Essential Commodities Act

According to Economic Survey 2019-20, Essential Commodities Act is out-dated and must go.

About

• Findings in the Economic Survey 2019-20 were against Essential Commodities Act (ECA) and other “anachronistic legislations” and interventionist government policies, including drug price control, grain procurement and farm loan waivers.
• ECA to control onion prices: In September 2019, the Centre invoked the ECA’S provisions to impose stock limits on onions after heavy rains wiped out a quarter of the kharif crop and led to a sustained rise in prices.
• How does ECA work: Stock limits ensure that onion stocks would be released into the open market and the supply would go up, ensuring prices remain affordable.
• ECA has unintended consequences: The Survey offers examples of stock limits on onion, sugar and pulses, where ECA intervention had little impact, and instead increased volatility in prices following production/ consumption shocks — the opposite of what it is intended for.

Arguments against ECA

• An archaic law:Essential Commodities Act has been in existence since 1955, when the economy was very different from what it is today. It was an economy ravaged by famine and food shortages.
• Difference between storage and hoarding: Recently there is evidence of interventions not working. It is because there is a distinction between storage and hoarding.
  • As compared to older times, when the economy experiences acute shortages, todaymany shortage cases are actually that of hoarding.
• Stock limits led to onion price volatility: To control soaring prices of onions over the last few months, centre through ECA imposed stock limits on onions. Instead of decreasing prices, this actually increased price volatility.
  • 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.
  • Lower stock limit led traders and wholesalers to immediately offload most of the kharif cropwhich led to a sharp increase in the volatility.
• Disincentivises storage infrastructure development: With too-frequent stock limits, traders may have no reason to invest in better storage infrastructure in the long run.
  • Also, food processing industries need to maintain large stocks to run their operations smoothly. Stock limits curtail their operations. In such a situation, large scale private investments are unlikely to flow into food processing and cold storage facilities.
• Higher prices of medicines:Drug Price Control Order issued under the ECA also distorted the market and actually made medicines less affordable.
  • The increase in prices is greater for more expensive formulations than for cheaper ones and for those sold in hospitals rather than retail shops.
• Rent seeking and Low conviction rates: Despite many raids conducted under the ECA in 2019, the conviction rate was abysmally low. The ECA only seems to enable rent-seeking and harassment.

Farm sector distortions

• Arguments against farm loan waivers: Beneficiaries of farm loan waivers consume less, save less, invest less and are less productive.
• Argument against government procurement of food grains:Government procurement of foodgrains led to a burgeoning food subsidy burden and inefficiencies in the markets.
  • It is beneficial to switch to cash transfers instead.

Arguments for ECA

• Adequate supply:Given that almost all crops are seasonal, ensuring round-the-clock supply requires adequate build-up of stocks during the season.
  • Without the ECA the common man would be at the mercy of opportunistic traders and shopkeepers.
• Genuine shortages:There can be genuine shortages triggered by weather-related disruptions in which case prices will move up.
  • So, if prices are always monitored, farmers may have no incentive to farm.
• Difficult to differentiate between hording and shortage: It may not always be possible to differentiate between genuine stock build-up and speculative hoarding.