New Markets for Smallholders in India

Exclusion, Policy and Mechanisms

SUKHPAL SINGH

1 Introduction
The gradual withdrawal of the state from agricultural
markets and the emphasis on the role of the private
tural markets (due to the amendment of the Agricul-
sector has meant the entry of corporate and
With tural tural the marketsturalProduce
Producegradual (due Marketing
Marketing Committeewithdrawal
(apmc) Act toin the amendment Committee of the state (apmc) of from the Agricul- agricul- Act in
multinational agencies through the opening 2003up of
in India, under which private markets can now be set up and
procurement, wholesale trade and retailing. contract
This farming (cf)paper
with and direct purchase from farmers
have been made legal) and the emphasis on the role of the private
examines the new corporate interface with primary
sector for bringing efficiency and growth to the farm sector,
producers in a small farmer-dominated economy. It
space is being provided to corporate and multinational agen-
contextualises the issue from the perspective of
cies through the opening up of procurement, wholesale trade
smallholders. It examines contract farming and retailing. The mechanisms being allowed and promoted
arrangements to show the exclusion of smallare cf,producers
public-private partnerships, food retailing and food
wholesaling. It is argued that the sources of trouble in thefarm
from the retail chain; the performance of modern
sector lie in the supply chains, which can be improved by
(supermarket) food retail chains in India andcorporate
their spread
involvement and investments. In this policy environ-
ment, and in the context
and penetration into, or interface with, farmers; of low growth of the farm sector and
policy
and regulatory issues; and some of the mechanismsdistress in large parts of India, do-
the prevalence of farmer
mestic corporates have made forays into the retail sector and in
and institutional innovations for more inclusive
perishable produce cf in the past decade. Many foreign
agricultural marketing systems. supermarket retailers (Metro, Wal-Mart, Teseo, Carrefour) have
also entered the wholesale cash and carry sector (permitted
since 1997). Foreign direct investment (fdi) in multi-brand
retail has now been permitted up to 51% (only since 2010) of
the total equity, and 100% of equity in single brand retail.
Except for coffee and tea, where 99% of the foreign investment
during 1991-2004 was from non-resident Indians, 75-95% of
the foreign investment approvals in other sectors were from
foreign nationals and entities (Rabobank 2005).
This paper examines the new corporate interface with primary
producers in a small farmer-dominated economy. Section 2
contextualises the issue from the perspective of smallholders;
Section 3 examines cf arrangements to show the exclusion of
small producers (although this is not absolute, as there are
crops and products which in fact involve mostly small producers);
Section 4 examines the performance of modern (supermarket)
food retail chains in India, their spread and penetration into, or
interface with, farmers, including exclusion of small producers
from these chains; Section 5 examines policy and regulatory
issues; Section 6 examines some of the mechanisms and insti-
tutional innovations for more inclusive agri cultural marketing
systems; and Section 7 concludes the paper.

Sukhpal Singh (sukhpal@iimahd.ernet.iri) is at the Centre2 for

Context

Management in Agriculture, Indian Institute of Management,

In India, 85% operated holdings are smaller than, or just
Ahmedabad.
about, two hectares, with 66% of all such holdings being

Economic & Political weekly nran December 29, 2012 vol xlvii no 52 95

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REVIEW OF RURAL AFFAIRS ~~

marginal (less than oneThe problem

hectare). is not even
In India, that sm
th
export crops like tea in
andtoday's
coffee,marketplace, bu
which are know
plantation character, skewed
see playingpresence
a significant field, asof
w
for example, 53% of exclusion
the coffee in this
area paper.
falls Ther
under f
hectares, and smallholders
together with in bothmedium
modern and traditionalfarmers,
markets. For the
60% of the output. In example,
the the prices small
case of producers
tea, receive are lower than
small farme
20% of the total those obtained by larger
production, farmers because of their weak
a percentage bar-
that is
in other developing countries
gaining power and holding (Neilson
capacity (Agrawal 2000).and
In wheat, Pritc
However, it is also marginal holders had the
important to highest yield per hectare compared
recognise that sm
do not form a homogeneous group.
with all other categories There
in India; however, they realised are
the sm
who are fully lowest prices per quintal
commercialised and and soldbuy
the lowestand
percentage of
sell in
There are others who
theirparticipate in
output in grain markets (Gandhi the
and Koshy 2006).market
There
manner, to buy inputsis similar
and evidence
sell from some
the 1980s withpart
regard to cardamom
of their
others are subsistence farmers,
growers who
in Kerala; here, too, small growers consume
received lower m
farm produce while prices than large
selling growers. In the
their cardamom market,
labour inwhere
thean mar
ing foodgrains to meet their
e-auction total
was introduced consumption
to improve price realisation to grow- ne
becoming net buyers ers,
of the food.
requirement ofWithin
a cardamom certificate and practices
commercial
from a market perspective, there
like making payment are
only after 14 days andagain
after assessingspecif
a
of the farming 500 gram sampleincluding
community, for quality acted as barriers
small for smallholders
farmers
are the small farmers and led to engage
who their exclusion (Joseph
with 2009; Joseph
high et al value
2010). ex
directly, or indirectly This points to the role of
through institutions and organisations
Primary Marketing in the
(pmos) and other sector, and to thefor
exporters, way markets are organised, all ofin
instance, which the c
and baby corn or gherkins. Second,
leads to the exclusion there
or mistreatment are
of small growers. the s
who are fully commercialised
Most importantly for smallholders,
and operate the issue of modernin do
value markets, for example in new
markets, which promotes vegetables like
and high value but risky crops, po
ion; they supply to wholesale markets,
is about the risk involved - both production risk or modern
and market risk.
tail, or wholesale "cash
There are 'n' carry"
many policy players.
and market instruments of risk reduc- Thir
small farmers who grow cereals
tion in India and
including crop/weather oilseed
insurance or
against yield/ pul
in domestic open markets locally,
production risk; orfor
state-sponsored tools, in apmc
example, msp for 24 or re
kets. Finally, there are
crops the small
and minimum farmers
statutory price in the
for sugar cane, the Market g
tion regions (and een elsewhere),
Intervention who
Scheme (mis) for other crops, produce
and the Farmer Income f
and depend on Insurance Scheme (fus),
the minimum market-based institutions,
support price that is, (msp
is, for wheat, paddy, Futures
cotton, markets and the Warehouse
and some receipt oilseeds.
system, besides
Further, there is an emerging segment
other mechanisms like diversification of
of crops and the use oforganic
risk
who have either entered export
reducing inputs markets
(Acharya 2006). directly
The implementation of msp,
private agencies or non-governmental
however, has been weak, except for a few cropsorganisation
in a few regions,
cater to domestic and has often
fresh and failed when farmers were most in need
processed of it. The
food mark
small farmers, other rural
lack of access topoor
insurance andwhose fortunes
credit markets makes small pro- a
agriculture and its markets,
ducers vulnerable, directly
and they reduce their or
risk by indirectly
choosing low-
agricultural labour, pastoralists and
risk activities or technologies that artisans.
have a low average return. Ma
are not only producers, but
For example, also regions
in semi-arid net consumers
of India, such self-insurance of
ing small farmers. produces 35% lower returns for the poor, than would have been
The major problems of
the casesmall and
had they not needed marginal
to self-insure farme
(World Bank 2007).
include spurious input supply, inadequate and co
3 Small Producers and CF
tional credit, lack of irrigation water and costly acce
of extension services Corporate
for agribusinesses, both domestic
commercial crops,and multinational,
explo
marketing of their produce (Dev through
interface with smallholders 2005) due to
seed production the
and supply,
of produce and factor and
input supply,credit markets
procurement of produce, and more(more
directly,
the case of marginal and small
through farmers,
the facilitation of production byand
means ofmore
cf and otherso
areas, as irrigated agriculture haslike
procurement arrangements a"contact
greater need
farming" (discussed
inputs (Swain 2000), high
below in theexpenditure onin health,
section on supermarkets). Further, India, super-
alternative (non-farm) sources
market of income
chain growth, including (Dev
fdi in retail, international 20
trade,
ment, which is the only way
and quality issues to raise
like Sanitary farmers'
and Phyto-sanitary and
(sps) meas-
comes, is low on
these
ures, farms because
organic trade, fair trade and ethical of the low
trade, promotion by the
elasticity of output, central
due andto thetheincreasing
state agencies, banking and input industrymecha
push for
the kind of crops grown (Muller
cf, the farming andtenancy,
crisis and reverse Patel 2004).
and the failure of

90 DECEMBER 2Ç, 2012 VOL XLVII NO 52 Mavì Economic & Political WEEKLY

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 REVIEW OF RURAL AFFAIRS

traditional cooperatives will all help the spread of cf across cropsbasmati paddy? How many can spare it for cf? How many
and regions as they provide new space to this arrangement in the
would like to spare it for cf with Markfed? Another export joint
venture - dealing with chilli export from India - between a us
context of the withdrawal of the state from agricultural space.
Studies have found that most firms work chiefly with largemultinational and an Indian company worked only with specific
and medium farmers (Table 1), with the exception of firms in
growers as it selectively recognised rural spaces and generated
Karnataka, Tamil Nadu and Andhra Pradesh, which workednew geographies of advantage and opportunity for partici-
pants, while excluding others (Pritchard and Connell 2011).
with small and marginal farmers due to the nature of the crops
(cucumber/gherkin and broiler chicken). In Gujarat, among It is not an accident that most cf projects are located in the
the sample farmers, only one contract grower with McCaina
states of Punjab, Haryana, Gujarat, Maharashtra, Karnataka and
Canadian multinational corporation (mnc) - had operationalTamil Nadu, which are agriculturally developed states. On the
land holdings of less than five acres (although McCain did buy
other hand, states such as Bihar, Jharkhand, Chhattisgarh, Orissa,
from some small growers without contracts), with the averageWest Bengal, the entire north-east, and parts of Uttarakhand,
landholding being 19 acres, compared with only five and nineHimachal Pradesh, Kerala and Jammu and Kashmir have been
acres for farm gate and apmc sellers, respectively. Contractbypassed by cf projects. Does this mean that the latter areas
growers for Frito-Lay in Punjab had average operational hold-and farmers would not benefit from the commercialisation
and vertical coordination of agriculture? These are areas with
ings of 63 acres, with only 22 acres owned and the rest leased.
the highest concentration of small and marginal farmers (Gill
None of the sample contract growers with Frito-Lay had less
than 10 acres of land, in spite of the fact that the average size2004). This essentially means that contracting companies do
not encourage the participation of those who need to be helped
of holdings in the state was nine acres, with 70% holdings be-
to participate, as risk preference and innovativeness require
low 10 acres each (Singh R 2008). A Punjab-based study of cf
not only attitude, but also resources and a risk-taking capabil-
showed that the average size of the operational holding of con-
tract growers was more than one and a half times that of theity to deal with risky crops and ventures. Smallholders are ex-
cluded from privately organised contract farming projects, as
non-contract growers. It found "no marginal farmer in the size
group of below one hectare [...] operating under contractwell from organic cotton in Madhya Pradesh (mp) and Gujarat,
farming. A handful of small farmers in the size group of one toand organic basmati rice in Haryana (Singh 2009).
two hectares were operating" (Kumar 2006: 5369). Another There are high value food chains like gherkins and baby corn
for export and maize for the feed industry, which are very in-
study noted that "the majority of the acreage registered in the
project [cf by Punjab Agro Foodgrains Corporation (pafc)] isclusive of smallholders. In fact, they mostly involve smallhold-
ers; even largeholders are equivalent to smallholders as far as
held by larger farmers, who tended to receive greater benefits
from participation (in contract farming)" (Witsoe 2006: 16). crop acreage allocation is concerned. They do not permit more
Table 1 : Crop and Agency-wise Average Size of Holding of Contract Growers than a certain small acreage under contract as
Study and Year Contracting Agency and Place Crop under Average Size Average % Area the crops require care, which only family la-
(Sample Size) Contract of Operated under Contract
Holding (Acres)
bour can provide. This is why such agencies
Singh 2002 (19)
look for indicators like family labour availabil-
-do- (15)
ity, besides education, irrigation, and so on.
-do- (24) The aspects of contracting that contribute
-do- (11)
to the exclusion of small producers from cf
Dev and Rao 2005 Andhra Pradesh government
are the enforcement of contracts, high trans-
action costs, quality standards, business atti-
Asokan and Singh 2006 (18) AM Todd, Punjab

Kumar 2006 tudes and ethics

(100) Many (for instance, non/delayed/
MNC
reduced payment and high rate of product
Singh S 2008 (21) McCain foods, Gujarat
rejection), and the weak bargaining power of
-do- (14)

small growers (Kirsten and Sartorius 2002).

The organisers of cf also find it expensive to
-do- (20)

Singh R (2008) (15)

Pritchard and Connell 2011 Karnataka and AP Chilli 35 (Karnataka) 60 (Karnataka) work with small producers due to their scat-
(15 in Karnataka and (AVT McCormick) 22.5,42,22.5 70,25 tered location and the smaller volumes of
10, 14 and 8 in AP) (AP- three (AP- three
their produce (Boselie et al 2003). The eligi-
locations) locations)
bility criteria for participation in cf projects/
schemes,
In fact, one of the parastatal agencies in Punjab (the which include irrigated land, suitable land, location
Punjab
State Cooperative Supply and Marketing Federationof[Markfed])
lands near main roads, and the literacy level of the farmer,
placed advertisements in local newspapers a few are years ago, discriminatory. In fact, in cf everywhere, private
themselves
publicising its basmati paddy cf programme, andagribusiness
asking po-firms have less interest and ability to deal with
small if
tential contract growers to contact its district managers farmers
they on an individual basis (Hazell 2005). Organic
were willing to grow at least three acres of basmati
producepaddy
chains also tend to exclude small producers due to the
high
under cf with Markfed. Several questions arise from certification
this kind costs, smaller volumes produced, and tighter
control
of offer: First, how many small farmers can spare three exercised
acres for by the chain leaders in the absence of any

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REVIEW OF RURAL AFFAIRS

agriculture is not doing well, coupled with the fear that super-
local market outlets for the organic producers (Raynolds 2004;
Singh 2009). markets will change the way food is produced and consumed;
emerging strong domestic retail players; consumer preference
4 Food Supermarkets and Smallholders for local street markets; complex urban planning regulations;
Retailing contributes about 15% of India's gross domestic product and institutional factors (Neilson and Pritchard 2007). Super-
(gdp) and 8% of employment (Patibandla 2012). However, only market chains have moved towards hyper and neighbourhood
4% of the 15 million retail outlets are bigger than 500 sq ft, and formats, and away from supermarket and department store
almost all are family owned (Kalhan 2007). In 2011, modern retail formats. Further, in most cases, fruits and vegetables account
had a 7% share in the total retail sales (Patibandla 2012). Modernfor only about 20% of their sales turnover (Reardon and Minten
food retail in India has developed in three waves. Modern retail-2011; Singh and Singla 2011).
ing started with cooperative stores. The Horticultural Producers'
Cooperative Marketing Society, Karnataka (hopcoms, a state-4.1 Exclusion in Supermarket Chains
run cooperative), set up retail stores in Bangalore during theIn the fresh fruit and vegetable (f&v) retail chain-led procure-
1950s, and "Safal" fruit and vegetable outlets were established ment of vegetables in India, it is the medium and large growers
in 1988 by the National Dairy Development Board in Delhi. Thewho are the contact growers for these chains - with only a few
establishment and expansion of the "Foodworld" outlets by theexceptions, like Namdhari Fresh, which involved smallholders
Ram Prasad Goenka (rpg) Group, starting with the first outletand practised cf with the vegetable growers (Table 3). Although
in Chennai in 1996, led to enhanced corporate interest in food it is argued that vegetable crops are more suitable for small-
retailing (Sulaiman et al 2011). However, the mid-1990s to the holders as they are more labour intensive and provide regular
early 2000s saw a wave of supermarkets in south India whichincome, the market/buyer does not seem to favour smallholders.
This is also corroborated by another recent study of a retail
was middle-class centric, and based on domestic and foreign joint
venture capital. Later, it spread throughout India and focused chain in Karnataka (rf), where the average size of a retail sup-
mainly on the middle class, although in some places, and through plier varied from 2.5 hacs (6.25 acres) to as much as 8.2 hacs
certain formats, it has moved into the lower-middle and upper (20.5 acres) and 9.3 hacs (23.25 acres) across locations within
working classes, and into smaller cities as well. During the lastthe state. This was many times the average size of holdings in
decade, there have been many corporate entries in the fresh pro- the state, or even the study areas (Kolar and Belgaum), which
duce retail sector, notable among them being Reliance Fresh (rf), were 4 acres (state) and 2.9 acres (Kolar), and 5 acres (Belgaum),
Spencer's, Aditya Birla Retail Limited's (abrl)Table 2: Major Food Supermarket Chains in India
More, Namdhari Fresh, Foodworld and Herit- Chain Stores in India Owned by Parent Ownership Structure
(Bangalore)

age Fresh@ (Table 2). Modern food retail was Relia

estimated to have grown 49% annually, from Reli
2001 to 2010. The large majority (around 75%)More 655(61) Adivisionof A highly diversified conglomerate ofthe Birla Group.
Aditya Birla Entered retail with acquisition and takeovers of
of modern private retail came in from 2006 to 275 Trinethra and 68 Fabmall in south India.
2010. Food and grocery market sales accountedSpencer's 241(21) A division of RPG A highly diversified conglomerate funded by
for a 73.2% share of the hypermarket, super- the Goenka family, since the 1990s.

market and discount formats in 2009 (www.Fresh@ 75(20) Adivisionof A dairy and food processing company funded by
Heritage Foods the Naidu family of Hyderabad diversified into
datamonitor.com). By 2010, the sales of the retailing, as of 2009, only in south India.
leading 20 private retail chains that sold foodFoodworld 67(42) 51% by a private Dairy Farm International isa Hong Kong retail
made up 5-6% of the urban food retail. Inter- consortium of Indian giant. Until 2005, the investment banks; 49% by
Dairy Farm 51% Indian interest was held by RPG and
estingly, the Indian private food retail chain
International managed alongside Spencer's.
development is driven by domestic capital in-Namdhari Fresh 25(18) Namdhari Seeds Group High-end stores with salad bars also earring an
vestment, as FDi was not permitted in multi- organic range.

brand retail until recently, and was restrictedITC Choupal Fresh 6 ITC group of companies Focus on fruits and vegetables (F&V).
The Future Group-owned Food Bazaar and Foodhall outlets also sell fresh fruits and vegetables, and in 201 1-12, the
to single brand and up to 51% of the equitygroup's annual sales were 1 .75 times that of Reliance Retail (Images Retail, June 2012).
(Reardon and Minten 2011). Source: Pritchard et al 2010; Singh and Singla 2011.

Some of the factors contributing to the slowTable 3: Crop and Agency-wise Average Size of Operated Holding of Retail Chain Contact/Contract
Vegetable Growers

growth of supermarketisation of food retail in F&V Chain (Sample Size) Location Crop under Contract/ Average Size (in Acres) Average%Area
India include restrictions on fdi due to the
Namdhari Fresh (33) Bangalore region Okra, Baby Corn 4.56 75.5
strong implications this holds for traditional
retail, local government and civil society; the
Reliance Fresh (28) Ahmedabad region Cauliflower, Cabbage 15.89

ITC Choupal Fresh (22) Chandigarh region Cauliflower, Bottlegourd 9.91 37.5
political resistance to supermarket retail pene-
ABRL-More (25) Bangalore region Cauliflower, Tomato 7.46 76.7
tration (Franz 2010); poor agriculture and rural
ABRL-More (22) Ahmedabad region Cauliflower, Tomato 14.74 66.8
infrastructure; slow reform of agricultural Vasudha (supplierto Belgaum region Cauliflower, Tomato 10.76 73
More, Reliance Fresh
markets at the state level (Reardon and Minten
2011); the implications of supermarkets for
and Smart) (19)

* There
farmers and the rural poor at a time when Source: S

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 = REVIEW OF RURAL AFFAIRS

respectively payments
(Pritchard
or quick purchases; however, these might
et not be al 2
and Chengappaenough to sustain
2008)the linkage. Although
onthe chains the
have
(frc) in the same
brought state
quality consciousness, introduced exotic(Karn
vegetables
shows that and package of practices for certain vegetables
landholding like cucumber
size, as
drylands, was higher
and long for
melon, farmers did not consider food
them the major buy-
and 1.5 acres, respectively)
ers of their produce (Singh and Singla 2011). t
market This lack of involvement
farmers (2 of the chains with their primary
acres, 1.5 ac
Similarly, as producers is also revealed
part of in another
the recent study of rf opera-
recent
Indian farm tions in Karnataka (Pritchard et al 2010),
sector, the which states Food
gramme of Bayer
[Supermarket purchasing in Crop
India Scien
tends to operate without contractual
mnc) in India relations
was found
with farmer suppliers, to
and that buyers did not play prominent be
regions roles in on-fai m monitoring
included, the [sic] . The practice
farmers of Collection Centres
(ccs) issuing their purchase requirements to farmers only the previous
that are covered, and the inform
night does not promote any shifts in cropping patterns; this would hap-
Bayer Crop Science launched it
pen only if there is a mechanism to inform farmers about the likely de-
where retail and processing
mand for different vegetables ahead of the planting season... The rapid ind
curing from farmers, and
winding back of these (procurement) strategies whe
in favour of a looser
ment system of procurement through ccs indicated
infrastructure, such a level of institutional
as in- col
compatibility between the profit strategies of the company and the agri-
has already been set up. Thos
cultural regions from which it was seeking to buy f&vs (p 452).
"nodes" in Punjab and Haryana
taka and Tamil Nadu,
Yet another and
recent study corroborates Andh
the above conclusions.
there are clusters of
Organised retailers have brought a intensified
new institution for marketing of
crops. This focus on
fresh fruits and vegetables by creating select
a system of preferential payment reg
for quality, although given the (small) scale of these arrangements, they
majority of Indian farmers fro
are yet to have an impact on the local mandi, where farmers continue to
phase, the fcp programme
sell bulk of their produce. However, the governance mechanism of the
excl
The focus of new
the programme
supply chain created by the organised retailers has not been fully
big majority of farmers
developed. The (Trebb
institutions related to contracts, payments, grades and
Thus, retail standards, are yet to evolve.
chain linkageThe marketing system of the organised
is re- sele
tailers does not fit into the standard contract farming and corporate
regions the programme reaches
farming formats. Neither there is [sic] a pre-determined procurement
covered, whichprice nor are only
is input or technical those
support provided as part of this arrange- o
is selective inment.terms
It is more like contact farming - of the
an informal procurement ar- fa
the size of rangement,
the where the retailers have informal
farms, arrangements with pro-of
level
ducers who can provide quality produce. There is no mechanism for
and irrigation facilities). Thu
sharing production and marketing risks. The procurement volumes and
needs, that is, the marginal
prices change daily based on the front end demand (communicated by an
ing irrigation the facilities and
head office) and prices at the local market. Each bas
party is free to ex-
remote plore better
regions, avenues of procurement
are and sale (Sulaiman et al 2011: 23).
excluded. Fu
market price-based
In this context, it is important procurem
to examine the role of the state
limited in promoting and
portion ofregulating the
new players fromgrowe
a smallholder
without any perspective. The role
firm of the state in agricultural markets is
commitment.
input or other services,
Table 4: Status of APMC Act Amendment at the State Level nor di
any formal State/UTs Having
contract
Amended Act
arrange
1 Andhra Pradesh (26 O
and Singla 2011). They did not
2 Arunachal Pradesh (9
use of inputs in Karnataka either
5 Assam (19 January 2007)
al 2011). 6 The
Goa (6 August 2007) chains
Partially Amended procured
"rr" grade produce;
7 Gujarat (1 May the
2007) (1) Punjab/UT of Chandigarh/Haryana (only directrejec
marketing
was left for the farmer to sell elsewhere 8 Himachal Pradesh (26 May 2005) and contract farming)
(Singh and Singla 2011). A recent study9 Karnataka
of (16 August 2007)

10 Maharashtra (11 July 2006) (3) Chhattisgarh, Madhya Pradesh (direct m

RF in Karnataka also reports no obligation
11 Nagaland (8 September 2005) contract farming
on the part of the farmers or the retail chain
12 Orissa (17 May 2006) Amendment Bills under Finalisation
to conduct a transaction. The agreement
13 Rajasthan (18 November 2005) (1) Haryana, (2) West Bengal,(3) NCT of Delhi, and (4) Puducherry
was reached solely on the basis of oral 14
as-Sikkim (20 April 2005) Remaining states:
surances (Pritchard et al 2010). 15 Tripura (11 May 2007)

Farmers valued lower transaction costs 16 Jharkhand (6 December 2008) Rules Notified
17 Mizoram (23 April 2008) Andhra Pradesh, Rajasthan, Maharashtra, Ori
more than the price, as the quantity sold was
18 Uttarakhand (18 April 2011) Himachal Pradesh, Karnataka, Madhya Pradesh
small and the price was pegged to that of the
Reportedly No Amendment Needed licence for more than one market), Mizoram (only f
market. They also valued small benefits like 1 Tamil Nadu

the return of the packing material, instant

Source: Ministry of Agriculture (2012).

Economic & Political weekly EEE3 December 29, 2012 vol xlvii no 52 99

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REVIEW OF RURAL AFFAIRS =r

the
realised contracting
th agen
by contract
the agreement
Unio (u
subject,
of the dif
sharing of cos
grower
ways. (goi
Most 2003). H
ing to
partially farmer intere
(T
steadments
of and deliveries,
am
in ducer
the has made
state firm-
Act ducement/force/intim
have le
direct
material pur
risks, compe
eventhe issued
sharing of produc
However,
markets. even amon
O
number
Act with of
respect to c
Andhra
of Pr
amendment. For e
vides
Gujarat for a registrat
in
set Rs
up 2,000.
soThe contra
f
most
year's all
msp of the s
cro
amended
security/bank A
guaran
from farm
produce, to be returne
other
markets. hand, in Gujar
Th
Table party Progre
5: in the tripart
State optional),
Common the logic
for Direct Purchase Licences Licences Licences ofF&Vs

Maharashtra 23 107 Yes

facilitators as they ha

Madhya Pradesh 8 Yes Yes ers. Further, they ca

Rajasthan 1 76 2 Yes besides monitoring i
Karnataka
porters are eligible to
Andhra Pradesh 171 2
cf scheme from the f
Gujarat 21 13 Yes
commitment fee of 5
Haryana 37
Himachal Pradesh 12
duction under cf by w
Odisha 46 Yes to be for different pe
Punjab 26 extending to a maxim
Tamil Nadu 179 6
tree crops, the agree
Uttarakhand Yes
upon by the parties. L
West Bengal Yes
negotiated price or in
Source: Ministry of Agriculture (2012).
are to be made by the
5 State and Agricultural
If the Markets:
produce is T
reject
The Model apmc Act
in of market;
the 2003, created
if the b
Agriculture, permits direct
contract purchas
price, the con
setting up of private wholesale
delivery is not marke
taken w
wherein a to
producer sell
comeselsewhere
to an and
agree
tion and supply of a specified
agency. The commod
storage y
well as location and time
sidered a of delivery
sub-yard of
agreed upon with Similarly,
the known contract
the Andhr
mandatory and optional provisions
guarantee of Rs of
2,00,
provisions include
anywho can
paymentdodefault
cf, con
bilities, farmer ments
asset indemnity
remain onlyinco
resolution, no raising
any of
ruleany
or structure
contract.
land, minimum contract
contractin period
any of
state os
recovered only tural
from state has
contracted doze
produc
registration with operating
local within
authority (Rsit.
500U
of the agreement to
Act beensured,
is submitted wit
there
tion. It specifies no
Thepayment
reality of
is any m
even m
produce, and thereform,processor/exporter which was t
produce within wholesale markets
90 days in order to reduce the so-called
and submit apmc th
Optional monopoly. Tillrelate
provisions date, not a single private
to wholesale
farm market has pra
toring of come up anywhere
production, in the country.
role of While many
the states have issued
farmer
tract growers, which are
dozens of licences with topurchase,
regard to direct be mutua
as mentioned

100 DECEMBER 29, 2012 vol XLVii no 52 ŒEQ Economic & Political weekly

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 above, regulations and business rules of practice,
there is some of which
no are
ports already available in the form of legal provisions tha
stating in the us and
2006, agricultura
Argentina. These practices can also be enforced through private-
formedsector codes of practice. The changes in standards and the basich
cartels,
private wholesal
requirements they impose on growers are conditions that will
have to be met if growers are to be able to tap the powerful
hub-and-spokes,
mandi board,
supermarkets. But global buyers can also play a role a
in assisting l
suppliers of
distance to improve practices theand become compliant. co
The
market,standards need to be flexible and interwoven with local condi-
purchase
and thetions if classificat
they are to benefit poor workers. They must also involve
local stakeholders, who will reflect the interests of workers in
"infrastructure se
Withregard
the process of setting standards and monitoring (ids 2003). to
recent Hortico in Zimbabwe had a supply base of more than 4,000
argument
and small producers, with an enforc
their average farm size of around two
the hectares. It had designed
basis of and operated the supply
mut chain with
a smallholder
a view to integrating small producers. The latter could provide co
work. However,
the required care, and had lower expenses than larger grow-
there ers. Furthermore, trust
be compared to large-scale growers, small pro- be
is it ducers had lower rejection
that even rates for certain non-traditional so
chise agreemen
vegetables. Hortico responded to the changes in the quantities
pages? demanded at short notice without any wastage, since its sup-
Similarly,
theapmc
ply base was spread over a large
Act number of small suppliers, en
buyers were
organised into sm
relatively small collection centres. In Thailand,
tops found that small
standing producers were able to adapt to organic
familiar
production methods, since practices like crop rotation and
6 Mechanisms for Inclusion
selection of resistant varieties were long established elements
The exclusion of small farmers from food chains doesof
not
theap-
traditional production system. The strategies were aimed
pear to be automatic. There have been successful cases where small producers in the supermarket supply chain,
at including
public or private assistance to the growers - in terms of techni-partnerships between public- and private-sector stake-
involving
cal assistance and supply of inputs and credit - was made(Boselie et al 2003). In South Africa, spar procured its
holders
available. In some places in Brazil, small dairy farmersproduce
went infrom emerging small farmers as they delivered in
smaller quantities, thereby ensuring produce freshness. This
for collective tanks to meet the requirement; large farmers,
helped
though, still had an advantage, as they did not face the the supermarket to build a rapport with the farming
trans-
community,
action costs involved in the collective use of physical assets. spar also provided growers with interest-free
Dairy companies and cooperatives encouraged the use of col- loans for up to three months upon presentation and
production
approval
lective tanks, sometimes even financing or facilitating credit of a business plan, with the amount being deducted
for milk producers (Farina 2002). at the time of delivery. Technical personnel from spar visited
growers'
Collective action to deal with scale requirements needs to befarms to ensure product quality standards. Further,
designed to satisfy new product and process standards, and
the supermarket required progress reports from the farmers to
avoid exclusion from new markets. Collective action enable spar personnel to provide management support. The
through
supermarket
cooperatives or associations is important, not only to enable developed a strong relation of trust with the
farmers,
buying and selling at better prices, but also to help small farm-despite having only a verbal contract with the pro-
ducers (Louw et al 2006). Thus, retail chains need to invest in
ers adapt to new patterns and greater levels of competition
(Schwentesius and Gomez 2002). Small farmers alsolinkage
require
building. Equally importantly, retail chains need to in-
vest in of
professional training in marketing and technical aspects the market end of the chain to increase the demand for
production. There is also a need to strengthen smallfarm produce, which will lead to a better impact at the back
farmer
end.pro-
organisations and provide technical assistance to increase Right now, they are marginal players in fruits and vegeta-
ductivity for the cost competitive market, providebles
helpandin
go by market prices and other terms and conditions of
the
improving the quality of produce, and encourage them tolocal
par-market; they bank on cost advantage for the farmer,
not better
ticipate more actively in the marketing of their produce in price realisation, as they procure only a small
order to capture the value added in the supply chain. proportion of the produce.
Similarly, in their contract arrangements with small produc-
6.1 Role of Corporate Agribusiness and Supermarkets
ers in west African countries, cotton companies started trans-
ferring
It is equally important to promote good business practices some of the operational or functional responsibilities -
that
likesides.
optimise retailer-supplier relations, and protect both the distribution of inputs, equipment orders and credit
This can be initiated by establishing or improving contract
repayment management - to the village associations from the

Economic & Political weekly CQ33 December 29, 2012 vol xlvii no 52 101

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 REVIEW OF RURAL AFFAIRS -

system, but how it is practised in a given context. If there

1970s
skills
are enough mechanisms to monitor and use the contract for de-
tional
velopmental purposes, it can certainly lead to a betterment of
but li
all the parties involved, especially small and marginal farmers.
ing,
Development agencies and farmer bodies need to identify crops d
suitable for smallholders, which are of short duration, labour-
accou
cess
intensive and less risky, and carry out value chain mapping and (
analysis to attempt a market linkage based on this analysis.
nies h
or pr
Contract farming, instead of "contact farming", should be made
ronm
mandatory for any corporate buyers of farm produce. Contracts
need to be transparent and require frequent and independent
profi
and
scrutiny in order to remain competitive, both vis-à-vis similar c
contracts and open market transactions. Publicising the con-
action
smallholders is ensured. tract terms widely can help stimulate competition.
Further, there is a need to limit the buying power of super-
6.2 Role of the State and Policy markets and agribusiness companies by strengthening compe-
For small producers, access to markets depends on: (a) under-
tition laws; for instance, the legal protection given under the
standing the markets, (b) the organisation of the firm or opera-Delayed Payments Prevention Law, 1956, to subcontracting
tions, (c) communication and transport links, and (d) an appro-
industries in Japan in their relations with large firms, wherein
priate policy environment (Page and Slater 2003). Insofar as
large procuring firms could not indulge in forbidden acts like
the role of the government in the commodity chain is con-
refuse to receive delivery of commissioned goods, delay pay-
cerned, it can proactively help stakeholders in the chain to
ment beyond the agreed period, return delivered goods with-
identify the opportunities and threats in the global value chains.out good reason, force price reduction, compulsory purchase
It can also assist producers to enter the chains (Kaplinsky of a parent firm's good by subcontractors, and discounting
2000). Policy challenges on standards include standard set- payment after prices have been agreed upon. These provisions
ting, monitoring compliance, providing assistance to achieve were monitored by the Fair Trade Commission and the Small
compliance, and sanctions on non-compliance. Much depends and Medium Enterprise Agency (Sako 1992). If cf is only
on how standards are implemented, monitored and verified another name for the subcontracting prevalent in industry,
(ids 2003). Therefore, it is crucial that the government and then it is only logical to extend such legal provisions with the
donor agencies help small farmers and entrepreneurs to necessary modifications suitable to farming contracts and
make investments in equipment, management, technology supermarket procurement. An independent authority such as
and commercial practice, and develop strong and efficient this can supervise and regulate supermarkets with regard to
organisations to meet the market requirements. That credit supplier, consumer and labour aspects. This authority can ban
support by the state to cf projects is crucial has been empha-the buying and selling of products below cost, make cf man-
sised earlier in other contexts. In Thailand, not only did thedatory, improve local traditional markets for small growers,
state provide coordination between and support of local slow the pace of supermarket expansion, establish multi-
authorities - such as agricultural extension agents, local ad-stakeholder initiatives in the chains, and provide support to
ministration officers, and the Bank of Agriculture and Agri-small producers and traditional food retailers. It is unfortu-
cultural Cooperatives (baac) - it also reallocated a 250 mil-nate that the recent fdi in multi-brand retail trading policy
lion Baht deposit in the baac. Interest compensation for
makes no mention of direct procurement from farmers or of
farmer participants in the programme (3.5% pa) was made
cf, or of any mandatory minimum procurement from small
available to encourage greater participation and reduce
and marginal farmers.
production costs. But later, farmers could obtain only a low Since supermarkets and contracting agencies use apmc mar-
interest rate (5% pa) loan, instead of compensation for
kets to discover their prices, it is important to improve the per-
interest charged (Singh 2005a). formance of these markets for farmers so that they can provide
The experience of food supermarkets in various developing
a competitive field for other channels (Singh and Singla 2011).
The amended apmc Act allows for the setting up of private
countries shows that the primary producer benefits from such
retail linkage are not automatic, and that farmers or suppliers,
markets; it is also necessary to acquire an open auction system,
especially small ones, are likely to be left out or unable to sustain
improve buyer competition in markets, provide better facilities
such as cold storage, and improve farmers' access to market
the linkage if appropriate mechanisms like farmer groups or
information (Gandhi and Namboodiri 2005). Also, there is a
policies to protect them from supermarket practices are not in
place. What is needed is preparedness to leverage the super-
need to make apmc licences open to all interested parties,
market presence for better smallholder livelihoods, in terms which
of is not the case in most instances, or is available only in
the black market. Further, the apmc market fee should be
producer institutions, regulations and well-tailored incentives
for inclusiveness. The experience of cf across the globe
collected through an e-system, where the physical presence of
suggests that it is not the contract per se that is harmful asthe
a produce and the buyer is not needed. The apmc markets

102 DECEMBER 29, 2012 vol XLVii no 52 ËEE3 Economic & Political WEEKLY

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 are importa
Given
of tech
proportion o
them; they
capital
retail intere
chain
contract gr
throug
houseof bet
receip
needed, and
market
provis
produce like
terms
Need to
nowStr
th
Theretition
is i
also
and cf in
provide g
was
ductivity no
fo
provedozen
the qu
pate the
more po
ac
ture farmer
value ad
tivated
amplify the
the they
costs w
of
for In Tha
member
makethroug
collec
trainin
opportunitie
aspects
adding activ
ketingproduc
and d
ment), c
transaction
ing arrang
with gr
taking
cooperatives
buy terms
and sell
adapttors,
to newan
fies
Cooperativece
farmer
producer or
table standar
contra
the tion an
standard
to
ernmentthe
ag
groups
inghav
of
partici
collectively
aged and
theirpr
r
atives (Asan
honest
roles
Farmers' an
or
and
transactiongo
c
the project
farmers
was differe
the case
land, organi
which
pany about
(Ornb t
both
contracting co
small from
and m t
and The
mediumgo
This provisi
is what
plans farme
during
tives smooth
could b
and ill-effe
the poli
aside ties
a ha
certa
ginal ing ag
farmer
small amenab
farme
into provis
contrac
low workin
interest
the
grading sam
and

Economic & Political weekly ra-ira December 29, 2012 vol xlvii no 52 103

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REVIEW OF RURAL AFFAIRS ====eee==T- =

7 Conclusions
is the most com
to The case for smallholder development as one of the
encourage the main ave-
nues of poverty reduction
yields
in local remains challenging. The challenge
ar
income enhance
is to overcome market failures to improve the working of mar-
from the
kets for produce and in the bank
access to financial services. This
11.75%must include
(Singh an
assistance in forming effective marketing organi-
sincethe law
sations, targeted agricultural on
research and extension, revamp-
development ag
ing financial systems to meet small farm credit needs, improved
the concept or
risk management policies, tenure security and efficient land
mentsmarkets
should (Hazell and Diao nd). Intermediation is required
re to
them the
link small farmers with globalsuppo
or national markets in process-
ing and marketing (Lipton 2002). This intermediation
promotional bod could
companies shoul
be by a private enterprise, either domestic or multinational, a
union statai or parastatal organisation, a cooperative or farmer as-
governme
or sociation, or even an ngo, although sometaxe
turnover mediation by the
owned; and
state may since
be required if a private or multinational enterprise is
should the
involved inco
in such intermediation. There are opportunities that
recently, some
smallholders can exploit in niche markets by differentiating g
Agriculture
products on the basis of geographic origin or and
as organically
Agribusiness
produced. But the major route has to be through the exploita-C
India (rbi) have
tion of factors like external economies of scale, through net-
pes with loans
working or clustering, and alliances and innovations like cf.a
Fair trade and
Thus, the major conditions for a successful interlocking be-a
marginal produ
tween agribusiness firms and small producers include increased
2004). There
competition for procurement instead of monopsony,is, a guaran-
fair trade move
teed market for farmer produce, an effective repayment mech-
number of
anism, market information for farmers sma
to effectively bargain
markets,
with companies, large withou
volumes of transactions through groups
of farmers to lower transaction costs, and no alternative
tional
chains. Th source
such market-ori
of raw material for firms (Kirsten and Sartorius 2002). The pro-
Value chains pro
duction risks that farmers face need to be reduced through the
hood perspective
provision of insurance, which should be part of the cf arrange-
globalised
ments. However, it is importantcomm
to remember that there cannot
and market dev
be a single blueprint or cf model for all situations as far as the
avoid the "race
role and nature of cf is concerned. Further, it is the context of the
through the
contract that can make a difference as there are inn
many actors and
nerships with
factors in the environment th
influencing the working and outcome
provide technol
of contracts, leading to a culture of contracting that is location-
social standards
and community-specific. In fact, there is so much diversity
Basix, among
an ngo
firms, farmers, contracts, crops and the socio-economicin
laboration with
environment that it is better to focus on specific situations than
facilitated the
on the generic institution of cf. p
It is important to choose crops
level in Jharkh
and technologies that are suitable for smallholders' cf.
agreed prices
Finally, an
there is no need to look for permanence in cf
facilitated
arrangements, although short- or by B
medium-term sustainability
provision
is desirable because ofof
the effect it has oncred
growers and the local
in 2005-06, whi
economy. However, as market conditions for a crop/commodity
585 acres in
change, cf can wither away as the market2007
becomes efficient.
ter prices and
As a vertical coordination hi
mechanism, cf is only a response to
ers compared
a situation of market failure, and depends on commodity/ w
the cost of
crop/sector dynamics prod
that are liable to change any time, espe-
The agency
cially in a globalised and liberalised world.(Bas
There are many
in 2006-07 (Mis
indications, though, that cf can continue even in the presence
longer functiona
of competitive markets - as in the developed countries, or even
partnership
in Thailand, cf is only an instrument/means to in
agricultural
successful in
and rural development, not an end in itself. bu

104 DECEMBER 29, 2012 vol XLVii no 52 11353 Economic & Political weekly

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