Essential Commodities Act (ECA) and its Implications and suitability to current Indian Business conditionsThe Essential Commodities Act (ECA) is a Central legislation used to control thestorage and sometimes also the movement in a large number of agriculturalcommodities including food grains, edible oils, pulses and sugar. The Act aims toensure availability of essential commodities to consumers and protect them fromexploitation by unscrupulous traders. Administered by the ministry of consumeraffairs, the law gives the government powers to control production, supply, anddistribution of essential commodities for ensuring their equitable distribution andavailability at fair prices. It dated back to an era of food scarcity when secured supplyof essential commodities was considered a necessary government responsibility.Under this act, the State Governments had the powers to issue Control Orders, givelicense to traders, impose stock limits, restrict movement of commodities, enforcecompulsorily purchase of the commodity at the levy price and prescribe tradingpractices. Both the Centre and state governments can issue an order declaring acommodity essential, allowing them to regulate its production, distribution, pricingand trading. The enforcement of the Act, however, lies with the state governments.Foodstuffs, including edible oilseeds and oils, drugs, petroleum andpetroleum products, raw jute and jute textiles, seeds of food crops, vegetables andfruit and cattle fodder can be declared as essential commodity under the Act. ThePunjab recently declared sand as an essential commodity following large-scalemining. In 2002, the Central Government issued an order removing the licensingrequirement and all restrictions on purchase, stocking, and transport of specifiedcommodities including wheat, rice, oilseeds and sugar, and decontrolled it further inthe 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 likeAndhra Pradesh, Maharashtra, Delhi, Punjab, West Bengal. Although the number ofcommodities notified under the ECA has been heavily pruned and only 15commodities remain notified under ECA at present, the powers to notify anycommodity remain in the hand of the authorities, unless the statute is repealedaltogether. It is often argued that removing controls on the movement and stocking ofagricultural commodities across the country would result in incentives for the
producer enterprises, cooperatives and private sector to invest in modern storage andbulk handling facilities for a range of commodities. Investment in these facilities fromnongovernment sources is likely to increase market efficiency and reduce post-harvestlosses. It is observed that several states like Andhra Pradesh, Tamil Nadu, Karnataka,Jammu and Kashmir and Madhya Pradesh have imposed statutory restrictions onmovements of rice outside the State with a view to maximize procurement. SomeStates also imposed informal restrictions on movement of food grains outside the stateduring particular periods of the year. The Tenth Five-Year Plan (2002-07) noted that: “There are a number ofother statutory controls, either arising from Essential Commodities Act, 1955 orother statutes, which discourage the private sector from taking up variousinfrastructure ventures. The stock and storage limits, restrictions on inter-stateand inter-district movement of food grains, controls on blending and processingof oilseeds, Prevention of Food Adulteration Act (PFA), 1954 FPO etc. areresponsible 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 fordispensing with major control measures or reforming many of them, coupledwith the removal of high fiscal levies.” (para 5.1.142). The problems in movement of primary products are still persistent, as noted bythe Mid- Term Review of Tenth Plan (Planning Commission, 2005):“The NCMP has stated that controls that depress the incomes of farmers will besystematically removed. The Tenth Plan had identified the Essential CommoditiesAct, 1955 (ECA) as one such impediment and, in May 2002, an Inter-Ministerial TaskForce on agricultural marketing reforms had enumerated more than 200 controlorders by various states. Although a number of agricultural commodities have beentaken 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 beensuggested that the ECA be so amended that rules framed under it apply in specifiedsituations without hampering normal market activity (para 5.90).” Despite the superficial absence of direct utilization of Control Orders, theirmere presence creates uncertainty and thereby distortions as any consignment couldbe stopped any time and detained for examination. It further keeps certain powerswith the food inspectors, often liable to be misused.
The EssentialCommodities Act mandatesthat commodities that havebeen identified as being“essential commodities” canonly be traded and stored bylicensed holders. However,legally, Negotiable warehousereceipt (NWR) is a negotiableinstrument. It is in the natureof an actionable claim representing a right to a commodity. Trading in NWR will notbe covered by ECA, until physical possession is sought. Only the last transactionwould have to comply with the provisions of the ECA.Regulations under the Essential Commodities Act, 1955: Regulating by licenses, permits, etc. the production, storage, transport, distribution, disposal acquisition, use or consumption of an essential commodity; Increasing cultivation of food grains; Controlling prices; Prohibiting the withholding from sale of any essential commodity; Requiring a stockholder to sell any essential commodity to the Government; Regulating or prohibiting any commercial or financial transactions in food items or cotton textiles which may be detrimental to the public interest; Collecting any information; Requiring production of books of accounts etc; and Any incidental mattersJustification for Regulations: These controls have been traditionally justified on the grounds that they arenecessary to control hoarding and other types of speculative activity.Problems due to restrictions: Most of the provisions in this Act have become irrelevant in the context of having achieved self-sufficiency in production. They hamper the market from performing its productive and commercial role.
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. Some notifications under the same Act restrict movement of goods from the surplus states to deficit states. 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. 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. Since the law is usually invoked without warning, big producers have difficulty in complying with the provision. The ECA was introduced during a period when India was not self-sufficient inagriculture and controlling the movement and storage practices acted as an efficientcheck against dishonest business practices. However, given the fact that India has nowcreated a respectable buffer stock of food grains against any disaster, thanks to theoperation 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, PlanningCommission) as well as key policymakers have at times expressed concerns over theprovision. There is reason to believe that the law has outlived its utility and is onlycontributing to the rising transaction costs. Although in the last few years both theState and the Central governments have taken number of steps to reduce the rigors ofthe 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, ifneed be. Out of the 15 commodities still kept in the list, 11 are related toagricultural products. The mere threat of potential Government action keeps theprivate sector participation in storage, transport and processing at a low level. It alsobears consequences on verifications made at the inter-state borders on movement ofgoods. In recent news govt. is going to make a rule in which Essential CommoditiesAct may not apply to big companies. After a request from India Inc., the government
is considering keeping private companies out of the purview of theEssential 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 modifiedlaw should address industry concerns "as it would allow the companies to maintainsupplies, quality and pricing of their products". A favourable decision couldbenefit companies such as ITC, Britannia, Godrej, Cadbury and Parle.Conclusion:- The powers for states to restrict the movement of agricultural productsout of their territory granted by the ECA are incompatible with the principle ofa single market. They may have served a purpose in helping to preserve localfood security but at the cost of reducing food security for India as a whole. Forthese reasons the provision should gradually be phased out. ----------X----------Reference: Essential commodity act, 1955 original papers, amendments papers http://economictimes.indiatimes.com/news/economy/policy/essential- commodities-act-may-not-apply-to-big-companies/articleshow/9616272.cms FAO report on TOWARDS AN INDIAN COMMON MARKET: REMOVAL OF RESTRICTIONS ON INTERNAL TRADE IN AGRICULTURE COMMODITIES By- Amit Kumar PGDMA 1001