Essential Commodities Act – Need, Issues, Solutions

essential commodities act upsc

In India, the market prices are dictated by demand and supply. However, it is affected by sporadic cases of hoarding, extreme weather events, natural calamities, etc. Hence the government is empowered by certain laws like the Essential Commodities Act- to intervene to protect the consumers’ interest. The government used the EC Act to ensure rational pricing and prevent hoarding of hand sanitizers and masks- basic necessities for tackling the COVID-19 crisis. It has been used by the government over the years to protect consumers in times of shortages. This law has also seen several amendments over the years- seeing a trend of becoming increasingly stringent in its provisions. However, the Union Cabinet approved an ordinance to amend the 1955 Act- relaxing some of its provisions.

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What is the Essential Commodities Act?

  • The Essential Commodities Act of 1955 enables the government to control the following aspects of certain commodities in the interest of the general public:
  1. Production
  2. Supply and distribution
  3. Trade and commerce

What is an essential commodity?

  • The Act defines ‘essential commodity’ as a commodity specified in the ‘Schedule’.
  • The government has been given sweeping powers with regards to what these essential commodities are. The Central government can add or remove commodities to or from the list as per the requirements of the situation.
  • Several items have been designed as ‘essential’ in the past- including cereals, pulses, edible oils, sugar, certain crops, fertilizers, drugs, petroleum products, etc.
  • Currently, the list includes drugs, organic and inorganic fertilizers, foodstuff, edible oils, petroleum and its products, cotton hank yarn, raw jute, jute textiles, seeds (of food crops, vegetables, fruits, jute, cotton and cattle fodder) and the latest 2 additions: hand sanitizers and masks.

How does it work?

  • The Act is implemented by the state governments and the Union Territory administrations and is monitored by the central government. The government can set prices through ‘Control Orders’.
  • When there is a supply shortage of a certain commodity and its prices spike, the centre notifies its stock-holding limits for a specified time.
  • The state governments act on this notification. They specify limits and ensure adherence.
  • Beyond this set limit, traders and dealers- including wholesalers, retailers and importers- are prohibited from stockpiling. Violators are termed as ‘black-marketeers’ or ‘illegal hoarders’.
  • The state authorities conduct raids to confiscate excess stocks. The confiscated stocks are auctioned off or sold via Fair Price Shops.
  • Violators are penalized and can be imprisoned for up to 7 years.
  • A state government can also choose not to impose restrictions. Instead, traders are to immediately sell all the excess stocks (beyond the specified quantity) of the specified commodities into the market.
  • The government is also empowered to fix an MRP (Maximum Retail Price) of packaged products that are declared as ‘essential commodities’.

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Why was it introduced?

  • The Act was passed in the aftermath of the Partition. During this period, the government wanted to safeguard the citizens from exploitation by black-marketeers and unscrupulous traders. The Act was used as the executive tool to control hoarding.
  • The Act was used, along with Prevention of Blackmarketing and Maintenance of Supplies of Essential Commodities Act, 1980, to detain/imprison hoarders.
  • The Act is now used to protect consumers against irrational price spikes of essential commodities and to improve food security.
  • The Act has been used multiple times to ensure adequate supplies in times of scarcity.
  • Most recently, it was used to prevent hoarding of hand-sanitizers and masks to enable a steady supply to the general public in times of a major health crisis despite the accompanying scare and demand spike.

What are the issues?

  • It is to be noted that the Act was brought in, with its provisions for limitations in the form of permits and mandis, during a scarcity period- when India depended on imports and assistance from countries like the USA. The situation has changed and hence requires a revamping of the Act.
  • Production of various agricultural commodities has gone up several folds from the 1950s. eg: wheat production has increased by 10 folds while paddy production increased by 4 folds and pulses’ production by 2.5 folds. India has even taken to exporting many agricultural products.
  • Farmers have been unable to get good prices despite producing a surplus in most categories of agricultural commodities. They especially suffer losses during the bumper harvest of perishable produces. The EC Act adds to their woes and often counters the little benefits brought about by DBTs and loan waivers.
  • Several crops in India are seasonal in nature. This means that to ensure a steady year-round supply, adequate stocking is required during the harvest seasons.
  • There is a difficulty in differentiating speculative hoarding from a genuine stocking.
  • India is increasingly becoming prone to adverse weather events that disrupt agricultural production and supply. In such cases, the prices are bound to increase in response to the supply shortage. Monitoring prices in such cases would be a disincentive to farmers.
  • Frequent stock-limits would repel large-scale private investments away from developing storage facilities. Eg: the much needed cold storage infrastructure for the agricultural sector.
  • The Act has become detrimental to agricultural investment and post-harvest activities.
  • The raids conducted under this Act have a very low conviction rate of just 3.8% according to the recent Economic Survey. It even termed the Act as ‘anachronistic’ (out-of-date).
  • The Survey also pointed out that the interventions under the EC Act have only led to an increase in volatility of the commodities’ prices (both wholesale and retail) instead of deflating them. The most recent illustration of this concern are:
  1. 2006 stock limit imposition on dal
  2. 2009 stock limit on sugar
  3. The imposition of the September 2019 stock limit on onions when the prices spiked from 60-80 INR/kg in October to 100 to 150 INR/kg in December.
  • The restrictions, under the Control Order, are placed without any debate or deliberative processes. This implies that there is a level of arbitrariness involved in the process.
  • These orders can involve a change in the limit of quantity without notice- sometimes even overnight. This introduces a sense of uncertainty for the traders.
  • Several traders may have pre-existing agreements with farmers to buy commodities from them. However, if honouring these contracts means that the mandated limits are exceeded, the situation would pose a problem to both parties of the contract.

What are the recommendations of the 2019 Srivatsava Committee?

A high-level government panel was constituted under Consumer Affairs Secretary, Avinash Kumar Srivatsava in August last year. It submitted the following recommendations:

  • It recommended diluting several provisions of the Act as the IPC already covers the offences listed in the EC Act.
  • It recommended giving more powers to the states to decide on the financial holding limit of the commodities’ stock.
  • It called for removing the imprisonment provision for punishing persons convicted of controlling the production, supply and distribution aspects of essential commodities under Section 7 of the EC Act.
  • It called for replacing the imprisonment provision with Rs.50 lakh fine.
  • It recommended the continuation of pecuniary punishment.
  • The panel sought to remove Section 10 of the Act which provides that “if a person violating an order is a company, every person who, at the time when the violation was committed, was in charge of and was responsible to the company shall be deemed to be guilty of the violation”.
  • If it can’t be scrapped completely, at least companies dealing with agriculture and horticulture must be exempted from its provisions.
  • It also recommended scrapping of provisions for cognizance of offences committed under the EC Act (Section 11).

What is the way forward?

  • In 2015, an occasional paper from NITI Aayog had recommended the review and revision of the Act because of some of the restrictive features discouraging the entry of large players into the agricultural marketing infrastructure.
  • Disproportionate punitive measures like attachment of properties, vehicle confiscation and preventive detention need to be done away with.
  • The Economic Survey 2019-20 had recommended repealing the Act altogether citing its ineffectiveness.
  • Like in case of modern competition law, the EC Act can be modified to require proof (that a person had cornered the market) for the imposition of stock limits. This will reduce the arbitrariness of the Act.
  • Though there has been a call for the total repeal of the EC Act, it should be noted that total deregulation of food-grains would increase the risk of inflationary food price spikes.
  • An Act for regulating essential commodities is required for ensuring food security as well as equitable availability of other essential commodities. Total deregulation could make way for the entry of the black market.
  • It is also to be understood that the aggravation of the 2019 onion prices situation following the invocation of the EC Act was a case of ‘law of unintended consequences’- where government intervention is made with a certain intention but results in a very different outcome. This is due to non-consideration of the general practice of storing produce for year-long availability and blind implementation of the EC Act provisions.
  • India was able to avoid large scale hoarding (like in the USA and Australia) during the COVID-19 lockdown using the provisions of this Act i.e. proper utilization of its provisions would actually help the executive manage abnormal situations.

What are the latest amendments to the Act?

  • The latest amendments provide that the foodstuffs can be regulated under the Act only under extraordinary circumstances like natural calamity, extraordinary price rise, famine or war.
  • Commodities like cereals, pulses, oilseeds, edible oils, onion and potatoes are to be deregulated.
  • Price trigger will be the basis for any action on imposing stock limits.
  • Eg: in case of horticultural commodities, a 100% increase in price over the last 5 years’ average retail price or retail price over the preceding 12 months (whichever is lower) will be triggers for invoking stock limiting.
  • In the case of non-perishable agricultural commodities, a 50% increase in price will constitute the price trigger.
  • The amendment will exempt the processors and value chain participants of agricultural produce and orders relating to PDS from the stock-holding limits.

Objectives and benefits of the amendment

  • The amendments are aimed at agricultural transformation and improving farmers’ income.
  • The changes will remove the reservations of private investors about excessive interference of the government into their business operations in the name of regulations.
  • The amendment seeks to bring in price stability while safeguarding the interests of both- farmers and consumers.
  • It will create a competitive environment while also preventing wastage of perishable commodities due to lack of storage facilities.

Conclusion

The Indian economy is a mix of market and planned economy- designed to suit the needs of a very diverse population. While ‘invisible hand’ of demand and supply is the major director of the market, the government has to intervene in certain extraordinary situations to regulate prices and supplies. The EC Act is an illustration of this concept. However, its provisions are to be exercised on a rational basis and should not end up suffocating the entrepreneurial aspiration of the population.

Practice Question for Mains

The Essential Commodities Act has been described as ‘anachronistic’ and ‘draconian’. Discuss reasons for and against repealing this Act. (250 words)

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