% increment of previous year budget. Take any scheme in government, the usual discussion in meetings revolves around Target Chase. There is a new idea floating to move away from the usual bureaucratic jargon of “targeting numbers” to “targeting names".

90 per cent of the government is now covered by the CAG, but much of this has been done through executive orders, not an amendment in our act. All PPPs, Panchayati raj institutions and NGOs getting government funding under need to be brought under the ambit of CAG. Due to no expertise on this topic, I will refrain from putting more words on the blogpost.

We are seeing that NRHM, NREGA & NRLM are delivering better result than government departments. Mission mode is working relatively well in the new order of scheme design. Accountability mechanisms and examples of government schemes that worked are quite low in our country. We need solid discussion on reports to understanding of the policies, scope, mechanisms, drivers and benefits of various schemes across different states and sectors. Everything has an expiry date, no matter how good their past performances. There is logic for having a provision to discard schemes once their utility is over. All programmes need strong monitoring, which is absent most of the times. A separate blog post is entirely needed to showcase the problem of monitoring and evaluation. That is a another story for another time.