Contracting Out Solutions: Political Economy of Contract Farming in the Indian Punjab

Contracting Out Solutions: Political Economy

of Contract Farming in the Indian Punjab

SUKHPAL SINGH *

Institute of Rural Management, Anand, Gujarat, India

Summary. — This paper examines the rationale, practice, and problems of contract farming invegetable crops in the agriculturally developed Indian Punjab which has faced the problem ofsustainability of growth since the early 1980s. It is found that agribusiness firms deal with relativelylarge producers and their contracts, which are biased against the farmer, perpetuate the existingproblems of the farm sector such as high chemical input intensity, and social differentiation.Contracting has however, led to higher farm incomes and more employment for labor. There seemsto be an inherent contradiction in the objectives of the contracting parties and those of the localeconomy.� 2002 Elsevier Science Ltd. All rights reserved.

Key words — contract farming, agriculture, crisis, sustainability, Punjab, India

1. INTRODUCTION

Contract farming refers to a system for theproduction and supply of agricultural produceunder forward contracts, the essence of suchcontracts being a commitment to provide anagricultural commodity of a type, at a timeand a price, and in the quantity required bya known buyer. It basically involves fourthings––pre-agreed price, quality, quantity oracreage (minimum/maximum) and time. Thecontracts could be of three types: (a) procure-ment contracts under which only sale andpurchase conditions are specified; (b) partialcontracts wherein only some of the inputs aresupplied by the contracting firm and produce isbought at pre-agreed prices; and (c) total con-tracts under which the contracting firm suppliesand manages all the inputs on the farm and thefarmer becomes just a supplier of land and la-bor. The relevance and importance of each typevary from product to product and over time,and these types are not mutually exclusive (Hill& Ingersent, 1982; Key & Runsten, 1999).Whereas the first type is generally referred to asa marketing contract, the other two are types ofproduction contract (Scott, 1984; Welsh, 1997).But, there is a systematic link between productand factor markets under the contract ar-rangement as contracts require definite qualityof produce and, therefore, specific inputs (Scott,1984; Little & Watts, 1994). In addition, dif-

ferent types of production contracts allocateproduction and market risks between the pro-ducer and the firm in different ways.For individual farmers, it is not the contract

per se, but the relationship it represents which isimportant as the divergence between the twomay prove crucial in determining the develop-ment of contract farming as an institution(Clapp, 1988). Further, the context of the

World Development Vol. 30, No. 9, pp. 1621–1638, 2002� 2002 Elsevier Science Ltd. All rights reserved

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* I wish to acknowledge the comments and suggestionswhich helped in making this paper more focused, par-

ticularly those from the two referees of the journal. I also

thank Martin Greeley and K. 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, for comments on an initial draft of the paper. I

am thankful to the Institute of Rural Management,

Anand (IRMA) for facilitating the fieldwork with a

grant and to the IDS, Brighton for offering me visiting

fellowship for the project on contract farming on which

this paper is based. Thanks are due to L.K. 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, Mr. H.C. Bahl and Dr. O.P.

Thakur of HLL Ltd., Zahura, and Mr. Nijjer and Dr.

S.K. Mishra of Nijjer Agro Foods Ltd., Jandiala.

However, I am solely responsible for the errors and

omissions, if any. Final revision accepted: 22 April 2002.

1621

contract can be significant, as there are manyactors and environmental factors which influ-ence the working and outcome of contracts.The way farmers perceive contract farming, i.e.,define their relationship with companies, differsacross cultures (Asano-Tamanoi, 1988). In fact,there is so much diversity in the type of firms,farmers, contracts, crops, and socioeconomicenvironment that it is better to focus on aspecific situation than the generic institution ofcontract farming.Contracting has emerged as good quality and

timely raw material availability have becomepre-requisites for any successful agribusinessfirm, whether operating in the domestic or in-ternational market. It is important to recognizethat this restructuring of the agricultural pro-duction sector is taking place due to policy andmarket changes outside the sector, i.e., in theindustrial and trade sectors. Moreover, thesemacro-policy changes drive micro-changes suchas contract farming which have the potential tochange the production structure and relationsof production in the agricultural sector. As apart of the internationalization process in ag-riculture which involves globalization of pro-duction, capital and trade, contract farmingencompasses all the three dimensions throughintervention in input supply and productiondecisions, supply of capital and finance, andglobal sourcing of agro-products. In fact, it isan extension of the phenomenon of globalsourcing wherein a firm can produce anythinganywhere, by sourcing inputs from anywhere,to be sold in any market in the world.The proponents of agribusiness promotion,

of which contract farming is a part, argue thatit leads to big jumps in incomes and employ-ment in agriculturally backward regions andbrings a break from low levels of productivityand instability in production, thus putting thelocal economy on a dynamic path of growthand development. This is possible not onlybecause of the technological and capital re-sources of these firms, but also because of theinternational character of processes of agri-business which allows access to internationalmarkets. The agribusiness firms take on risk byundertaking new projects in processing andmarketing and provide a stream of cash flow tothe local economy. Agribusiness growth, it isargued, also helps earn foreign exchange andincrease food supply nationally and locally(Williams & Karen, 1985; Leisinger, 1987;Benziger, 1996) though, as shown by the reviewin the following section, in practice, it may

harm the food security situation (Shiva, 1991;Little & Watts, 1994). It is also important torecognize the role of the state in encouraging ordiscouraging the agribusiness firms and inprotecting the producers in contract situations(Asano-Tamanoi, 1988; Christensen, 1992;Grosh, 1994; Benziger, 1996). Moreover, thereis a need to look at the potential role of agri-business more specifically for different com-modity sectors and regions, but not as ablanket solution, as there are certain sectorswhich may require a more effective public sec-tor or state intervention especially in tech-nology and institutional innovations, instead ofa private agribusiness effort (Christensen,1992).Looking at agribusiness growth from a dif-

ferent perspective makes it clear however, thatit is essentially a process of industrialization ofagricultural and rural production which takesplace through simultaneous processes of ap-propriationism and substitutionism. Whereasappropriationism operates as a process of ex-ploitation of land and other biological sourcesof supply by the application of modern andadvanced technology to get more and cheaperraw materials, substitutionism as a process triesto move agribusiness away from direct depen-dence on land and other direct sources of rawmaterials by way of application of technologyto create new products and sources of products.Thus, the two processes, though contradictory,are driven by the same agribusiness forces.Further, the application of biotechnology ac-celerates these processes and leads to what canbe called bio-industrialization (Goodman, Sorj,& Wilkinson, 1987). In fact, contract farmingdirectly promotes the process of appropria-tionism. This is a political economy view oftechnology-led growth. In fact, contract farm-ing is similar to the practice of subcontractingin the industrial sector under which the largefirms farm out many production activities tosmall firms and benefit from lower costs andbetter skills (Wilson, 1986; Watts, 1992; White,1997).Thus, given the failure of government

mechanisms for support to agriculture, widesupport for contract farming under the Struc-tural Adjustment Programme (SAP) and liber-alization policies, and its promotion by theinternational development agencies such asthe World Bank, the USAID, the IFC and theCDC (Little & Watts, 1994; White, 1997), it isinevitable that more contracting and new formsof contracts will be tried by the agribusiness

WORLD DEVELOPMENT1622

firms as it is the only way to ensure quality,timely and cost effective availability of rawmaterial for processing, especially when, insome countries such as India, captive farming isnot allowed legally. Besides, captive farmingmeans putting large amount of resources intoraw material production which may not be thebest economic option for many agribusinessfirms, especially small scale ones. It may alsonot be a viable option. Since contract farmingalso leads to changes in the way agriculturalproduction, processing, and marketing are or-ganized (White, 1997), it is important to un-derstand its practice and dynamics.This paper examines the rationale and im-

plications of contract farming in the context ofdeveloping countries. It supplements a criticalreview of literature with case studies of contractfarming in the Indian Punjab and documentsboth positive and negative effects––especiallyfor the producers––with the help of evidencefrom the field. The case studies explore thenature of contracts across classes of farmersand companies (local versus multinational) andexamine the farmer and the firm perceptions ofthe working of the contract system and prob-lems therein. They also attempt to examine theeffect of the contract system on the localeconomy and the community. The IndianPunjab, which is the most agriculturally devel-oped region of India, has been experiencingserious problems in its farm sector in the recentyears due to the tapering off of the GreenRevolution growth momentum. There havebeen no studies on this aspect of Punjab orIndia’s agrarian economy until recently. Thisstudy contexualizes the practice of contractingin the new economic policy and environment inIndia. It goes beyond firm–farmer relations andexamines the development implications ofcontract farming in the context of small-holderfarming. It compares the contract systems ofmultinational and local firms for their relevanceand focuses on the context, and not contract-farming per se. The case studies are based on aninterview survey of contract farmers in the stateof Punjab with the help of an interview sched-ule, and discussions with the managers in twodifferent types of agribusiness firms––twoMulti-National Corporation (MNC) subsid-iaries, and one small domestic firm––which areinvolved in processing and marketing of value-added food products for domestic and exportmarkets.The primary survey of contract growers was

conducted in different contract-farming pockets

of the state. Since the study intended to coverthe contract systems of all the major playersand for all significant contract crops in thestate, it was not restrictive in terms of loca-tional coverage of farmers. A complete list ofgrowers could not be obtained from the com-panies; and as some of them gave only a fewgood contract growers’ names and addresses(as the companies perceived them to be), thefarmers were located through a snowball sam-pling procedure, i.e., locating the whereaboutsof more farmers from a few who were con-tacted initially with the details provided bythe companies. About 20% of the interviewedfarmers grew, under contract, two or threecrops for the same or different companies. Theywere treated as different respondents for dif-ferent crops as their experiences varied acrosscrops and companies. Thus, in all, 69 contractfarmers were interviewed which covered threecrops (tomato, potato, and chili) and threecontracting companies: Hindustan Lever Lim-ited (HLL––a subsidiary of Unilever) (24) andNijjer Agro Foods Limited in tomato (15); andPepsi Foods Limited (a subsidiary of Pepsico)in potato (19) and chili (11) in the state. Theother methods of information collection in-cluded interviews with groups of farmers, andobservation in the field. In addition, the localpress, especially vernacular newspapers, wasmonitored closely for the happenings in thecontract system in general.Section 2 of the paper traces the logic of

contract farming as a system before examiningthe implications of such an arrangement for theprimary producers as reported in variousstrands of literature. Section 3 presents the ra-tionale and the evolution of contract farming inthe study area. The performance of contracts isanalyzed in Section 4. Section 5 provides acontextual analysis of contract farming in termsof its long-term socioeconomic and develop-ment implications. The concluding section dis-cusses major findings and possible alternativeswithin contracting to avoid its ill-effects and tomaximize the benefits.

2. LOGIC AND IMPLICATIONS OFCONTRACT FARMING: A REVIEW

For different reasons, both farmers and farmproduct processors/distributors may prefercontracts to complete vertical integration. Afarmer prefers a contract which can be termi-nated on reasonably short notice, to complete

CONTRACTING OUT SOLUTIONS 1623

vertical integration which is virtually irrevers-ible. Contractual arrangements are attractive tofarmers seeking additional sources of capital toexpand their businesses and also a more certainprice by shifting part of the risk of adverse pricemovement to the buyer (Hill & Ingersent,1982). They also get access to new technologyand inputs which otherwise may be outsidetheir reach (Goldsmith, 1985). On the otherhand, for an agribusiness firm, besides provid-ing assured and stable quality raw materialsupplies, the contracts are more flexible in theface of market uncertainty. Contracts makesmaller demands on scarce capital resources,and impose less of an additional burden of la-bor relations, ownership of land, and farmproduction activities, on management com-pared with that under captive farming (Buch-Hansen & Marcussen, 1982; Kirk, 1987). Iteven allows the firm access to unpaid familylabor (White, 1997) and state funds directed atfarmers by development agencies, indirectlythrough agricultural production sector (Clapp,1988). The firm can also project an image ofworking with local producers as a partner whenit undertakes contract farming and may evenobtain statal and international agency incen-tives for its activities as developmental projects(Kirk, 1987). Since value addition is increas-ingly taking place in the upstream stages of theagribusiness chain as the downstream stageshave been more or less exhausted in terms ofquality and value of product, the firms are alsocompelled to go for more direct links withfarmers.Therefore, it is argued that contract-farming

benefits not only consumers and the processorsbut also the farmers (Hill & Ingersent, 1982).At the macro-economic level, contracting canhelp to remove market imperfections in pro-duce, capital (credit), land, labor, informationand insurance markets, lead to better coordi-nation of local production activities which of-ten involve initial investment in processing,extension, etc., and can reduce transactioncosts (Grosh, 1994; Key & Runsten, 1999).From an institutional economics perspective,contract farming could be looked upon as away of creating positive externalities, which canresult in overall rural development, if they arebetter created by agribusiness firms than by theopen market or the state. Thus, besides raisinggrower incomes, contract farming may alsocreate positive multiplier effects for employ-ment, infrastructure, and market develop-ment in the local economy (Key & Runsten,

1999). Therefore, contract-farming figures asan institutional arrangement for agriculturaldevelopment in the fields of inputs, productexchange, and product upgrading, the last re-ferring to research and innovations (Christen-sen, 1992).A political economy view of contracting,

however, rejects these benefits to consumers andfarmers and argues that contracting developsonly when there is diminished role of the state inagriculture, increased specialization of agricul-tural production processes, and the agriculturalmarkets such as farm produce or credit becomeless competitive or inefficient. In fact, it arguesthat contract production is one mode of capi-talist penetration of agriculture for capital ac-cumulation and exploitation of farming sector.This even leads to processes of ‘‘self-exploita-tion’’ of the farmers, and the companies gainindirect control of land. The political econ-omy approach rejects the various rationales ofcontracting such as perishability of produce,specialization of a crop, capital intensity ofproduction, etc. and argues that it is the socialrelations of production which determine theseaspects of production system and that productdifferentiation and monopolistic tendenciescause contracting (Wilson, 1986). Though thereare many benefits of contract production for thefarmers, what happens when yields stagnate,costs rise and there are open market gluts?The studies of contract farming show that the

farmers agreed that contracting helped thembecome better farmers, gave more reliable in-comes, generated employment especially forwomen, provided new skills of farming, and didaway with patron-client relationship betweenlarge and small producers (Glover & Kusterer,1990; Fulton & Clark, 1996). But, farmersgenerally find that the contracts are biased andenforced strictly. Firms provide poor extensionservice, overprice their services, pass on the riskto the producers, offer low prices of produce,favor large farmers, delay payments, do notprovide compensation for natural calamity loss,and do not explain the pricing method (Glover& Kusterer, 1990; Grosh, 1994). Farmers feltthat they had little bargaining power comparedwith that of the companies which they perceivedbenefited more than the farmers, and that theyhad become dependent on the firms for creditand other inputs (Fulton & Clark, 1996). Fi-nally, how can a contract between a processorand a farmer be equitable, as the two are notequal entities? Under conditions of anti-farmercontract terms and limited market choices,


contracting tends to reinforce itself over time(Wilson, 1986). The overexploitation of ground-water, salination of soils, soil fertility decline,and pollution are typical examples of environ-mental degradation due to contract farming(Siddiqui, 1998). The firms tend to move on tonew growers and lands after exhausting thenatural potential of the local resources, partic-ularly land and water, or when productivitydeclines due to some other reason (Torres,1997).The effect of contracting on noncontract

farmers and the surrounding areas is also amatter of concern in that what is favorable forthe contracting firms and farmers may harmother actors and sectors of the local economy(Little & Watts, 1994; Porter & Phillips-How-ard, 1995). Contract production tends to shiftfarm production in favor of export-orientedand cash crops at the cost of basic food cropsfor the poor. This can lead to higher prices ofthe food commodities and products, especiallyfor noncontract farmers and the labor house-holds who do not benefit from contracting interms of higher incomes. Even regional differ-entiation tends to increase as the firms chooserelatively better-off areas for contracting(Shiva, 1991; Little & Watts, 1994).It is also feared that by favoring the large-

scale farmer, who is better able to meet the ex-acting requirements of producing to contractspecification, contracting may encourage a so-cially undesirable ‘‘dual’’ agricultural develop-ment (Sachikoyne, 1989; Korovkin, 1992;Grosh, 1994; Little & Watts, 1994; Dunham,1995). The agribusiness companies have differ-ent contracts for different types of farmers forthe same crop. The bigger farmers have con-tracts which provide for an advance assessmentof produce, and advance payment and fixing ofprice, compared to the small and/or poorfarmers from whom the firm picks up only se-lected part of the produce which meets qualitystandards (Grosh, 1994; Morvaridi, 1995). Thissocioeconomic divide can be further deepenedbetween the contracting and the noncontractingfarmers (Glover & Kusterer, 1990). Even thewage rate for the landless workers may declineover time due to contracting as workers fromoutside in-migrate while the out-migrationstops from the given area. This can further ac-centuate the disparity between the landed andthe landless (Kirk, 1987; Little & Watts, 1994).Another important area of enquiry is the

gender effect of contract farming. In manycases, women did not express dissatisfaction

with the contract arrangement and in fact, re-ported that the employment under contractproduction had given them better self-esteem,self-confidence and influencing power withinthe household (Kirk, 1987; Glover & Kusterer,1990; Dunham, 1995; Porter & Phillips-How-ard, 1995; Torres, 1997). But contract farmingdoes lead to gender inequalities both in thequantity and the quality of work for womenand children. The women not only end upworking longer hours in the fields, as they areconsidered better workers and are paid less(Collins, 1993), but also the burden of off-farmwork falls on them due to the overoccupationof men with contract production (Porter &Phillips-Howard, 1997; White, 1997). There isgendering of tasks in the field (Torres, 1997).The gender relations within the household areaffected by way of tension over contribution bywomen to contract production, and negotiationby women for share in the contract income(Carney, 1988). This in turn affects productivityof the farm as fields tend to be neglected.These disputes, being private family matters,are difficult to resolve. But, it is important torecognize that the impact on women is class-differentiated. There have been instances ofcollective action by women’s groups over con-trol of contract production and income (Bulow& Sorensen, 1993).The growth of contract farming leading to

commercialized sophisticated export agricul-ture undermines the communal arrangements,giving rise to new forms of mass-based ruralorganizations: labor unions among agriculturalworkers, on the one hand, and associationsdefending the commercial interests of smallagricultural producers, on the other (Clapp,1988). The growing importance of contractfarming has serious implications for the agri-business cooperatives, which have been prac-ticing some form of contract procurement inthe past simply because they are producer-owned organizations. In Australia, the lack offinancial support to cooperatives by the stateand the competition from the MNCs and localprivate firms which practiced contract farmingunder deregulated policy environment, led tothe closing down of some cooperative process-ing plants and a change in their status (fromcooperatives to companies) in case of someothers (Burch & Pritchard, 1996). In addition,an agribusiness firm generally does not en-courage the formation and expansion of coop-eratives in its area of operation as they maybecome competitors in the relatively longer


term and spoil the procurement base of the firm(Wilson, 1986). This happened in the case of aUnilever subsidiary in Cameroon, wherein asfarmers tried to organize a cooperative tostrengthen their bargaining power, the com-pany refused to procure and farmers’ crop waswasted. This happened despite the fact thatlarge farmers dominated the cooperative. Fi-nally, the cooperative failed (Konings, 1998). Itis clear, however, that a para-statal body couldencourage cooperatives genuinely and if thathappens, then they could succeed, as happenedin Kenya in case of tea (Konings, 1998). But thesuccess of the contract system per se in Kenyawas the result of the coming together of thestate, donors and transnational capital, favor-able market conditions, access to capital, and arelatively decentralized management system(Little & Watts, 1994).The tools of mitigating loss of control under

contracting, used by farmers in the First World,have been the petitioning of the state for in-tervention to regulate the contracts, the for-mation of producer bargaining units, and theformation of farmers’ markets (Welsh, 1997).The difficulty in collective action arises due tothe heterogeneity of farmers and the conflictbetween the self-interest and the collective in-terest. Each farmer views his relationship withthe company as an individualized one (Glover,1987; Kirk, 1987; Rickson & Burch, 1996).Even where cooperatives deal with contractingfirms, the farmers put self-interest before thecollective interest (Kontos, 1990).The above review reveals that though con-

tracting leads to better incomes and employ-

ment in the beginning, the relations betweenfirms and farmers worsen over time to the dis-advantage of the growers, and the system re-sults in ecological and economic degradation oflocal production systems. Most of the studiesfind contracts inequitable, short-term, andambiguous. It is not the contract per se how-ever which is harmful, but how it is imple-mented in a given context.

3. RATIONALE AND EVOLUTION OFCONTRACT FARMING IN THE INDIAN

PUNJAB

The Punjab agriculture has been known forits Green Revolution of the late 1960s and the1970s and overall agricultural development.The state achieved this though 70% of theholdings are less than four hectares each (Table1). But during the 1980s, the Green Revolutionmomentum could not be sustained. The num-ber of operational holdings in 1980–81 declinedas compared to those in 1970–71, especially inmarginal and small categories, due to the phe-nomenon of ‘‘reverse tenancy’’ under whichsmall and marginal farmers leased out land tomedium and large farmers (Table 1). There wasstagnation in yields accompanied by increasingcosts of cultivation. By the mid-1980s, a wheatgrower in Punjab was obtaining lower net re-turns per hectare, even after incurring highercosts per hectare on modern inputs, comparedto a wheat grower in Madhya Pradesh (Nadk-arni, 1988). The proportion of agricultural la-bor in the total rural male workers went up by

Table 1. Distribution of operational holdings in Punjab: 1970–71, 1980–81 and 1990–91

Type and size ofholdings

Percentage share of all holdings Percentage change

1970–71 1980–81 1990–91 1980–81 over1970–71

1990–91 over1980–81

1990–91 over1970–71

Marginal 37.63 19.21 26.47 �61.89 50.07 �42.78(0–1 hectares) (4.07)a

Small 18.91 19.41 18.25 �23.34 2.24 �21.62(1–2 hectares) (8.14)Medium 20.40 27.98 25.86 2.25 0.47 2.73(2–4 hectares) (20.87)Large 18.01 26.20 23.41 8.60 �2.82 5.54(4–10 hectares) (40.22)Very large 5.01 7.20 6.01 7.34 �9.15 �2.48(above 10 hectares) (26.70)

Total 100.00 100.00 100.00 �25.32 8.79 �18.76

Source: Ghuman (2001).a Figures in brackets are percentage of area under respective category of holdings in total area.


2.2% and that of the cultivators down by 2.7%during the 1980s. The jobs generated in thenonfarm sector were only 19% of the ones lostin the farm sector (Fisher, Mahajan, & Singha,1997). The net annual income of a seven hect-are farm family in the 1980s was found to belower than the annual salary of a governmentdepartment assistant (Johl, 1996). Punjabended up growing largely wheat and rice (71%of the gross cropped area) and food grain cropsaccounted for 75% of the total cropped area(Table 2). The net sown area was 84% of thetotal area and the cropping intensity 178, with94% of the total area being irrigated by theearly 1990s (Table 3). The area under vegetablecrops has been declining since the 1970s inrelative terms (Chand, 1999b). By the late1980s, Punjab had 82 tractors and 160 pump-sets per 1,000 hectares of cropped area each,and the fertilizer consumption was of the orderof 170 kg/hectare (Ghuman, 2001; Sidhu &Johl, 2001). This high degree of mechanisationled to the problem of rural unemployment. Theintensive production led not only to monocul-tures but also to higher incidence of pests anddiseases which, in turn, led to the ecologicalproblems of decline in water table, water log-ging, soil salinity, toxicity, and micro-nutrientdeficiency (Sidhu & Johl, 2001).The Johl Committee report on diversification

of Punjab agriculture (1986) recommended that

at least 20% of the area under wheat and paddyshould be brought under new crops especiallyfruits and vegetables which accounted for onlyless than 2% of the gross cropped area at thattime as they were not, like many other crops,competitive with wheat or paddy in terms oftheir relative profitability. It was thus realizedthat the economic condition of a vast majorityof farmers, especially marginal and small, couldnot be improved unless there were changes inthe cropping pattern and the technology ofproduction. Diversification, intended to stabi-lize incomes and employment in the farmingsector, could either be in terms of variety ofcrops grown or technologies used. The pro-cessing and marketing activities were necessaryto bring dynamism to the agricultural sector byway of either reduction in cost of cultivationthrough productivity improvement or cuttingcosts directly, or by raising returns to the pro-ducers by value addition or diversification. Thecontract-farming arrangement with the growersby the private domestic and multinational ag-ribusiness interests was to achieve both theobjectives of cost reduction and value additionby providing them better seeds and other in-puts, and better markets and prices.In the late 1980s, there was also a gradual

opening up of the Indian industrial sector tocompetition. Making use of this opportunity,a para-statal body (Punjab Agro-Industries

Table 2. Changes in cropping pattern in Punjab (1960–98) (% of gross cropped area)

Year Food grains Cereals Wheat Rice Cotton Oilseeds Sugarcane Pulses

1960–61 64.73 45.65 29.59 4.80 9.45 3.91 2.81 19.081970–71 69.18 61.89 40.49 6.87 6.99 5.20 2.25 7.291980–81 77.77 66.76 41.57 17.49 9.60 3.52 1.05 5.041990–91 75.55 73.65 43.63 26.86 9.34 1.39 1.35 1.911994–95 76.64 75.41 43.04 29.44 7.77 1.92 1.04 1.231995–96 74.17 72.94 41.77 28.33 9.62 3.07 1.76 1.231996–97 72.87 71.63 41.34 27.62 9.16 3.15 2.23 1.241997–98 74.60 73.55 41.94 28.94 9.20 1.77 1.60 1.05

Source: Sidhu and Johl (2001).

Table 3. Some important aspects of Punjab agriculture: 1950–51 to 1998–99

1950–51 1960–61 1970–71 1980–81 1990–91 1994–95 1997–98 1998–99

Net sown area as percentage oftotal area

– 75 81 83 84 84 85 83

Cropping intensity 118 126 140 161 178 183 185 184Irrigated area as percentage ofgross cropped area

55.7 56.0 74.7 85.5 94.0 95.1 96.1 96.2

Area under food grains aspercentage of gross cropped area

67.9 64.8 69.2 71.8 75.6 76.6 74.6 78.3

Source: Ghuman (2001).


Corporation) got into the promotion of fruitand vegetable processing and marketing activ-ity, and with large support from the farmerlobby (Bhartiya Kissan Union (BKU) or In-dian Farmers’ Union) and a farmer-based po-litical party (Akali Dal), brought in Pepsi (a USMNC) in 1988 as a joint venture partner (thethird partner was an Indian corporate, Voltas)to procure and process certain fruits and veg-etables of the state. By the early 1990s, it hadgot into the contract production and processingof tomatoes. The entry of Pepsi was followedby another local entrepreneur (Nijjer) who alsoset up a tomato-processing plant with half thePepsi plant’s capacity, floated a public limitedcompany with financial support from the Pun-jab Financial Corporation (PFC), and startedprocuring from farmers under contact.Contract farming in Punjab was in place by

the early 1990s with the entry of Pepsi Foods, aMNC (Pepsico) subsidiary, into tomato andchili processing and a local firm, Nijjer AgroFoods Ltd., into tomato processing. It wasfurther established with the selling off of itstomato-processing facility by Pepsi Foods toHindustan Lever Limited (HLL, a Unileversubsidiary (which processes one-tenth of world’stomato production) and the largest food pro-cessing and marketing company in India) in1995, and Pepsi’s entry into potato contractingby the mid-1990s. Since two of the firms (Pepsiand HLL) are export-oriented directly, and thethird (Nijjer) indirectly as it supplies tomatopaste to Nestl�ee (a MNC) under a contract, thefarming sector of the state stands internation-alized through contract production system. TheHLL plant in Punjab is the biggest tomatopaste plant in Asia with a capacity to process650 tons of tomatoes a day. The companyworks with about 400 contract growers. Pepsiwhich had been working with hundreds offarmers with more than 1,700 acres under chiliuntil 1997, now works with only about a fewdozen who plant 300 acres of land with chili inall. The contract farming in potatoes by PepsiFoods started in 1997–98 with 40 farmerswhich now number about 60. Nijjer AgroFoods works with about 400 contract tomatofarmers.The contracts are Procurement and Input

(P&I) contracts under which the firms not onlyagree to pick up the contracted acreage speci-fied quality produce at a fixed time and price,but also provide inputs such as seedlings oncredit (with part payment in advance), technicaladvice and various equipment, all free of cost

on returnable basis. The contracts are onlyverbal commitments as there is no writtenproof with the farmers in the case of Pepsi andHLL, though Nijjer has written contracts (inlocal language) with farmers. The acreage fortomato production should not be less than 2.5acres in Rajasthan (for HLL) and five acres forpotato and tomato in Punjab (Pepsi and Nijjerrespectively) though it is not strictly followed.The contract price varies across regions de-pending on transport cost of produce to thefactory. There is competition between HLL andNijjer in the contract tomato price in some ar-eas. The tomato quality refers to produce notbeing rotten, worm affected, yellow in color ordamaged. The lots are rejected or accepteddepending on the sample results. The farmersare selected on the basis of ability of a farmer toadopt new technology, suitability of land, as-sured irrigation, financial position, and com-mitment and literacy level. The companies alsorecommend a schedule of pesticide sprays foreach area and even the type and brand of pes-ticide to be used each time through farmerbooklets. At the time of harvest, each tomatofarmer is given crates free of cost on returnablebasis. In the case of crop failure, HLL com-pensates the farmer to the extent of waiving hisseedlings cost. Pepsi buys back the entire pro-duce of potato and only two tons of chili. Thepayment is made within 1–2 weeks after deliv-ery by check/draft in the bank account of thefarmer. Pepsi allows part of the acreage pro-duce to be sold outside if enough procurementis available. The produce in all cases is broughtto the factory by the farmers at their owntransport cost, which is taken into account bythe companies while fixing the contract pricefor each contract production region.Most of the MNC contract growers had

secondary or college-level education with 12years of schooling on the average, and the localfirm growers had only primary or secondaryeducation (seven years of schooling). The av-erage landholdings owned by MNC farmerswere on the order of 40 acres ranging from 5 to195 acres, compared with an average of just 17acres of the Nijjer growers, some of whom werealso landless. Some of the contract growers alsoleased land ranging from 5 to 50 acres, theaverage being 23.65 acres. Thus, the averagesize of the operational holding of the MNCgrowers was 72 acres, ranging from 53 to 90acres, and of the local firm growers 22 acresranging from 3 to 60 acres, with the average forall growers being 61 acres. On an average, the


Pepsi chili farmers were more literate and hadlarger holdings (owned and operated) thantheir potato and tomato counterparts, with theexception of land ownership which was higherin case of tomato growers (Table 4). Even un-der Pepsi ownership earlier, most of the tomatocontract growers were medium or large farmers(Bhalla & Singh, 1996). There was no MNCgrower with less than 15 acres of operationallandholding which is much above the averagesize of the operational holding in the state (8.9acres) (Johl, 1996).Many of the farmers working with Pepsi and

HLL own cold storages, petrol pumps, poultryfarms, and trade in potato seed, pesticides,fertilizers and other inputs, and other agri-cultural commodities such as vegetables inwholesale, and produce seeds of various tradi-tional and nontraditional crops for private andpara-statal bodies. Some have returned fromcountries such as Canada and the United Statesto try their hand at farming with modern ma-chines and methods, and new crops. They havealso (more than one-third) grown two or threecontract crops for the same or different com-panies at the same time or over the years. Veryoften, these farmers own cars, jeeps, motorcy-cles, multiple tractors and other agriculturalmachines, and have large well-furnished houseslocally known as Kothis. A recent study ofcontract-farming system of the two tomato-processing firms (HLL and Nijjer) in the statealso found that 96% of the contract growersowned tractors, with some having more thanone tractor, and 82% had tubewells for irriga-tion (Rangi & Sidhu, 2000). These farmers have

been the major beneficiaries of Green Revolu-tion in Punjab agriculture in the 1970s or haveforeign remittances from family members basedabroad. Many of them also belong to the ruralsalaried class who maintain their farming in-terests and are exposed to the world of tech-nology, markets, administration, and business.Even the average acreage under contract for

MNC (14.3 acres) as well as all contractgrowers (12.33 acres) was much above the av-erage operational holding in the state. In fact,there have been growers of tomato in the past(under Pepsi) who put their entire land (asmuch as 45 hectares) under tomato (in 1995)and as much as 13 hectares under chili (in 1996)(Gabrani, 1996). The contracted acreage underpotato and chili for Pepsi was very modest, i.e.,three-fourth of potato farmers and 90% of chiligrowers planting only five acres or less eachunder contract, and the contract productionwas in owned land in most of the cases. TheHLL growers not only planted larger acreageunder contract but also had larger landhold-ings. The average contracting experience was5.4 years for HLL tomato growers, two yearsfor Nijjer tomato growers, and 3.7 years and1.6 years in case of Pepsi chili and Pepsi potatogrowers respectively, with the average acrossfirms being 3.35 years (Table 4). The mainbenefits of contracting, as perceived by thecontract farmers, were: better and reliable in-come, new and better farming skills, and bettersoil management in that order across firms. Thefarmers also prefer contracting as it gives thembulk sales outlet. Some of them go for tomatoproduction as the crop is said to be effective in

Table 4. 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 growersa

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

Years of schooling 12.13 11.58 13.09 6.93 11.59(5–18) (5–15) (5–17) (0–15) (0–18)

Land owned 47.25 33.79 39.63 16.87 35.72(5–150) (5–95) (5–195) (0–60) (0–195)

Land leased 30.96 18.95 40.45 5.6 23.65(0–165) (0–100) (0–165) (0–25) (0–165)

Land operated 78.21 52.74 90.18 22.47 60.99(16–225) (15–150) (15–225) (3–60) (3–225)

Land under contract 26.88 4.37 4 5.27 12.33(2–130) (1–15) (1–7) (1–13) (1–130)

Years under contract 5.38 1.58 3.73 2.07 3.35(1–10) (1–5) (1–10) (1–6) (1–10)

The figures in parentheses are the range (minimum and maximum) for each parameter.

Source: Primary survey.aHLL: HLL tomato, Pepsi-P: Pepsi potato, Pepsi-C: Pepsi chili and Nijjer: Nijjer tomato.


reducing water logging though it is also pesti-cide intensive. Similarly, potato is only a threemonth crop and farmers can take an additionalcrop of sunflower after potato. The chili crop isgrown under contracts as they provide an as-sured market.

4. PERFORMANCE OF CONTRACTS

(a) Procurement and default

Default on quantity and/or quality has beenone of the most common problems for firms incontracting everywhere (Glover & Kusterer,1990). The terms of the contract were same forall classes of farmers and almost all the growers(90%) had met the contract terms in the past. Incase of default, companies lose recoveries ofseeds/seedlings cost. The default rate is high(>50%) only if the gap between contract priceand market price is very large (3–5 times). Thecompanies blacklist all the full and part de-faulters. They have not pursued legal actionagainst the defaulters, as it is neither feasiblenor politically wise. About 80% of the farmersfrom the previous season are retained for thenext season. It is not that only farmers default.Even companies (especially HLL) have notbeen able to procure from the farmers manytimes, especially when they overcontract acre-age and the yields are good. Then, either theydid not give quota slips in time for entire pro-duce or became strict on quality. Pepsi acceptseven lower quality produce from contractgrowers.

(b) Input supply and crop failures

The HLL contract growers did not appreci-ate the company selling seedlings to the non-contract farmers when it had surplus seedlings,just for the commercial consideration of mak-

ing money out of additional seedling produc-tion. But perhaps the company wanted tocreate a larger base for procurement and con-tracts in the longer term and also, surplus in themarket to keep the market prices down. ThePepsi farmers found the potato seed suppliedby the company generally less than adequatefor the acreage to be sown under contract.Two-thirds of the HLL farmers, three-fourth ofthe Nijjer growers, and about half of the Pepsipotato growers reported lower yields as a caseof crop failure, with another 12% of HLL and7% of Nijjer growers reporting total crop fail-ure. Some of the Pepsi growers reported poorquality of produce (Table 5).The main reasons for crop failure were dis-

ease or pest attack, natural calamity, and seedfailure in that order (Table 6). About 25% ofthe HLL growers only reported a waiver ofseedlings cost by the company in such situa-tions. The companies tend to blame the yieldloss on the farmer and, therefore, do not offerany compensation. Though farmers feel there isgenerally no dictation from the company onfield practices, they tend to follow the recom-mended practices as otherwise they may facequality problems. But, the farmers find com-pany recommended pesticides costly and non-viable, as they are of the view that there is somecorrupt arrangement between the company andthe pesticide companies/dealers about the saleof particular pesticides and brands. There havebeen no problems of disease or lower yield inchili. The farmers agreed that Pepsi had intro-duced new technology of deep chiselling, newmethods of transplantation, besides introduc-ing new seed varieties in tomato.

(c) Problems and remedies

About two-thirds of the HLL growers andmore than 50% of the Nijjer growers did notface any major problem in contracting. The

Table 5. Company-wise distribution of growers by type of crop failure

Type of cropfailure

HLL Pepsi-P Pepsi-C Nijjer All

No. offarmers

Percent No. offarmers




Percent

Lower yield 15 62.5 9 47.4 1 9.1 11 73.3 36 52.2Poor quality 0 0 2 10.5 0 0 0 0 2 2.9Total failure 3 12.5 1 5.3 0 0 1 6.7 5 7.2No problem 6 25 7 36.8 10 90.9 3 20 26 37.7All 24 100 19 100 11 100 15 100 69 100

Source: Primary survey.


others reported problems such as poor coordi-nation of activities, poor technical assistance,delayed payments, outright cheating in deal-ings, and manipulation of norms by the firm.One of the cases of poor coordination was thedelivery of tomatoes at the factory. The farmershad to wait at the factory gate for a day ormore which led to weight loss of produce due toevaporation and the company ended up re-ceiving more concentrated produce at the sameprice. Further, longer delays result in spoilageand higher rejection rate for the farmers. Thisagain has been the most frequent problem forfarmers under contracts almost everywhere,either because of genuine problems on the partof the firm or due to deliberate strategy ofgetting more concentrated produce for pro-cessing (Glover & Kusterer, 1990). Some of thePepsi potato farmers had a few problems withthe contract system, but a large number (60%)were happy. But, some of the pioneering andvery large growers for the company were highlydisenchanted with the company for leavingthem in the lurch. These farmers were workingwith Pepsi initially by planting large acreages inorder to give it a beginning in the state as thesefarmers belonged to a political party which wasinstrumental in bringing the company into thestate and the country under a very tight policyregime. In fact, one of them who is also theelected village headman said that he had stop-ped working with Pepsi as ‘‘it is used to havinga new husband every night’’ meaning that thecompany did not remain a faithful partner.Though a vast majority of growers did not

see any major role for the government in con-

tract system, some of them wanted it to makethe market more competitive by setting upmore processing units (27%) and some otherswanted regulation of contracts and companies(10%). But a majority of them were more in-terested in the companies making improve-ments in their systems like a higher rate fortheir crop, better extension, field-level gradingand pick up, and a more sincere approach whiledealing with growers. Despite various problemsand conflicts between companies and growers,62% of HLL, 80% of Nijjer, and 68% and 73%of Pepsi (potato and chili respectively) farmerswanted to continue contracting.

5. CONTRACTING AND THE LOCALECONOMY

As the above account of contract farming inthe state shows, farmers are generally happywith contracting, though they do face someday-to-day problems which have implicationsfor their incomes. On the other hand, compa-nies are also sticking to the system though theydo face problem of defaults from the farmers’side. In this section, the effects of contractsystem on the local economy and its contribu-tion in resolving the farm sector crisis are ex-amined.

(a) Farm incomes and wage employment

Farmer satisfaction with contracts can bemeasured by the growers’ interest in the con-tract system, number of farmers under the

Table 6. Company-wise distribution of growers by reasons for crop failure

Reasons for cropfailure

HLL Pepsi-P Pepsi-C Nijjer All

No. offarmers





Percent

Disease/pest 4 16.7 2 10.5 0 0 9 60 15 21.7Natural calamity 3 12.5 3 15.8 0 0 0 0 6 8.7Seed failure 3 12.5 3 15.8 0 0 1 6.7 7 10.1Disease andnatural calamity

4 16.7 1 5.3 1 9.1 1 6.7 7 10.1

Disease and seedfailure

0 0 1 5.3 0 0 1 6.7 2 2.9

Natural calamityand seed failure

1 4.2 2 10.5 0 0 0 0 3 4.3

Disease, naturalcalamity and seedfailure

3 12.5 0 0 0 0 0 0 3 4.3

No 6 25 7 36.8 10 90.9 3 20 26 37.7All 24 100 19 100 11 100 15 100 69 100

Source: Primary survey.


arrangement––growing or dwindling––and thelevel and frequency of income and its distri-bution effects across classes of farmers (CDC,1989). More specifically, farmer satisfaction iscaptured through profitability of the crop, ef-ficiency of payments and input supply, marketassurance for the produce, and farmer partici-pation in crucial decisions relating to contractproduction. There is no doubt that the vegeta-ble crops under contracts are profitable forfarmers. A very large majority of farmers in-terviewed also wanted to continue workingunder the contracts and many others wanted toget into contract production. This certainlyindicates that the farmers, on the whole, arehappy about the contract system. But this trendmay not last long due to the monopsonistictendencies and the practice of ‘‘agribusinessnormalisation’’ over time by contracting firms.Agribusiness normalization refers to a processwherein agribusiness firms, in their start-upstage, offer promotional policies such as highprices, low quality standards, and generousinput and credit support to contract growerswhich exceed what they expect to maintain overthe long run. This is done to shelter the growersfrom the high risk associated with contractcrops and to establish a procurement base forraw material supply. But the firm may find itimpossible to sustain these costs beyond one ortwo years, by which time growers have com-mited substantial resources to contract cropsand incurred heavy debts. At this stage, whenthe source of supply is assured and profitmaximization objectives require firms to raisequality standards and lower procurementprices, the firms begin to rationalize growernumbers by retaining only those growers whocan supply better quality produce at lowerprices, and squeeze growers as they becomedependent on contract-farming operations. Ag-ribusiness normalization process means lowerproduce prices and higher input costs for thefarmers which leads to discontent among them.This process is an inevitable dynamic of pro-cessor–grower relations (Glover & Kusterer,1990).That contracting has led to more and better

employment opportunities for labor, especiallywomen, is true and acknowledged by theworkers. Fruit and vegetable crops requiremore intensive labor input than other crops andtheir labor system resembles that of the indus-trial sector due to the requirements of timing,quality, and standardization in their produc-tion which cannot be met by mechanical

methods. This requires ‘‘quality labor’’ (mean-ing efficient, timely and paced), ‘‘flexible labor’’(meaning easily available and lower cost) and‘‘docile labor’’ (meaning politically trouble-freelabor). These conditions are better met withfemale labor, as women are perceived to behomemakers and, therefore, low-cost, sincereand more obedient workers. This is a manipu-lation of the cultural understanding of gender.Thus, contract farming under company super-vision can be termed as ‘‘factories in the fields’’from the point of view of labor (Collins, 1993).The labor intensity was 640 h per hectare for

potato, and 3,600–4,000 h per hectare for to-mato, as against 740 h per hectare for paddy.Thus, employment in vegetable crops such astomato is five times of that for paddy (Gill,2001). This has come as a big employmentboom in contract-farming pockets as themechanization of sowing and harvesting oper-ations of paddy and wheat crops has reducedmanual work in these crops to negligible. But,very high labor intensity may not hold in con-tract production, as some of the operations arehighly mechanized. In addition, the employ-ment generated for labor may disappear soon,as these companies are already planning tomechanize planting and harvesting operations.There is a piece rate system of output-linked

wages, i.e., wages per crate of tomatoes pickedby a worker. The wage rate for tomato harvestis Rs. 2–2.5 per crate. The more one picks in aday, the better the worker is paid. Harvestingof one acre tomato requires 15–20 women fortwo days as one woman can pick up only 25–30crates a day (a crate carries 20 kg of tomatoes).During harvesting season, wages go up whentomato harvesting competes with that of potatoand wheat in some areas. But wages are soondepressed as there is a large flow of migrantlabor into the state. In fact, migrant agricul-tural labor accounts for 25% of the total agri-cultural labor force in the state (Gill, 2000).This is similar to what happened in Mexico(Barron & Rello, 2000). The wage rate for po-tato harvesting is based on work output, i.e.,per bag of potatoes picked up by the labor. It isgenerally Rs. 5 /bag or Rs. 40 /day for femalelabor.

(b) Biased contracts

Whereas the contract agreements protect thefirms from all and even unforeseen obligations,the farmer must meet the contract obligationsunder all circumstances. There is no compen-


sation to him even under conditions of cropfailure due to natural calamity. In every con-tract, the farmer is bound to sell to the com-pany only and is penalized for default. Butthere is no specified company liability for thefailure to buy his produce. The contracts of thelocal and the MNCs also differ in many otherways. For example, the contracts of the localfirm were in local vernacular language whereasthose of the MNCs were in English only, whichis the case in MNC seed production contractingin India as well (Shiva & Crompton, 1998).Moreover, the specification of the terms of thecontracts was much clearer and more stringentin the case of MNCs as compared to that of thelocal firm. That contracts are biased is clearfrom the following extracts:

Further provided that the seeds, the plants sproutingfrom the seeds and all parts of the plant will remainthe exclusive property of PFL (the company) and shallonly be disposed/sold off if so desired by PFL, as perPFL’s instructions (Pepsi Foods contract).

In case of default, the grower shall be liable to pay toPFL the damages for the shortfall on this account andin such an event, PFL reserves the right to forthwithterminate the contract (Pepsi Foods contract). (Butno liability is specified in case the company fails topick up the produce).

The decision on grading will be at sole discretion ofPFL. However, PFL retains the first right to buy po-tato rejected due to deviation from specifications atprevailing market price (Pepsi Foods contract).

Farmer is bound to sell all healthy produce to the firmonly. On the other hand, if the company’s factory isout of order due to some reason beyond its control,then company will not be liable for any loss to thegrower (Nijjer Agro Foods contract).

(c) Sustainability implications

Repeated cultivation of the same crop with-out rotation can lead to a variety of soil infes-tations, most commonly nematodes, which hashappened in many locations in the case of to-matoes. In fact, sometimes, the land becomesunfit for any kind of crop cultivation (Glover &Kusterer, 1990; Torres, 1997). The irrigationintensity for tomato, potato and chili, is greaterthan for of wheat. For example, potato requires8–12 irrigations compared with only 5–6 forwheat and other crops (Chand, 1999a; PepsiFoods manual for potato production in Pun-jab). Pesticides and fertilizers are also used atmuch higher levels than in the traditional crops.For example, potato cultivation requires 108 kgof NPK (inorganic fertilizer) per acre as com-

pared to only 78 kg for wheat (Chand, 1999a)and 60 kg each of phosphorus and potassiumper acre as per Pepsi Foods manual. Tomatorequires 60–90 kg of nitrogen, 60–100 kg ofphosphorus, and 60–120 kg of potash per acredepending on the quality of soil as per HLLmanual. Similarly, the chip potato crop re-quires 4–5 pesticide sprays and the seed potatocrop 6–7 sprays as per Pepsi Foods manual.Tomato under contract requires as many as 14sprays as per HLL manual, which is evenhigher than that for cotton. This situation canbe quite problematic where farmer awarenessof the negative effects of pesticides on the en-vironment, other than human and animal lives,especially food-related aspects, is very low(Gandhi & Patel, 1997).

(d) Socioeconomic and gender differentiation

Contract farming has led to the increasedincidence of reverse tenancy in the region as thereturns from farming have increased for thosewho can invest in it and take the risk of cropfailure. These are mostly the large landholdersor those who have other nonfarm sources ofincome. This is certainly leading to a higherdegree of economic differentiation in the re-gion as those who lease out land are only worseoff.Female labor is preferred for transplanting

and harvesting work as they are perceived asmore sincere, more suited for this work, thusmore efficient, do not agitate. Sometimes, whenthere are daily wage rates, they are cheaper tohire (a female worker’s wage is only 50–60% ofthe male worker’s wage) and more oftenavailable in peak season. This certainly leads tomore work for women and an undesirable pushfor the use of female child labor. A largenumber of women could be seen picking pota-toes and tomatoes and grading them in thefields at harvest time. Even mothers with in-fants attend to grading work as it is generally inone place and under shade of some tree orunder a shed. This is no different from what hasbeen observed in Mexico tomato fields underthe agribusiness company ownership (Collins,1993; Torres, 1997). There is also child laborused in harvesting of crops, especially tomatoand chili. Since the wages are based on workperformed, working families tend to use childlabor to maximize earnings.In some cases, the women members of the

contract grower households could be seen su-pervising the potato grading labor especially


when the produce is graded not in the fields butat the farm house of the grower. This is possibleand desirable as most of the potato gradinglabor is done by female workers and it is easyand more effective for a female member tocontrol their work. Otherwise, these women donot participate in any farm work. But they dogive necessary instructions to labor as andwhen required, from the house itself.

(e) Nature and commitment of firms

Of the three firms operating in the state andstudied here, two (Pepsi Foods and HLL) areMNC subsidiaries and, are therefore, globallyoriented in their operations. Both are expand-ing their operations in the food sector as part oftheir global strategies, and are likely to stay inthis business, but may not restrict themselves toPunjab alone as is already evident in HLL’smove into Haryana and Rajasthan for its pro-curement. In addition, Pepsi Foods’ limitedprocurement (10% of the total requirement)from contract growers leaves much to be de-sired. It is just from 60 farmers and about 300acres of potato production that it procures. Onthe other hand, the locally emergent and locallyoriented firm (Nijjer) is small in its operationsand finding it difficult to grow on its own. It hasalready become a subcontractor to Nestl�ee so faras contract production of tomato and process-ing of tomato paste is concerned. It procuresfrom farmers, processes the tomatoes into pasteand supplies it in bulk to Nestl�ee. Thus, it isoperating as an intermediary between thefarmers and the MNC. By doing so, it not onlyavoids the risk of farm production by con-tracting but also the market risk by selling inbulk to Nestl�ee. Thus, practically, it is operatingas a subsidiary of a MNC and, therefore, thebenefits for the local economy are being re-duced to that extent.If Unilever’s strategies and actions in Aus-

tralian tomato sector are any indication of theHLL policy, then it is not likely to benefit thelocal economy and the farmers for long. InAustralia, Unilever’s actions were far fromrhetoric as it did rationalize the grower num-bers and worked only with large and efficientgrowers. Even the upgrading of Australianoperations did not correspond to a strength-ening of the company’s commitment to pur-chase Australian tomatoes as the investmentwas into upscaling of filling, storage and dis-tribution capacity which implied that any to-

mato paste (Australian or imported) could beutilized equally efficiently in the new plant. Thepreference for purchasing local tomatoes ini-tially by the company was a function of utiliz-ing plant’s sunk costs rather than a reflection ofany innate advantage of local tomato purchase.Further, the plant was oriented toward do-mestic market supply rather than for export(Burch & Pritchard, 1996). In India, HLL hasalso been practicing subcontracted procure-ment of tomatoes through agents in the nameof contract farming in Karnataka (Subrah-manyam, 2000).So far as Pepsi is concerned, its record again

is poor in terms of delivering the promiseddeals. Its interest in Punjab farming is alreadydiluted as it has sold off the tomato paste plantto the HLL and is about to wind up chili op-erations as well. Further, the crop it is con-tinuing in (potato) has been a well-tried crop ofthe region for many years. Thus, out of threecrops it ventured into, one (tomato) it has givenup, the second (chili) it is planning to give upfor good, and the third (potato) is not a sig-nificant one any way. Therefore, its contribu-tion in changing the cropping pattern of thestate is nowhere to be seen. Even after a fewyears of operations, it works only with 60farmers and procures most of its potato re-quirements from outside the state. At the timeof entry into the state and the country, it hadpromised to promote many other horticulturalcrops such as pears, grapes, apples etc., butnothing has been attempted along those lines.In fact, by acquiring a paddy-processing plantin the neighboring Haryana, it is only perpet-uating paddy cultivation in the state and theregion, though the primary grounds for Pepsi’sentry into India was that it would encouragediversification away from paddy and wheat inthe state of Punjab (Singh, 1997).Further, the scale of operations of the com-

panies does not warrant any optimism so far asdiversification of state agriculture is concerned.Most of these firms have limited processingcapacities and work only with a few dozen(Pepsi) or a few hundred farmers (HLL andNijjer). Despite 10 years of presence of some ofthem in the state, there has been no increase inprocessing capacity. In fact, the farmers feelthat the companies should cover more acreage.Interestingly, another report on hi-tech agri-culture in Punjab (Sharma, 1998), coming 12years after the Johl committee report, alsoconcludes by recommending action on the di-versification front.


(f) Effect on cropping pattern and land leasemarket

The area under the contract crop (tomato)has increased in all pockets of the region wherethere is practice of contract farming. Eachpocket has a few hundred acres under tomato,which, in some areas, was not grown at allearlier. In all, the area under tomato in Punjabin 1999 was reported to be 15,000 acres andthe total production of the crop 93,000 tons(Punjabi Tribune, Chandigarh, 9.5.1999),which had increased to 2.5 lakh tons by 2,000.There has been a considerable shift frompaddy, wheat and cotton to tomato partly be-cause of better economics of tomato crop undercontract, which is explained to the prospectivecontract growers by the company officials, andpartly because of the constant failure of cottonin some of these regions in the past few years.But, at the same time, no increase in area underhorticultural crops is evident, as the productionincrease under contracting has come largelyfrom yield factor and not from expansion ofarea. In fact, the area under fruit and vegetablecrops in the state remains <2%. Moreover,there might have been area shift within fruitand vegetable crops due to contracting. Thelease rates have also increased as there is nowmore demand for the same land for the openmarket as well as contract production of to-matoes. In addition, as tomato crop is moreremunerative, a system of six-month or single-crop leases instead of annual leases has devel-oped. The land lease rate is not much affectedby potato contracts as this crop has been grownin the state for many years.

6. CONCLUSIONS

The above analysis of case studies in the In-dian Punjab reveals that though contractinghas initially led to higher incomes for thefarmers and more employment for labor, it isnot smooth sailing for firms and is unlikely tobe sustained due to lack of trust between firmsand farmers and the tendencies toward agri-business normalization and monopolization byfirms. More important, it does not address thereal development problems of the state’s farmsector in any way. A comparison of contractsystems of local firm and MNCs shows that thelocal firm is better able to relate to the growersdue to its local language contracts and localorigins which is evident in the larger proportion

of its growers who are willing to continue withit compared to the growers with the multina-tionals. But, it may not be able to make muchdifference due to its small size and low level ofinvolvement (only higher price) as reflected inlower yields, and subcontracted marketing ac-tivity which reduces its surplus generation andthereby, capacity to offer better services togrowers.The nongovernmental organizations (NGOs)

and community organizations which can play arole in information provision, and in monitor-ing and regulating the working of contracts are,unfortunately, not present in the state in anysignificant manner. In fact, that was one of thereasons that the suicides by farmers due to cropfailure and indebtedness in the state recently(1998 and 1999) could not be prevented. Worse,there is no genuine farmer organization or co-operative in the state in agro-processing ormarketing. So, what is required for makingcontract-farming system successful is the insti-tutional and organizational innovations in thestate’s rural sector, which it is capable of, asproved by the emergence of the second-handtractor markets in the state (Singh, 1999).Vigorous bargaining cooperatives or other ag-ricultural producer organizations, which havebeen able to secure the standardization ofcontracts and their scrutiny by a governmentagency in the United States, and help con-tract farmers manage their relationships withcompanies well in Japan (Wilson, 1986; Asano-Tamanoi, 1988), are needed to negotiate equi-table contracts.Legal protection for contract growers as a

group must be considered to shield them fromill-effects of contracting. There are cases of legalprotection given to subcontracting industries inJapan in their relations with large firms. Theselaws specify the duties (to have a clear, writtencontract with the subcontractor) and forbiddenacts for the large parent firm. The latter includerefusal to receive delivery of commissionedgoods, delaying the payment beyond agreedperiod, discounting of payment, returning com-missioned goods without good reason, forcedprice reduction, compulsory purchase by sub-contractors of parental firm’s products, andforcing subcontractors to pay in advance formaterials supplied by the parent firm. Theseprovisions are monitored by the Fair TradeCommission. Interestingly, most of the viola-tions by parent firms were on the written formand clear terms of the contracts (Sako, 1992). Ifcontract farming is the only flexible production


system prevalent in industry applied to farmproduction, then it is logical to extend suchlegal provisions with necessary modifications tofarming contracts.An analysis of the labor conditions under the

contract-farming system shows that the laborissues in contract farming are still not ad-dressed in research on contract farming. Sincecontract production is primarily carried outwith female labor––adult and increasinglychild––there is a need to address the wholequestion of changing the agrarian productionstructure under contract farming from a genderperspective with focus on issues of transfer ofskills, choice of technology, organization oflabor, working conditions, and terms of work.The organization of labor is another importantmeasure to prevent or eliminate some of the illsof contract-farming system for labor. Contractfarm labor associations can also be used formonitoring wage and work conditions. In fact,there could be legal provisions to involve laborrepresentatives when companies and growers/growers’ groups decide on labor and wage is-sues. As a civil society intervention, there couldbe codes of conduct for farmers for use of laborwhich can be enforced by contracting agri-business firms who should also work toward

more ethical and human labor standards con-stantly.One of the major issues in the farming sector

of the state has been that of farmer participa-tion in agro-industrial development as it isbelieved that the capitalist farmers have accu-mulated, under the Green Revolution regime,significant investible surpluses which need to begiven an outlet for investment. That purpose iscertainly not being served by the contract-farming model of agricultural change as thesefirms are the only beneficiaries of surplus gen-erated through value addition which they donot share with farmers. In fact, the issue ofdiversification has been tackled in an undesir-able fashion. Diversification can mean doingsomething differently or a different thing alto-gether. But, here, different things are beingdone in the same way, i.e., new crops are beinggrown with same or higher input intensity. Infact, what the state should have undertaken inparticipation with other actors has been left tothe private corporate and multinational enter-prises. It is important to recognize that what isneeded is not less of the state, but a better statefor promotion and regulation of economic ac-tivities, and new organizations and institutionsfor sustainability of agricultural development.

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Contracting Out Solutions: Political Economy of Contract Farming in the Indian Punjab