Multi-national corporations and agricultural development: a study of contract farming in the Indian...

Journal of International Development

J. Int. Dev. 14, 181–194 (2002)

DOI: 10.1002/jid.858

MULTI-NATIONAL CORPORATIONSAND AGRICULTURAL DEVELOPMENT:

A STUDY OF CONTRACT FARMINGIN THE INDIAN PUNJAB

SUKHPAL SINGH*

Institute of Rural Management, Anand, Gujarat, India

Abstract: This paper examines the rationale, practice and implications of contract farming

under the MNCs in vegetable crops in the Indian Punjab from the new institutional economics

perspective. It is found that the MNCs deal with relatively large producers, their contracts are

biased against the farmer, and the contract crops perpetuate many of the existing problems of

the farming sector like high chemical input intensity, unstable future incomes, and social

differentiation, though contracting has led to higher farm incomes and labour employment,

especially for women. There is an inherent contradiction in the objectives of the contracting

parties and that of the local economy and suitable institutions and organisations are not

present in the state. Copyright # 2002 John Wiley & Sons, Ltd.

1 INTRODUCTION

Besides providing resources for productive investment, Multi-National Corporations

(MNCs) can benefit the locals in employment, technology transfer, and incremental

technical knowledge, especially at the farmers’ level (Goldsmith, 1985). But, the argument

against the MNCs is that they do not promote larger national objectives like employment

generation, equity and balanced regional growth as they are driven by business goals

alone. They tamper with the local production structures by extending their procurement

operations beyond mere crops into supply of inputs, monitoring of crops, and promotion of

only certain crops and species, especially under contract farming system. There is a large

amount of literature which focuses on the use of contract farming by MNCs as part of the

new international division of labour and sees it as a means by which these firms shift risk to

the peasant farmers and bind them to exploitative monopsonistic relationships

(Wilson, 1986; Little and Watts, 1994). Also, the presence of an MNC in food chain

Copyright # 2002 John Wiley & Sons, Ltd.

*Correspondence to: Dr S. Singh, Associate Professor, Institute of Rural Management, Anand—388 001, Gujarat,India. E-mail: [email protected]

gives rise to two types of information asymmetries i.e. market asymmetries and

hierarchical asymmetries. Whereas the first type relate to market arrangements like

contracting, the second refer to internalizing the transaction in the event of market failure

(Scott, 1984; Hennessey, 1996). In fact, the factors which determine the impact of the

MNCs in a developing agricultural economy are both macro as well as micro; and include

the market structure, terms and conditions of investment, and the regulatory mechanisms

at the macro level, and the channel of raw material supply used, and nature of this

arrangement at the micro level. There have been no studies of the contract farming system

in Punjab or India until recently. This paper examines the role of the MNCs in agricultural

development from an institutional economics perspective by analysing the performance of

the contract system; exploring the nature of contracts; studying the farmer and the firm

perceptions of the functioning of the contract system; and looking into the effect of

contract system on the local economy in the Indian Punjab. The following section makes

quick review of the various strands of literature on contract farming system. The context

and methodology of the present study are discussed in Section III. The performance of

contract system in the given context is analysed in Section IV followed by a focus on the

relationship between the MNCs and the contract growers in Section V. The final section

concludes the paper with policy suggestions for better use of contract farming system for

agricultural development under the MNC regime.

2 REVIEW OF LITERATURE

Contract farming can be defined in terms of a system for the production and supply of

agricultural produce under forward contracts, the essence of such contracts being a

commitment to provide an agricultural commodity of a type, at a time and a price, and in

the quantity required by a known buyer. It basically involves four things—pre-agreed

price, quality, quantity or acreage (minimum/maximum) and time. The logic for contract

farming from an institutional economics perspective is in information asymmetries

between primary producer and processor as contracting helps bring together the two sides

with the respective information edges they have. Further, the risk of market failure, both in

terms of price as well as quality may also cause contracting (Scott, 1984; Hennessey,

1996). The MNCs prefer contracts to complete vertical integration as it overcomes land

constraint, reduces risk of primary production, promotes market for inputs, and is

politically more acceptable. Similarly, farmers go for contracting as it provides access

to assured market and prices, costly inputs, and new technology (Eaton and Shepherd,

2001). But, for the individual farmers, it is not the contract per se but the relationship it

represents which is crucial as the divergence between the two may prove crucial in

determining the development of contract farming as an institution (Clapp, 1988). Further,

it is the context of the contract which can make a whole lot of difference as there are many

actors and factors in the environment which influence the working and outcome of

contracts. The way farmers perceive contract farming i.e. define their relationship with

companies differs across cultures (Asano-Tamanoi, 1988). In fact, there is so much

diversity in the type of firms, farmers, nature of contracts, crops, and socio-economic

environment that it is better to focus on specific situation than the generic institution of

contract farming. Since contracting can help in removing market imperfections and co-

ordination failures, it can be viewed as an important potential institutional mechanism for

agricultural development (Grosh, 1994).

182 S. Singh

Copyright # 2002 John Wiley & Sons, Ltd. J. Int. Dev. 14, 181–194 (2002)

The studies of implications of contract farming by the MNCs show that the farmers

agreed that contracting helped them become better farmers, gave more reliable

incomes, generated employment especially for women, provided new skills of

farming, and did away with patron–client relationship between large and small

producers (Glover and Kusterer, 1990). But, farmers generally found that the contract

firms provided poor extension service, over priced their services, passed on the risk to

the producers, offered low prices of produce, delayed payments, and did not explain

the pricing method (Glover and Kusterer, 1990; Grosh, 1994). In Africa, farmers

faced problems of bribes (by company officials), manipulation of inspection stan-

dards, tying of one contract to another, and outright cheating in accounts by MNCs

(Little and Watts, 1994; Porter and Phillips-Howard, 1997). On a larger level, farmers

felt that they had little bargaining power compared with that of the companies which

they perceived benefited more than the farmers, and that they had become dependent

on the firms for credit and other inputs (Glover and Kusterer, 1990; Burch et al.,

1996).

There are also problems of monopsony of the processing firm, defaults by the firm,

biased contracts and their strict enforcement (Grosh, 1994). In fact, contracting causes

new market asymmetries of the static type i.e. monopsonistic exploitation of the growers

by the processor, monitoring of production contracts, incomplete specification of the

contracts, and crop specific access to credit and other inputs; as well as of the dynamic

type which is to do with the operations of the contracts like quality control and its

manipulation depending on the market situation due to the exclusive dealing attribute of

the contracts (Hennessey, 1996), technology transfer and skilling, product specific asset

fixity among growers, and the relative bargaining power of the processor and the growers

over time. And both of these types of asymmetries have efficiency and equity implica-

tions, with implications of static asymmetries being negative most of the time, both for

equity as well as efficiency, while those of the dynamic ones being positive or negative or

even uncertain depending on the assumptions about the contract relationship (Scott,

1984; Baumann, 2000). Further, incomes under contract fluctuate widely, are not

sustainable due to ‘agribusiness normalization’ by firms over time, market choices

become limited, and contracting may prove costly in terms of use of local resources, in

the presence of unstable international commodity and product markets, and due to the

way the contracts are practised; and it tends to reinforce itself over time (Wilson, 1986;

Little and Watts, 1994; Dunham, 1995; Burch et al., 1996; Torres, 1997). Contracting

leads, finally, to the worsening of the relationship between producers and firms to the

disadvantage of the former. Finally, how can a contract between a processor and a farmer

be equitable, as the two are not equal entities? (Wilson, 1986; Eaton and Shepherd,

2001).

The over-exploitation of groundwater, salination of soils, soil fertility decline, and

pollution are typical examples of environmental degradation due to contract farming

(Siddiqui, 1998). The firms tend to move on to new growers and lands after exhausting the

natural potential of the local resources, particularly land and water, or when productivity

declines due to some other reason (Torres, 1997). The above review reveals that contract

farming has led to many ill-effects in the spheres of livelihoods of producers, environment,

and local development. Most of the studies find contracts inequitable, short-term, and

ambiguous (Glover and Kusterer, 1990; Grosh, 1994; Porter and Phillips-Howard, 1997).

But, it is not the contract per se, which is harmful, but how it is practised in a given

context.

Contract Farming in the Indian Punjab 183


3 CONTEXT AND METHODOLOGY

The Punjab agriculture has been known for its green revolution of the late 1960s and the

1970s. Not only has it achieved an irrigation coverage of 95 per cent of the net sown area,

cropping intensity of 185, HYV coverage of 93 per cent which are all the highest among

the Indian states, but also the yields of wheat and paddy are very high. The state has

achieved this despite the fact that 70 per cent of the holdings have been below 4 hectares

each. But, during the 1980s, the momentum of the green revolution could not be sustained.

There was stagnation in yields accompanied by increasing costs of cultivation. By the mid-

1980s, a wheat grower in Punjab was obtaining lower net returns per hectare, even after

incurring higher costs per hectare on modern inputs, than a wheat grower in Madhya

Pradesh (Nadkarni, 1988). The input use efficiency has been low e.g. only 35–50 per cent

in nitrogenous fertilizers and tractor utilization only 60 per cent (600 hours per year) of

that required for their viability (1000 hours per year). The net annual income of a 7-hectare

farm family in the 1980s was found to be lower than the annual salary of a government

department assistant (Johl, 1996). About 24 per cent of small farmers and 31 per cent of

marginal farmers have incomes below the poverty line (Chand, 1999). Further, Punjab

ended up growing largely wheat and rice (71 per cent of the gross cropped area) and the net

cultivated area is already 84 per cent of the total area.

The high degree of mechanization (e.g. 28 tractors per 1000 acres of land) led to the

problem of rural unemployment. The intensive production has also led not only to

monocultures but also to higher incidence of pests and diseases which have in turn led to

the ecological problems of: decline in water table, water logging, soil salinity, toxicity and

micro-nutrient deficiency. The economic condition of a vast majority of farmers, especially

marginal and small, could not be improved unless there were changes in the cropping

pattern and technology of production. Diversification within agriculture was intended to

stabilize incomes and employment in the farming sector which could either be in terms of

variety of crops grown or technologies used for the same set of crops. The economic logic

behind the promotion of contract farming was that to bring dynamism to the agricultural

sector, either cost of cultivation had to be lowered by raising productivity or cutting costs

directly, or returns to the producers were to be raised by value addition or diversification.

Contract farming in Punjab was in place by the mid-1990s with the entry of Pepsi into

tomato, chillies and potato, and the selling off of its tomato facility by Pepsi to HLL which

brought another multinational into the state in 1997. Since both the firms are export-

oriented directly (Pepsi and HLL) and a local firm (Nijjer) indirectly, through Nestle, the

farming sector of the state stands internationalised through contract production system. It

is in this context that the study looks at the role of contract farming arrangement under the

MNCs in terms of its contribution to help improve farm incomes and employment, and

sustain the farm sector of the state. Hindustan Lever Limited (HLL) and Pepsi Foods

Limited (PFL) are both MNC subsidiaries (of Unilever and Pepsico respectively). The PFL

works with 60 potato farmers and a few dozen chilly growers; and the HLL with 400

tomato growers.

3.1 Methodology

The case studies are based on an interview survey of contract farmers in the state of Punjab

with the help of an interview schedule prepared for the purpose, and discussions with the

184 S. Singh


officials of the MNC subsidiaries involved in processing and marketing of three crops

(potato, tomato and chillies) being procured under contracts. The primary survey of

contract growers was conducted in districts of Amritsar, Jalandhar, Patiala and Bathinda in

Punjab. The choice of these districts was driven by the prevalence of the contract system in

different pockets of the state. Since the study intended to cover the contract systems of

both the players and for all contract crops in the state, it was not restrictive in nature in

terms of locational coverage of farmers. A complete lists of growers could not be obtained

from the companies; and as some of them gave only a few good contract growers’ names

and addresses (as the companies perceived them to be), the farmers were located through a

snowball sampling procedure i.e. locating the whereabouts of more farmers from a few

who were contacted initially with company given details. There were many farmers among

those interviewed who grew, under contract, more than one (2 or 3) crops for the same or

different companies. They were treated as different respondents for different crops as the

experiences differed across crops and companies.

The interview schedule consisted of three parts. The first part was about the profile of

the growers in terms of literacy, land holding and basic details about contracting; second

part explored the nature and significance of the contract in terms of detailed features of the

contracts and their enforcement; and the third part had questions relating to the effects of

contracting on the local economy, and the role of various agencies in terms of farmer

perceptions, besides the sustainability of the system itself. The other methods of

information collection included interviews with groups of farmers, observation in the

field, and interviews with company officials. Also, local press, especially vernacular

newspapers, was monitored closely for the happenings in the contract system and crops in

general.

4 PRACTICE AND PERFORMANCE OF CONTRACTS

4.1 Profile of Contracts and Growers

The contracts are Procurement and Input (P&I) contracts under which the firms not only

agree to pick up the contracted acreage specified quality produce at a fixed time and price,

but also provide inputs like seedlings on credit (with part payment in advance), and

technical advice and various equipments (on returnable basis) free of cost. The contracts

are only verbal commitments as there is no written proof with the farmers, and include

acreage and quality conditions. The acreage for tomato production under HLL should not

be less than 2.5 acres in Rajasthan and 5 acres in Punjab. The minimum acreage required

under contract for Pepsi is 5 acres though it is not strictly followed. The contract price

varies across regions depending on transport cost as the produce is brought to the factory

by the farmers at their own cost in case of both the firms. The tomato quality refers to

produce not being rotten, worm affected, yellow in colour or damaged. The lots are

rejected or accepted depending on the sample results. The companies also recommend

schedule of pesticide sprays for each area and even the type and brand of pesticide to be

used each time. At the time of harvest, each farmer is given 30–40 crates free of cost on

returnable basis by HLL. In the case of crop failure, HLL compensates the farmer to the

extent of waiving his seedlings cost. Pepsi buys back the entire produce of potato (only

two tonnes of chillies) and payment is made within 1–2 weeks after delivery by cheque/

draft in the bank account of the farmer. The company allows part of the acreage produce to



be sold outside if enough procurement is available. This kind of contracts eliminates the

asymmetric information problem as most of the information about the crop and its

purchase is already known to both the parties. But, some other aspects like produce testing

or quality check by the firm with sophisticated equipment still cause lot of tension between

farmers and the firm as farmers do not appreciate such technical tests and believe that the

firm is cheating them.

Most of the MNC contract growers were secondary or college level literate with 12 years

of schooling on the average. The average owned land holdings of these farmers were of the

order of 40 acres ranging from 5 to 195 acres. Some of them also leased in land ranging

from 19–40 acres and even more, the average being 28 acres. Thus, the average size of the

operational holding was 72 acres, ranging from 53 to 90 acres (Table 1). There was no

farmer with less than 15 acres of operational land holding which is much above the average

operational holding in the state (8.9 acres (Johl, 1996)). Even the acreage under contract

(14.3 acres) was much above the average operational holding in the state, varying from 4 to

27 acres across firms. In fact, there have been growers of tomato in the past (under Pepsi)

who put their entire land (as much as 45 hectares) under tomato in 1995 and as much as 13

hectares under chillies in 1996 (Gabrani, 1996). The contracted acreage under potato for

Pepsi was very modest i.e. three-quarters of farmers growing only 5 acres or less under

contract, and the contract production was in owned land in most of the cases. Similarly, in

chillies, the acreage under contract was just 5 acres or less in 90 per cent cases with the

other 10 per cent growing 6–10 acres each under contract. The HLL growers not only

planted larger acreage under contract but also had larger owned landholdings. The average

contracting experience of tomato growers was 5.4 years and only 3.7 and 1.6 years in

chillies and potato respectively, the overall average being 3.7 years (Table 1). Some of these

growers are agribusinessmen, rural salaried, or have returned from the West to try their

hand at modern farming. More than one-third of them have grown two or three contract

crops for the same or different companies at the same time or over the years. Thus, MNCs

have preferred to work with relatively large growers due to the familiar reasons of reducing

transaction costs and also to benefit from the resource position of the larger farmers.

Table 1. Company wise average and range of schooling (years), of land owned, of land leased,of land operated, of land under contract (all in acres) and of experience of contracting (years)

of contract growers

Parameter (average) HLL Pepsi-P Pepsi-C All

Years of schooling 12.13 11.58 13.09 12.13

(5–18) (5–15) (5–17) (5–18)

Land owned 47.25 33.79 39.63 40.96

(5–150) (5–95) (5–195) (5–195)

Land leased 30.96 18.95 40.45 28.66

(0–165) (0–100) (0–165) (0–165)

Land operated 78.21 52.74 90.18 71.68

(16–225) (15–150) (15–225) (15–225)

Land under contract 26.88 4.37 4 14.3

(2–130) (1–15) (1–7) (1–130)

Years under contract 5.38 1.58 3.73 3.7

(1–10) (1–5) (1–10) (1–10)

Note: HLL: HLL tomato, Pepsi-P: Pepsi potato, and Pepsi-C: Pepsi chillies. The figures in parentheses are therange (minimum and maximum) for each parameter.Source (Tables 1–3): Primary survey.

186 S. Singh


4.2 Farmer and Firm Default

Default on quantity and/or quality has been one of the most common problems for firms in

contracting everywhere (Glover and Kusterer, 1990). The terms of the contract were same

for all classes of farmers and almost all of the growers (90 per cent) had met the contract

terms in the past. In case of default, companies lose recoveries of seeds/seedlings cost. The

default in terms of extra-contractual marketing is resorted to by farmers as there is another

local firm operating in the region in the same business, and therefore, the switching costs

for the farmers are low. Also, some times, open market, especially in bad crop years,

becomes a competitor to the firms. The default rate is high (>50 per cent) only if the gap

between contract and open market prices is very large (3–5 times). Thus, the conditions of

monopsony which is crucial for viable functioning of the contracting firm, in terms of a

reasonable return on its investment, is not met in this case. Also, the fixed price clause in

the contracts of these firms is responsible for this situation as there is little incentive for the

farmers to comply with contracts in terms of quantity and quality, and there are low

barriers to entry and exit in markets like potato and fresh tomato for players who would

like to make quick money. The companies blacklist all the full and part defaulters. They

have not gone in for legal action against the defaulters, as it is neither feasible to sue so

many farmers due to high transaction costs and unappealing available remedies, nor

politically wise as this will sour relations with other farmers in the region and create a

negative image for the firm. About 80 per cent of the farmers from the previous season are

retained.

It is not that only the farmers default. Even companies (especially HLL) have not been

able to procure from the farmers many times especially when they over-contracted acreage

and the yields were good. Then, either they did not give quota slips in time for entire

produce or became strict on quality. Pepsi accepted even lower quality produce from

contract growers and procured large quantities from non-contract growers during market

gluts at lower than contract prices. Two-thirds of the tomato farmers reported lower yields

as a case of crop failure, with another 12 per cent reporting total crop failure, the main

reasons being disease or pest attack, natural calamity, and seed failure in that order

(Tables 2 and 3). The company response had been nil for most of these cases, with only a

few (25 per cent) reporting waiver of seedlings cost as the compensation. A large

proportion of potato farmers (47 per cent) reported lower yield of the contract variety

than that of the local ones due to the seed variety itself and a few (10 per cent) poor quality

of produce (Tables 2 and 3), but there was no compensation for this from the company.

This lack of response from the companies could be another reason for farmers to default as

Table 2. Company-wise distribution of growers by type of crop failure

Type of HLL Pepsi-P Pepsi-C Allcrop failure

No. of Per No. of Per No. of Per No. of Perfarmers cent farmers cent farmers cent farmers cent

Lower yield 15 62.5 9 47.4 1 9.1 25 46.2

Poor quality 0 0 2 10.5 0 0 2 3.7

Total failure 3 12.5 1 5.3 0 0 4 7.4

No problem 6 25 7 36.8 10 90.9 23 42.6

All 24 100 19 100 11 100 54 100



they were not compensated i.e. the companies did not share the natural calamity risk and

went by the contract provisions only. There have been no major problems of disease and

lower yield in chillies (Tables 2 and 3).

4.3 Farm Incomes and Labour Employment

Farmer satisfaction with contracts can be measured by the growers’ interest in the contract

system, number of farmers under the arrangement—growing or dwindling—and the level

and frequency of income and its distribution effects across classes of farmers and within

the households (CDC, 1989). More specifically, it is captured through farmer profitability

of the crop, efficiency of payments and input supply, market assurance for the produce, and

farmer participation in crucial decisions relating to contract production. There is no doubt

that the vegetable crops under contracts are profitable for farmers as they get not only

assured prices and market but also, much higher yields (Eaton and Shepherd, 2001). A

very large majority of farmers interviewed also wanted to continue working under the

contracts and many others wanted to get into contract production. This certainly indicates

that the farmers, on the whole, are happy about the contract system. But, this may not last

for long due to the monopsonistic tendencies, ‘agribusiness normalization’ over time by

these firms, and the lack of commitment of firms to the state’s farming sector as they are

moving out of the state or contracting itself.

That contracting has led to more and better employment opportunities for labour

especially women is true and acknowledged by the labour. The labour intensity of potato

and other vegetable crops is much higher than that in the traditional crops. It varies from

307 hours per acre in potato to 539 hours in other kharif vegetables (Chand, 1999) which

may not be true for contract crop production as the operations are highly mechanized.

There is piece rate of output linked system of wages i.e. wages per crate/bag of tomatoes/

potatoes picked by a worker. The women have got more work opportunities with the

Table 3. Company-wise distribution of growers by reasons for crop failure

Reasons for HLL Pepsi-P Pepsi-C Allcrop failure

No. of Per No. of Per No. of Per No. of Perfarmers cent farmers cent farmers cent farmers cent

Disease/Pest 4 16.7 2 10.5 0 0 6 11.1

Natural calamity 3 12.5 3 15.8 0 0 6 11.1

Seed failure 3 12.5 3 15.8 0 0 6 11.1

Disease and 4 16.7 1 5.3 1 9.1 6 11.1

natural calamity

Disease and 0 0 1 5.3 0 0 1 1.8

seed failure

Natural calamity 1 4.2 2 10.5 0 0 3 5.6

and seed failure

Disease, natural 3 12.5 0 0 0 0 3 5.6

calamity and

seed failure

No 6 25 7 36.8 10 90.9 23 42.6

All 24 100 19 100 11 100 54 100

188 S. Singh


introduction of these crops, as female labour is low cost, more sincere, and found to be

more suited for picking and transplanting jobs. There is also practice of child labour in

tomato harvesting and potato grading. Even mothers with infants attend to grading work as

it is generally in one place and under shade of some tree or under a shed. This is no

different from what has been observed in Mexico tomato fields under the agribusiness

company ownership (Torres, 1997). Though this has come as a big employment boom in

these areas as the mechanisation of sowing and harvesting operations of paddy and wheat

crops had reduced manual work to negligible but, the employment generated for labour

may disappear as these companies are already planning to mechanise the planting and

harvesting operations.

4.4 Local Economy-wide Effects

4.4.1 Economic differentiation

The contracts also reinforce the practice of reverse tenancy as large and medium farmers

lease in land from small and marginal farmers for contract production as these large

farmers can afford large input costs and take the risk of crop failure. The land lease rates

have increased and there is now a practice of six-month lease as against annual lease

prevalent earlier, especially in tomato crop.

4.4.2 Sustainability implications

Repeated cultivation of the same crop without rotation can lead to a variety of soil

infestations, most commonly nematodes, which has happened in many situations in the

case of tomatoes. In fact, sometimes, the land becomes unfit for any kind of crop

cultivation (Glover and Kusterer, 1990; Torres, 1997). Irrigation intensity of contract

crops like tomato, potato and chillies is more than that of wheat. For example, potato

requires 8–12 irrigations compared with only 5–6 for wheat and other crops (Chand, 1999;

also Pepsi Foods manual for potato production in Punjab). Ecological implications of

chemical use on these crops are also a cause for concern as pesticides and fertilizers are

used at much higher levels than in the traditional crops. For example, potato cultivation

requires 108 kg of NPK (inorganic fertilizer) per acre as against only 78 kg for wheat

(Chand, 1999) and 60 kg each of phosphorus and potassium per acre (Pepsi Foods

manual). Tomato crop requires 60–90 kg. of nitrogen, 60–100 kg of phosphorus and 60–

120 kg of potash per acre depending on the quality of soil (HLL manual for growing

processing tomatoes). Similarly, the chip potato crop requires 4–5 pesticide sprays and the

seed potato crop 6–7 sprays (Pepsi Foods manual for potato production in Punjab). Tomato

crop under contract requires as many as 14 sprays (HLL manual for growing processing

tomatoes), which is even higher than that in cotton.

5 RELATIONS BETWEEN GROWERS AND MNCS

The longer-term relations between contract growers and the corporations is one of the

most important issues as it has implications for the sustainability of the contract farm as

well as corporate processing or marketing enterprises. The following qualitative account

suggests the nature of relations between growers and corporations.



5.1 Market Imperfections

Contracting is generally a response to market imperfections where market niche is either

so narrow or so unfamiliar that growers would not produce the crop unless there is some

assured market mechanism. Contracting internalises the market for a crop or produce and

avoids market competition (Baumann, 2000). But, in a crop like tomato or potato, the

market is not so differentiated or absent that contracting is inescapable, and therefore

prone to extra-contractual marketing and farmer manipulations. As against this, the case of

chillies was more close to the ideal type of market imperfection as there was little market

for the contracted varieties. Further, since contract is a way of allocating risk between the

producer and the processor, the risk in these crops is higher, especially in tomato, for

processor as it not only foregoes input recoveries in case of default but also suffers lack of

procurement. On the other hand, a defaulting farmer hardly loses anything as there are

alternative outlets for his produce. Also, large investments by the companies in the region

in processing plants and input provision makes them more vulnerable as compared with

the farmers who do not stand to lose much as contract crops are not even six monthly

crops. So, they can always easily withdraw from the contract crop production.

5.2 Input Supply and Crop Failures

The HLL contract growers did not appreciate the company selling seedlings to the non-

contract farmers when it had surplus seedlings, just for the commercial consideration of

making money out of additional seedling production. But, perhaps, the company wanted to

create a larger base for procurement and contracts in the longer term by doing this. The

companies tends to blame the yield loss on the farmer and, therefore, do not offer any

compensation. Though farmers feel there is generally no dictation from the companies on

field practices, they tend to follow the recommended practices as otherwise they may face

quality problems. Also, since the costs of these practices are not accounted into the

contract price directly, farmers do not value them beyond a point. But, the farmers find

company recommended pesticides costly and non-viable, as they doubt that there must be

some corrupt arrangement between the company and the pesticides companies/dealers

about the sale of particular pesticides and brands. The Pepsi farmers found the potato seed

supplied by the company generally less than adequate for the acreage to be sown under

contract.

5.3 Produce Delivery and Payment

About two-thirds of the HLL growers did not face any major problem in contracting, but

others reported problems like poor co-ordination of activities, poor technical assistance,

delayed payments, outright cheating in dealings, and manipulation of norms by the firm.

One of the cases of poor co-ordination was the delivery of tomatoes at the factory. The

farmers had to wait at the factory gate for a day or more, which leads to weight loss of

produce due to evaporation and adds to the cost for the farmers. The company ends up

receiving more concentrated produce at the same price. Further, longer delays result in

spoilage and higher rejection rate for the farmers. This again has been the most frequent

farmer problem under contracts almost everywhere, either because of genuine problems

190 S. Singh


on the part of the firm or due to deliberate strategy of getting more concentrated produce

for processing (Glover and Kusterer, 1990). The delayed deliveries and delayed payments

have been reported to be serious problems for the farmers by another recent study of the

tomato contract farming system in the state as well (Rangi and Sidhu, 2000).

5.4 Biased Contracts

Whereas the contract agreements protect the firms of all and even any unforeseen

obligation, the farmer is to meet the contract obligations under all circumstances. There

is no compensation to him even under conditions of crop failure due to natural calamity. In

all the contracts, the farmer is bound to sell to the company only and is to be penalized for

default. But, there is no specified company liability for the failure to buy his produce. The

contracts, which are in English language only, are biased against the farmers as is evident

from the following excerpts from the contracts of the companies:

Further provided that the seeds, the plants sprouting from the seeds and all parts of

the plant will remain the exclusive property of PFL (the company) and shall only be

disposed/sold off if so desired by PFL, as per PFL’s instructions.

In case of default, the grower shall be liable to pay to PFL the damages for the short-

fall on this account and in such an event, PFL reserves the right to forthwith termi-

nate the contract. (But, no liability is specified in case the company fails to pick up

the produce)

The decision on grading will be at sole discretion of PFL. However, PFL retains the

first right to buy potato rejected due to deviation from specifications at prevailing

market price.

5.5 Future of Contracts

Some of the Pepsi potato farmers had a few problems with the company system, but a large

number (60 per cent) were happy. Only excess or low quality chilly produce of the contract

growers is sold in the open market. Though a majority of growers did not see any major

role for government in contract system, some of them wanted it to make market more

competitive by setting up more processing units (27 per cent) and to regulate contracts and

companies (10 per cent). But a majority of them were more keen on the companies making

improvements in their systems like higher rate for crop, better extension, field level

grading and pick up, and a more sincere approach while dealing with growers. Despite

various problems and conflicts between companies and growers, 62 per cent of HLL and

68 and 73 per cent of Pepsi farmers (potato and chilly respectively) wanted to continue

contracting.

6 CONCLUSIONS

One of the major issues in the farming sector of the state has been that of farmer

participation in agro-industrial development as it is believed that the capitalist farmers



have accumulated, under the green revolution regime, significant investible surpluses

which need to be given an outlet for investment. That purpose is certainly not being served

by the contract farming model of agricultural change as these firms are the only

beneficiaries of value addition surplus and do not share the extra profits with farmers.

In fact, the issue of diversification has been tackled in an undesirable fashion. Diversifica-

tion can mean doing same thing or different things differently. But, here, the different

things are being done in the same way i.e. new crops are being grown with same or higher

input intensity. In fact, what the state should have directed and attempted in participation

with other actors has been left to the private corporate and multinational enterprises.

It is important to recognize that what is needed is not less of state but better state for

promotion and regulation of economic activities, organisations, and institutions for

sustainability.

Contract farming system should be seen as a partnership between agribusiness firms and

farmers, and to be successful it requires a long-term commitment from both parties. In the

absence of that mutual commitment, even if there is an incentive system created by the

state for the MNCs to attend to the desired developmental objectives and help them cover

the higher risk of operations while meeting such objectives, it is not likely to work due to

the moral hazard problem. Therefore, there is a role for the state agencies and the NGOs to

intervene in contract situations as intermediaries to protect the farmer and broader local

community interests. The NGOs and community organizations, which can play a role in

information provision, and in monitoring and regulating the working of contracts, are,

unfortunately, missing from the state altogether. In fact, that was one of the reasons that the

farmer suicides could not be prevented in the state recently (1998) due to crop failure and

indebtedness. So, what is must for making success out of contract system is the

institutional and organizational innovations in the state’s rural sector, which it is capable

of, as proved by the emergence of the secondary tractor markets in the state (Singh, 1999).

Bargaining co-operatives, or other agricultural producer organisations are needed to

negotiate equitable contracts which have been able to secure the standardization of

contracts and their scrutiny by a government agency in the past in the US (Wilson, 1986).

In Japan as well, farmers have managed their relationships with companies well through

co-operatives (Asano-Tamanoi, 1988).

The issue of regulating MNCs in developing countries may look somewhat out of

context in today’s economic order. But if the advantages of the MNC operations are to be

utilized for host country’s development, and the disadvantages are to be minimized, then

there has to be some regulation of the MNCs which need not be discriminatory. The

developing countries should have a clear idea of what they should (not) expect from these

corporations. Priority should be given to specifying very clearly the ‘rules of the game’ so

that MNCs contribute their bit in terms of technology transfer especially biotechnology

and information technology as development today is driven by technology. If these

enterprises can function efficiently and contribute to technology transfer and development

in their industry sectors, that should be a good enough achievement. The demands of

globalization require that the MNCs become more responsive to local needs while

retaining their global efficiency. This requires their structure and operations to be

somewhat differently organized in terms of a mix of dispersion and specialization of

the key resources of the MNCs in an interdependent network of worldwide operations.

Here also, the state can influence the MNCs to reconsider their structure and operations to

meet the local objectives. Liberalization certainly does not mean absence of the state. It

only means a better state.

192 S. Singh


A legal protection to contract growers as a group is must to protect them from ill-effects

of contracting (Wilson, 1986). There are cases of legal protection given to subcontracting

industries in Japan in their relations with large firms. This set of laws specify the duties

(to have a written clear terms contract with the subcontractor) and forbidden acts for the

large parent firm. The forbidden acts include refusal to receive delivery of commissioned

goods, delaying the payment beyond agreed period, discounting of payment, returning

commissioned goods without good reason, forced price reduction, compulsory purchase

by subcontractors of parental firm’s products, and forcing subcontractors to pay in advance

for materials supplied by the parent firm. And, these provisions are monitored by the Fair

Trade Commission. Interestingly, most of the violations by parent firms were on the

written form of contracts and clear terms of the contracts (Sako, 1992). If contract farming

is nothing but the flexible production systems prevalent in industry applied to farm

production, then it is only logical to extend such legal provisions with necessary

modifications to farming contracts.

ACKNOWLEDGEMENTS

I wish to acknowledge the comments and suggestions which helped in making this paper

more focused, particularly those from Martin Greeley and Shiva Sivaramakrishnan of the

Institute of Development Studies (IDS), Sussex (UK) where I spent three months as a

visiting fellow writing initial drafts of this paper in 1999 and presented two seminars. I am

thankful to the Institute of Rural Management, Anand (IRMA) for facilitating the

fieldwork with a grant and to the IDS Sussex for offering me visiting fellowship for the

project on contract farming on which this paper is based. Thanks are due to LK Vaswani of

IRMA for comments on the interview schedule and to all the companies and contract

growers for sharing the information especially Dr Aneesh Chawla of Pepsi Foods Ltd

Channo (Sangrur), and Mr H. C. Bahl and Dr O. P. Thakur of HLL Ltd, Zahura

(Hoshiarpur). However, I am solely responsible for the errors and omissions, if any.

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