[Editorial Analysis] Essential Commodities Act

Mains Paper 2: Polity
Prelims level: Essential Commodities Act
Mains level: Shortcomings of the Essential Commodities Act

Context:

• The ECA was enacted in 1955 to give government the power 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 list of items under the Act include drugs, fertilisers, pulses and edible oils, and petroleum and petroleum products. The Centre can include new commodities as and when the need arises, and take them off the list once the situation improves.
• 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.
• 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.

Shortcomings of the Act:

• However, the Act has created market distortions that have prevented the efficient development of agricultural markets.
• Given that almost all crops are seasonal, ensuring round-the-clock supply requires adequate buildup of stocks during the season. So, it may not always be possible to differentiate between genuine stock build-up and speculative hoarding.
• Also, 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.
• Further, the Act does not distinguish between hoarders and firms that “genuinely” need to hold on to these stocks due to the nature of their operations.
• These stock limits have also had “limited” success in containing volatility of prices of these commodities.
• For instance, stock limits imposed in September 2019 on onions to prevent hoarding by traders had no effect in controlling the rise in their prices and instead had led to a sharp increase in the volatility of their prices since November.
• The lower stock limits must have led the traders and wholesalers to offload most of the kharif crop in October itself. The Economic Survey argues that if the government had not intervened, traders would have stored part of their produce to ensure smooth availability of the commodity at stable prices throughout the year.
• In the long term, the Act disincentivizes development of storage infrastructure thereby leading to increased volatility in prices following production/consumption shocks—the opposite of what it was intended for.
• The Act has also reduced the effectiveness of free trade and flow of commodities from areas with surplus stock to markets with higher demand.
• The Survey added that despite 76,000 raids conducted under the ECA in 2019, the conviction rate was abysmally low. This goes on to show that the ECA only seems to enable rent-seeking and harassment.

Way forward:

• Although the ECA has novel intentions but the interventions that were apt in instances of severe market failures have lost their relevance in a transformed economy.
• Eliminating such instances of needless government intervention will enable competitive markets and thereby spur investments and economic growth.

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Prelims Questions:

Q.1) With reference to the Parliamentary Standing Committee on Human Resource Development (HRD) report on school education, consider the following statements:
1. Only 56% of schools have electricity, with the lowest rates in Manipur and Madhya Pradesh, where less than 20% have access to power.
2. Less than 57% of schools have playgrounds, including less than 30% of schools in Odisha and Jammu and Kashmir, according to the Unified District Information System for Education (UDISE) 2017-18 survey.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: C

Mains Questions:

Q.1) The Economic Survey 2020 has severely criticized the Essential Commodities Act (ECA). What is the Essential Commodities Act? Highlight the problems associated with the Act.

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