Essential commodities act


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Essential Commodity Act,ECA 1955

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Essential commodities act

  1. 1. Essential Commodities Act (ECA) and its Implications and suitability to current Indian Business conditions<br />The Essential Commodities Act (ECA) is a Central legislation used to control the storage and sometimes also the movement in a large number of agricultural commodities including food grains, edible oils, pulses and sugar. The Act aims to ensure availability of essential commodities to consumers and protect them from exploitation by unscrupulous traders. Administered by the ministry of consumer affairs, the law gives the government powers to control production, supply, and distribution of essential commodities for ensuring their equitable distribution and availability at fair prices.  It dated back to an era of food scarcity when secured supply of essential commodities was considered a necessary government responsibility. Under this act, the State Governments had the powers to issue Control Orders, give license to traders, impose stock limits, restrict movement of commodities, enforce compulsorily purchase of the commodity at the levy price and prescribe trading practices. Both the Centre and state governments can issue an order declaring a commodity essential, allowing them to regulate its production, distribution, pricing and trading. The enforcement of the Act, however, lies with the state governments. Foodstuffs, including edible oilseeds and oils, drugs, petroleum and petroleum products, raw jute and jute textiles, seeds of food crops, vegetables and fruit and cattle fodder can be declared as essential commodity under the Act. The Punjab recently declared sand as an essential commodity following large-scale mining.<br />In 2002, the Central Government issued an order removing the licensing requirement and all restrictions on purchase, stocking, and transport of specified commodities including wheat, rice, oilseeds and sugar, and decontrolled it further in the following period. However, Control Orders are still in place in many States, although some of them are not used. The regulations are maximum in states like Andhra Pradesh, Maharashtra, Delhi, Punjab, West Bengal. Although the number of commodities notified under the ECA has been heavily pruned and only 15 commodities remain notified under ECA at present, the powers to notify any commodity remain in the hand of the authorities, unless the statute is repealed altogether. It is often argued that removing controls on the movement and stocking of agricultural commodities across the country would result in incentives for the producer enterprises, cooperatives and private sector to invest in modern storage and bulk handling facilities for a range of commodities. Investment in these facilities from nongovernment sources is likely to increase market efficiency and reduce post-harvest losses. It is observed that several states like Andhra Pradesh, Tamil Nadu, Karnataka, Jammu and Kashmir and Madhya Pradesh have imposed statutory restrictions on movements of rice outside the State with a view to maximize procurement. Some States also imposed informal restrictions on movement of food grains outside the state during particular periods of the year.<br />The Tenth Five-Year Plan (2002-07) noted that: “There are a number of other statutory controls, either arising from Essential Commodities Act, 1955 or other statutes, which discourage the private sector from taking up various infrastructure ventures. The stock and storage limits, restrictions on inter-state and inter-district movement of food grains, controls on blending and processing of oilseeds, Prevention of Food Adulteration Act (PFA), 1954 FPO etc. are responsible for the slow growth of infrastructure and marketing development. This has adversely affected the potential of private sector initiatives and, consequently, agricultural development. Therefore, steps would be taken for dispensing with major control measures or reforming many of them, coupled with the removal of high fiscal levies.” (para 5.1.142).<br />The problems in movement of primary products are still persistent, as noted by the Mid- Term Review of Tenth Plan (Planning Commission, 2005):<br />“The NCMP has stated that controls that depress the incomes of farmers will be systematically removed. The Tenth Plan had identified the Essential Commodities Act, 1955 (ECA) as one such impediment and, in May 2002, an Inter-Ministerial Task Force on agricultural marketing reforms had enumerated more than 200 control orders by various states. Although a number of agricultural commodities have been taken off the ECA, the rigid rules framed under the Act continue, for the most part. However, the NCMP also states that the ECA will not be diluted. It has been suggested that the ECA be so amended that rules framed under it apply in specified situations without hampering normal market activity (para 5.90).”<br />Despite the superficial absence of direct utilization of Control Orders, their mere presence creates uncertainty and thereby distortions as any consignment could be stopped any time and detained for examination. It further keeps certain powers with the food inspectors, often liable to be misused.<br />righttop00The Essential Commodities Act mandates that commodities that have been identified as being “essential commodities” can only be traded and stored by licensed holders. However, legally, Negotiable warehouse receipt (NWR) is a negotiable instrument. It is in the nature of an actionable claim representing a right to a commodity. Trading in NWR will not be covered by ECA, until physical possession is sought. Only the last transaction would have to comply with the provisions of the ECA. <br />Regulations under the Essential Commodities Act, 1955:<br /><ul><li>Regulating by licenses, permits, etc. the production, storage, transport, distribution, disposal acquisition, use or consumption of an essential commodity;
  2. 2. Increasing cultivation of food grains;
  3. 3. Controlling prices;
  4. 4. Prohibiting the withholding from sale of any essential commodity;
  5. 5. Requiring a stockholder to sell any essential commodity to the Government;
  6. 6. Regulating or prohibiting any commercial or financial transactions in food items or cotton textiles which may be detrimental to the public interest;
  7. 7. Collecting any information;
  8. 8. Requiring production of books of accounts etc; and
  9. 9. Any incidental matters</li></ul>Justification for Regulations:<br />These controls have been traditionally justified on the grounds that they are necessary to control hoarding and other types of speculative activity. <br />Problems due to restrictions:<br />Most of the provisions in this Act have become irrelevant in the context of having achieved self-sufficiency in production.<br />They hamper the market from performing its productive and commercial role.<br />A large number of permits and licences are required to be obtained from the authorities under the Essential Commodities Act and periodically returns have to be submitted and inspections carried out, which add to transaction costs.<br />Some notifications under the same Act restrict movement of goods from the surplus states to deficit states.<br />These controls and restrictions, which include the ever present threat of arrest, act as disincentives to production and distribution of essential commodities by organised companies that can exploit economies of scale.<br />Privately, the industry says the Act gives immense powers to the state authorities and inspectors to harass companies. States have the power to detain anyone who is believed to interfere with maintenance of supplies of commodities essential to the community. Sugar, wheat, pulses, edible oils, onions have all at some point come under the ambit of this Act.<br />Since the law is usually invoked without warning, big producers have difficulty in complying with the provision.<br />The ECA was introduced during a period when India was not self-sufficient in agriculture and controlling the movement and storage practices acted as an efficient check against dishonest business practices. However, given the fact that India has now created a respectable buffer stock of food grains against any disaster, thanks to the operation of the FCI, there is scope for re-looking at the actual utility of the provision. Several government committees (e.g. – Mid-term review of Tenth Plan, Planning Commission) as well as key policymakers have at times expressed concerns over the provision. There is reason to believe that the law has outlived its utility and is only contributing to the rising transaction costs. Although in the last few years both the State and the Central governments have taken number of steps to reduce the rigors of the ECA and the number of commodities covered by it has been drastically cut down, the government still retains the right to bring any commodity under its purview, if need be. Out of the 15 commodities still kept in the list, 11 are related to agricultural products. The mere threat of potential Government action keeps the private sector participation in storage, transport and processing at a low level. It also bears consequences on verifications made at the inter-state borders on movement of goods.<br />In recent news govt. is going to make a rule in which Essential Commodities Act may not apply to big companies. After a request from India Inc., the government is considering keeping private companies out of the purview of the Essential Commodities Act, allowing them to hold commodities such as wheat, rice, edible oil and sugar in bulk even when the stock limit rule is in force. The modified law should address industry concerns "as it would allow the companies to maintain supplies, quality and pricing of their products". A favourable decision could benefit companies such as ITC, Britannia, Godrej, Cadbury and Parle. <br />Conclusion:-<br />The powers for states to restrict the movement of agricultural products out of their territory granted by the ECA are incompatible with the principle of a single market. They may have served a purpose in helping to preserve local food security but at the cost of reducing food security for India as a whole. For these reasons the provision should gradually be phased out.<br />----------X----------<br />Reference:<br /><ul><li>Essential commodity act, 1955 original papers, amendments papers
  10. 10.