Thursday, March 24, 2011

24 March 2011: Relationship Farming:The Problem of Enforcement in Contract Farming Systems in India

Sudha Narayanan
Cornell University and
Visiting Post-doctoral Fellow, Centre for Development Economics, Delhi School of Economics

This study examines the problem of enforcement in select contract farming schemes in southern India, bringing together data from surveys, conducted between 2007 and 2010, of 824 farmers from multiple commodity sectors. The central argument of this paper is that contract farming relationships in India are seen more as relationships and less as contracts, with formal enforcement mechanisms playing only a peripheral role in maintaining and supporting transactions. This is related only in part to the costs and inefficacy of formal enforcement mechanisms. Given that firms typically contract for small quantitites from a large number of farmers, court-based enforcement does not usually make economic sense. In a case presented in this study, 37% of the contract farmers had some default; most of these were modest amounts. Depending on the costs of enforcement, the number defaulting farmers who can be taken to court without entailing a net loss for the firm, ranges from only 3% to about 25% of those who have outstanding dues. More importantly, however, firms tend to view court-based formal enforcement as detrimental to farm-firm relationships in a way that undermines the handshake ethic. This latter concern drives firm to leverage relationships to support economic transactions, mixing formal and informal elements to do so, with considerable heterogeneity among the commodities. The space of contract farming then defines a `moral' economy, where breach by both firm and farmers is pervasive, a large part of which is overlooked or excused in the interests of sustaining the system. The Farmer Survey finds that the incidence of breach by way of sideselling farmers is 17% and 10% of contracting farmers reported that the firm had breached the contract the previous season. While personal relationships underpin these economic transactions for promoting contractual commitment and compliance, the study suggests that relationships necessarily work in tandem with price-based incentives. When contract price offers enough premium over alternative prices, relationship-based incentives to improve contractual performance are ineffective since they are rendered irrelevant. When spot market prices far exceed contract price,relationships are inadequate and fail to induce farmers to honor contracts. Between these two ends, however, there exists a range of price differentials, where despite the incentives for breach implied by high market prices, relationship can overturn or neutralize this influence and improve contractual performance. In short, there are limits to the role of relationships in defining a self-enforcing range of agreements, and this could differ across commodities. Overall, the empirical evidence cautions that policy prescriptions mandating legal and institutional mechanisms to promote contract farming might be ineffective, if not misplaced.

Date: March 24, 2011
Time: 03:00 P.M.

New Seminar Room [First Floor],
Department of Economics,
Delhi School of Economics,
New Delhi-110007(INDIA)


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