Essential Commodities Act(ECA)

Context:

Cabinet has approved historic amendment to the Essential Commodities Act. Under the proposed amendments, essentials like cereals, pulses, oilseeds, edible oils, onion and potatoes have been excluded from the Essential Commodities Act.

Essential Commodities Act (ECA)

  • It was enacted in 1955.
  • Used by the Government to regulate the production, supply and distribution of a whole host of commodities it declares ‘essential’ in order to make them available to consumers at fair prices.
  • The Act gives powers to the central government to add or remove a commodity in the “Schedule.” The Centre, if it is satisfied that it is necessary to do so in public interest, can notify an item as essential, in consultation with state governments.
  • There is no specific definition of essential commodities in The EC Act. Section 2(A) of the act states that an “essential commodity” means a commodity specified in the “Schedule” of this Act.
  • At present, the “Schedule” contains 9 commodities — drugs; fertilisers, whether inorganic, organic or mixed; foodstuffs, including edible oils; hank yarn made wholly from cotton; petroleum and petroleum products; raw jute and jute textiles; seeds of food-crops and seeds of fruits and vegetables, seeds of cattle fodder, jute seed, cotton seed; face masks; and hand sanitisers.
  • The latest items added to this schedule are face masks and hand sanitisers, which were declared essential commodities with effect from March 13, 2020 in the wake of Covid-19 outbreak. The Centre can include new commodities as and when the need arises, and take them off the list once the situation improves.
  • Under the Act, the government can also fix the maximum retail price (MRP) of any packaged product that it declares an “essential commodity”.

How the Essential Commodities Act is used by Government

  • If the Centre finds that a certain commodity is in short supply and its price is spiking, it can notify stock-holding limits on it for a specified period.
  • The States act on this notification to specify limits and take steps to ensure that these are adhered to.
  • Anybody trading or dealing in a commodity, be it wholesalers, retailers or even importers are prevented from stockpiling it beyond a certain quantity.
  • A State can, however, choose not to impose any restrictions. But once it does, traders have to immediately sell into the market any stocks held beyond the mandated quantity.

Importance of Essential Commodities Act

  • The ECA gives consumers protection against irrational spikes in prices of essential commodities.
  • The Government has invoked the Act umpteen times to ensure adequate supplies.
  • It cracks down on hoarders and black-marketeers of such commodities.
  • State agencies conduct raids to get everyone to toe the line and the errant are punished.

Recent Changes in the Act

The Union Cabinet has approved an ordinance to amend The Essential Commodities Act, 1955, to deregulate commodities such as cereals, pulses, oilseeds, edible oils, onion and potatoes.

  • The ordinance has introduced a new subsection (1A) in Section 3 of The Essential Commodities Act, 1955.
  • The amended law provides a mechanism for the “regulation” of agricultural foodstuffs, namely cereals, pulses, oilseeds, edible oils, potato, and supplies under extraordinary circumstances, which include extraordinary price rise, war, famine, and natural calamity of a severe nature.
  • Under the amended EC Act, agri-food stuffs can only be regulated under extraordinary circumstances such as war, famine, extraordinary price rise, and natural calamity.
  • Any action on imposing stock limits will be based on the price trigger. Thus, in case of horticultural produce, a 100 per cent increase in the retail price of the commodity over the immediately preceding 12 months or the average retail price of the last five years, whichever is lower, will be the trigger for invoking the stock limit for such commodities.
  • For non-perishable agricultural foodstuffs, the price trigger will be a 50 per cent increase in the retail price of the commodity over the immediately preceding 12 months or the average retail price of the last five years, whichever is lower.
  • Exemptions from stock-holding limits will be provided to processors and value chain participants of any agricultural produce, and orders relating to the Public Distribution System

Need for amendment of ECA

  • The EC Act was legislated at a time when the country was facing scarcity of foodstuffs due to persistent abysmal levels of foodgrain production. The country was dependent on imports and assistance to feed the population.
  • In this scenario, to stop the hoarding and black marketing of foodstuffs, The Essential Commodities Act was enacted in 1955.
  • But now the situation has changed. Production of wheat has increased by 10 times (from less than 10 million tonnes in 1955-56 to more than 100 million tonnes in 2018-19); during the same period, the production of rice has increased more than four times from around 25 million tonnes to 110 million tonnes. The production of pulses has increased by 2.5 times, from 10 million tonnes to 25 million tonnes.
  • India has now become an exporter of several agricultural products. With these developments, the EC Act has become anachronistic.

The recent Economic Survey referred to the act is being outdated and needed immediate reform

In September 2019, the Centre invoked the ECA Act’s provisions to impose stock limits on onions after heavy rains wiped out a quarter of the kharif crop and led to a sustained spike in prices.

  • Although the restrictions on both retail and wholesale traders were meant to prevent hoarding and enhance supply in the market, the Survey showed that there was actually an increase in price volatility and a widening wedge between wholesale and retail prices.
  • This is due to the fact that ECA act fails to differentiate between hoarding and Storage.
  • Thus in the long term, the Act disincentives development of storage infrastructure, thereby leading to increased volatility in prices following production/ consumption shocks — the opposite of what it is intended for.

Benefits of the amendment

  • The amendment seeks to free agricultural markets from the limitations imposed by permits and mandis that were originally designed for an era of scarcity.
  • This will remove fears of private investors of excessive regulatory interference in their business operations.
  • The freedom to produce, hold, move, distribute and supply will lead to harnessing of economies of scale and attract private sector/foreign direct investment into agriculture sector.
  • It will help drive up investment in cold storages and modernization of food supply chain.

The move provides more choices for farmers to trade their produce, but its success will depend on how the private sector leverages the opportunity.

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