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Transcript of 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
Copyright # 2002 John Wiley & Sons, Ltd. J. Int. Dev. 14, 181–194 (2002)
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
Copyright # 2002 John Wiley & Sons, Ltd. J. Int. Dev. 14, 181–194 (2002)
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
Contract Farming in the Indian Punjab 185
Copyright # 2002 John Wiley & Sons, Ltd. J. Int. Dev. 14, 181–194 (2002)
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
Copyright # 2002 John Wiley & Sons, Ltd. J. Int. Dev. 14, 181–194 (2002)
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
Contract Farming in the Indian Punjab 187
Copyright # 2002 John Wiley & Sons, Ltd. J. Int. Dev. 14, 181–194 (2002)
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
Copyright # 2002 John Wiley & Sons, Ltd. J. Int. Dev. 14, 181–194 (2002)
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.
Contract Farming in the Indian Punjab 189
Copyright # 2002 John Wiley & Sons, Ltd. J. Int. Dev. 14, 181–194 (2002)
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
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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
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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.
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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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