In recent weeks, there has been a lot of commentary around the new farm bills passed into law by the Indian Parliament: the Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Bill (FAPAFS), the Farmers Produce Trade and Commerce (Promotion and Facilitation) Bill (FPTC), and the Essential Commodities (Amendment) Bill (ECA). In intent, these bills remove long standing market restrictions on agricultural sales. Farmer producer organisations (FPOs) can benefit from the marketing opportunities that will unlock, allowing for income and welfare growth.
As India continues its rapid urbanisation, supplying cities and district towns with food provides a new growth opportunity for rural areas. Urban-facing agribusinesses and value chains offer employment opportunities in aggregation, logistics, storage and processing. In city centres, food-related services such as restaurants, organised retail, and food delivery will increase in importance as a channel of employment generation.
Coupled with income and population growth, urbanisation is also changing food preferences. The share of rice and wheat in Indian diets has declined, while the consumption of fruits, vegetables, and livestock products has increased. According to NSSO surveys, monthly expenditure on cereals and cereal products fell from 41.1% to 10.8% in rural India and from 23.4% to 6.6% in urban areas between 1971-72 and 2011-12.
The rising demand for diversified agricultural products is an opportunity for smallholder farmers to commercialise, improving agricultural incomes and nutritional status at the household level. However, smallholders face obstacles in accessing credit, purchased inputs, technology and extension services to produce the quality required for urban consumption.
High transaction costs resulting from a low volume of produce, poor connectivity to markets, difficulty finding buyers and low bargaining power limit their market participation. This empowers intermediaries, who purchase from farmers at the lowest competitive price at the farmgate and sell in markets in their stead.
India’s market structure has long favoured staple grains. MSP incentivises farmers to grow staples and the APMC enables procurement into PDS, ensuring a productivity increase in staple grains. But the system is inadequate for marketing higher value crops. Only 6% of Indian farmers benefit from the MSP, and there are few alternative value chains for quality, high-value produce.
Though permitted in 2003, onerous requirements and fees have limited contract farming, except for a few crops like cotton and barley. The most significant challenges have been collective action problems of companies having to form contracts with hundreds of small farmers in informal groups, poor contract compliance by buyer or seller with low accountability, and the limitation of procuring from the area of a particular market’s jurisdiction.
The Producer Companies Act of 2002 made provisions for small producers’ aggregation into companies, allowing farmers to jointly access inputs, credit, farm machinery, and together sell in the markets. These FPOs can address contracting and adherences problems in contract farming with small farms. Although the initial uptake has been slow, government schemes and corporate, NGO, and private foundation interests have led to a rapid increase in FPO formation. Only 445 FPOs were registered in 2013, but since 2016, over 5,881 have been registered.
Despite the increased focus, success stories have been few. The extended gestation period required for FPOs to become self-sustaining, limited financing opportunities, weak linkages to markets, high coordination costs, and inadequate managerial expertise remain significant challenges.
This is where the FPTC and FAPAFS acts play essential roles. FPTC allows the creation of ‘trade areas’ where any corporate buyer, processor, private trader, or agri-entrepreneur can buy directly from farmers. Referred to as the ‘Contract Farming Bill’, FAPAFS allows for non-compulsory written contracts between buyer and seller across the country, beyond the purview of APMCs. While this freedom is a welcome change, FAPAFS excludes land leasing and prevents sponsors from constructing structures on farmland.
The easing of market restrictions will result in a private sector response in agricultural value chains. Cold chains, better connectivity, the establishment of grades and standards, and storage infrastructure will be in the private sector’s best interest while linking directly to farms. But without strong FPOs, FAPAFS and FPTC will do little to improve smallholder market access by themselves.