Decoded: Changes to Essential Commodities Act and why they are drawing flak

While some welcome the amendments, others have doubt and point to the arbitrary powers the government can still use to control trade

What is the Essential Commodities Act?

The roots of this Act can be traced back to 1939 when the Government of India made rules regarding control, production, supply, and distribution of certain specific commodities under the Defence of India Act, 1939 during World War II. 

The Act ceased to exist in 1946. However, it was felt that certain regulations are needed urgently for the protection of some essential commodities in the interest of the public. Therefore, The Essential Supplies (Temporary Powers) Ordinance was issued in 1946, which was subsequently replaced by the Essential Supplies (Temporary Powers) Act, 1946.

The provisions of this Act were further extended by two resolutions of the General Assembly in 1948 and 1949. 

After independence, by the third Constitutional Amendment, the first Essential Commodities Ordinance was issued, which was subsequently replaced by the present Act namely, The Essential Commodities Act, 1955.

It has since been used by the Government to regulate the production, supply and distribution of a host of commodities it considers as essential items in order to make them available to consumers at fair prices.

The Act empowers the Centre to include new commodities as and when the need arises, and take them off the list once the situation improves.

The EC Act together with the Prevention of Black Marketing and Maintenance of Supplies of Essential Commodities Act enacted in the year 1980 provides a potent weapon to the government to crackdown on hoarding and black marketeering. 

This Black Marketing Act provides powers to officers of the Union and state governments to pass detention orders against persons who seek to control production, distribution, and supply, trade, and commerce of those essential commodities defined under Section 2 of the Essential Commodities Act, 1955. 

The Act also contains the manner according to which these detention orders are to be passed or executed.

A labour load a sack of onion on hand cart after authorities eased COVID-19 lockdown restrictions, in Guwahati.

How does the Act function?

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. 

However, once it does, traders have to immediately sell into the market any stocks held beyond the mandated quantity. This improves supplies and brings down prices. If some shopkeepers and traders don’t comply with the guidelines, the states can conduct raids and undertake other measures to release these stocks. The penal powers are provided by the Black Marketing and Hoarding Act of 1980 mentioned above. 

Are the Act’s provisions sparingly used?

The provisions of the EC Act are randomly used several times to keep a check on the prices of volatile commodities such as onions, potatoes and pulses. Various governments in the past have recommended unshackling the EC Act and bringing items out from its purview. Not only that, governments have in the past delisted items from the EC Act, only to bring them back whenever there is a slight increase in prices to protect the consumers. 

In fact, a high-powered committee of Chief Ministers constituted by the previous UPA government that had presented Prime Minister Narendra Modi as its chairman had also recommended amending the draconian provisions of the Act.

That’s not all, reports show that back in 2001 a conference of Chief Ministers called by the Union government had recommended that all restrictions under the Act should be abolished and movement of agricultural goods, its storage should be freed, as the EC Act benefits neither the producer nor the consumers in times of crisis.

A boy looks on boiled rice as he came to get free food, outside Calcutta University at College Street, Kolkata.

Thereafter, reports show that between 2002 and 2006, the number of commodities listed in the act, which once touched 70 was brought down to seven. 

Then in 2006, the Act was amended to bring in more items, but only for six months at a time. Between 2006 and 2007, as inflation started to soar in some commodities, wheat, rice, sugar, edible oil and pulses were brought back in its purview.

That is not all, in 2016 the NDA government removed the licensing requirement, stock limits and movements restrictions on certain food items under ECA. 

These included items like wheat and wheat products, edible oils, hydrogenated vegetable oils, onions and potatoes. For pulses, the restrictions were removed until September 2017, while it was for different periods for other commodities. 

Exporters, retailers having multiple outlets or large departmental stores, food processors and importers were also kept outside the licensing requirement, stock limits and movement restrictions under ECA as per the 2016 amendments.

The NDA government also brought items under its purview or removed them depending upon prevailing market circumstances. Infact, as late as 2019 and even in 2020, the Act was imposed multiple times on items -mainly onions- to control prices and check hoarding. 

In 2019, the Centre perhaps in a first of kind move imposed the stock holding limits on onions directly exercising its powers under the Act without even authorising the states to do so. At one time, it had put a stock holding limit of 10 tonnes on retailers and 50 tonnes on wholesalers which was brought down to mere 5 tonnes for retailers and 25 tonnes for wholesalers.

Clearly, when it comes to the Act and its impositions all governments have been using its provisions to control prices and clamp down on traders, mostly at the expense of farmers.

Goods kept in WDRA registered warehouses are usually exempted from the provisions of the EC Act but their number is so small that it hardly makes any difference. Sources say that out of the total 170 million tonnes of recognised warehousing capacity in the country, only around 10 million tonnes (a little less than 6 per cent) is in WDRA registered warehouses.

What are new changes in the EC Act approved by the Parliament?

The new amendment states that the Act’s provisions that includes imposing stock holding limits won’t be applicable to food stuffs such as cereals, pulses, potato, onions, edible oilseeds and oils except under extraordinary circumstances that include war, famine, natural calamity or extraordinary increase in prices.

These price limits are when there is 100 per cent increase in retail price of horticulture produce or 50 per cent increase in retail price of non-perishable items as compared to the previous 12 months or last five years’ average whichever is lower.

However, such stock limits won’t be applicable to value chain participants such as exporters and large warehouses, provided that such stocks don’t exceed the overall ceiling of installed capacity of processing or the demand for export in case of an exporter.

Criticism of these amendments

There are basically two kinds of criticism of the amendments. The first one is that once regulations are lifted, big hoarders and traders will have a free run. The amendments seen in conjunction with the other two bills, critics say will ensure that while one hand farmers are fleeced by traders who will buy from them at lower price and then store at will to jack up prices for the end consumer.

The states too will lose their powers to regulate commodities under the Act and won’t have any right to impose stock holding limits on any commodity which can lead to wild fluctuation in prices.

The second argument is the bar kept for triggering the provisions of EC Act -that is stock holding limits etc- is too low and will leave a lot of arbitrariness in the hands of government officials.

A recent case in point is the ban on onion exports which was announced suddenly without giving any notice leading to massive loss for farmers and sharp drop in prices in the range of Rs 1,000-1,200 per quintal in the span of a few days.

Economists like Ashok Gulati have a different point of view. 

They feel that the price trigger could be breached frequently leaving a lot of power in the government's hands to clamp down on essential commodities using the Act's provisions. 

Gulati in an interaction with Business Standard sometime back had said that though the government has exempted ‘value chain participants’ from the provisions of the above mentioned clause but what happens if a Farmer-Producer Company (FPO) decided to store potatoes that it has bought from farmers. Will it be subjected to the same provisions as big traders?

Sukhpal Singh, Chairperson of Centre for Management in Agriculture in IIM-Ahmedabad said that sugar has been kept out of the provisions of the exempted foodstuffs, which means the government will continue to exercise control over it.

The reality as some experts said could be different as the recent onions export ban showed. Government won’t by any count would like inflation to rise as that could badly antagonise its primarily middle class urban vote bank.