Day 17 – Q 3. The government’s recent ordinance on contract farming is a win-win for farmers, buyers and even traders. Comment. 

  • IASbaba
  • June 29, 2020
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GS 3, Indian Economy, TLP-UPSC Mains Answer Writing
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3. The government’s recent ordinance on contract farming is a win-win for farmers, buyers and even traders. Comment. 
अनुबंध खेती पर सरकार का हालिया अध्यादेश किसानों, खरीदारों और यहां तक कि व्यापारियों के लिए एक जीत है। टिप्पणी करें।

Demand of the question:

It expects students to write about the benefits of new contract farming ordinance to farmers, buyers and even traders along with  


The ordinance on contract farming is part of the new legal framework for agricultural markets. It is in addition to the other two ordinances that amend the Essential Commodities Act and reduce the power of APMCs, with the aim of setting up a national market for food.


Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance Benefits:


  • Market access: Framework for farmers to enter into direct contracts with those who wish to buy farm produce. So far, in most of the country, a farmer cannot directly sell his produce to consumers or food processing companies; he has to go through a licenced trader. E.g. If a certain kind of potato was needed for potato chips, or a specific variety of oranges was more suited to making juice, or a restaurant chain needed a large quantity of mushrooms or asparagus, It could  get into a contract with farmers to grow that particular item and buy it later at prices already agreed upon. Farmers are no longer at the mercy of the traders.
  • Complex structure of APMCs: Solving the problem of APMC laws Which are outdated in several states. Traders find it easy to form cartels in these markets and offer low prices to farmers. Farmers are also left to the vagaries of daily price changes. However, the ordinance states that APMC market laws will only apply in the physical space of the market, and will not govern transactions outside the market. No taxes or fees associated with any APMC can be levied on such transactions.
  • More liberty and freedom: Farmers can lock in prices and buyers for their produce even before the harvest, and intermediaries can be assured of supply and price at the time of harvest. 


  • Reduction in intermediaries will reduce the cost of farm produce which will help common buyers to manage their monthly budget.
  • Buyers like the food processing industry will get a more secure and flexible environment for procurement of raw materials directly from farmers or farmer producer organisations.
  • Similar models have already benefited farmers in selling their poultry livestock and few agriculture commodities to industrial players directly.


  • Competition to traders: While intermediaries play an essential role in meeting supply and demand, It does not prohibit intermediaries or discourage them in any manner. It does not do away with APMCs. However, from now on, they have to compete with other buyers to provide better services or prices.
  • Expansion of storage capacity in the private sector: Since the ordinance in addition to other ordinance on the Essential Commodities Act exempts intermediaries from stock limits for contract farming, it will give comfort to large organisations to participate in contract farming. It may also encourage smaller traders to expand capacity.

The idea of contract farming is not new; some states like Punjab have attempted to encourage it through state legislation. Even today, in spite of multiple legal hurdles, the small scale of contract farming in India is playing a positive role for farmers. The agriculture ministry had released a model law to govern contract farming in 2018, but it was a little too prescriptive, the ordinance allows contract farming in any agricultural product, leaves pricing to the parties, and allows for a central e-registration of contracts.

However, the ordinance is a positive move towards freedom of contracting,

  • So far, modern retail has been largely purchasing perishable produce from mandis. Since the volumes of fresh produce are still low for modern retail and it has to compete with roadside vendors, it has been reluctant to invest in backend infrastructure.
  • Instead of using the regular judiciary for dispute resolution between parties, the ordinance delegates dispute resolution to the executive (sub-divisional magistrate), who will not be bound by rules of procedure. This gives the government more powers than the parties in the case. That would not happen if disputes were required to go to the judiciary.
  • The ordinance also creates a window for reintroducing government interference by giving the executive powers to adjudicate disputes through suo motu cases. This violates a fundamental principle of contract law: If the parties to a contract are not complaining, third parties should not interfere in the contractual relationship. 
  • Violating this principle undermines the commercial relationship between the parties. If the government intervenes in contract farming agreements frequently, buyers may back out.
  • Big buyers like processors, exporters, and organised retailers going to individual farmers are not a very efficient proposition. They need to create a scale, and for that, building farmer producer organisations (FPOs), based on local commodity interests, is a must. This will help ensure uniform quality, lower transaction costs, and also improve the bargaining power of farmers vis-à-vis large buyers.

The 1991 reforms saw a fundamental shift in the legal approach to industry and services. A whole host of laws of the licence, permit and inspection raj were withdrawn, and more freedom was given to the participants. 


Agriculture sector was long waiting for reforms. The participants in this sector still live in the old legal regime. The ordinances are a welcome step in giving freedom to farmers to sell their produce without restrictions. 


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