India: Analysis Of Essential Commodities (Amendment) Ordinance, 2020

2.1. The Act was enacted in the interest of general public to ensure availability of essential commodities to consumers.

2.2. The Act seeks to control of the production, supply and distribution of, and trade and commerce, in certain commodities through government intervention. Such commodities are declared as essential and State Government/Union territories enforce provisions of Act to control prices of such essential commodities.

Illustration: Central Government by control order dated March 24, 2020 regulated prices of 2 ply and 3 ply masks till June 2020¹.

2.3. Major commodity group under Act are - essential pharmaceutical drugs, fertilizers, foodstuffs (including edible oil and seeds, vanaspati, pulses, sugarcane, rice, paddy; Hank yarn made wholly from cotton; Petroleum and petroleum products; raw jute and jute textile; onion and potato, seeds of food-crops and seeds of fruits and vegetables, jute seed and cotton seeds.²

3. Cure dangerous than the disease!

The objective of Act was to (i) ensure that the poor people afford essential commodities and (ii) prevent hoarding and black marketing of essential commodities. However, over years, it has been found that the bitter pill of 'control orders' achieved outcomes that were exactly opposite of what was intended.

3.1. These control orders, at times, spiked up volatility of the wholesale and retail prices instead of smoothening them.

3.2. The control orders limiting stockholding uniformly applied to entire agriculture supply chain, including wholesalers, food processing industries and retail food chains. Thus, Act did not distinguish between speculative hoarders vis-à-vis organizations genuinely need to hold stocks owing to the nature of their operations.

3.3. Aside above there were other 'side-effects'. The Act dis-incentivized investments in storage and warehousing infrastructure due to unpredictable imposition of stock limits. In absence of such control orders it is industry view that traders would store part of the produce to ensure uninterrupted supply of essential commodities at stable prices.

3.4. The Act and government intervention distorts entry of large private sector players into agricultural marketing.

3.5. Owing to stock limits, traders are unable to deliver promised quantity of commodity on exchange platform which affects growth and development of commodity market.

3.6. Government raids aimed at prevent hoardings of essential commodities too, has been found ineffective in controlling prices of essential commodities.

4. Motivations behind amendment³

The amendment is part of government's keenness to bring ease of doing business. The objectives behind amendment are several and listed below:

4.1. Excessive intervention by control orders stifles economic freedom. Government has other tools at its disposal like-

- 'Direct participation' as a market maker or as buyer/supplier of goods and services;

- 'Indirect participation' in form of subsidy, taxation, etc.; or

- Use of price stabilization fund.

4.2. Anti-hoarding provisions of Act discouraged open reporting of stock holdings, storage capacities, trading and carry forward positions. This coupled with absence of aggregated data of the total private storage capacity, which would enable policymakers to assess the impact of any production shocks on the prices. Absence of reliable and relevant data further discouraged investors as it was difficult for them to make accurate business forecasts.

4.3. Supporting development of commodity futures markets. This in turn would trigger efficient discovery of market expected future prices, which can provide a better basis for private storage decisions and avoid 'peaks' and 'troughs' in prices.

4.4. In index of economic freedom, India is categorized as mostly unfree with score of 55.2 in 2019. Our rank is 129 among 186 countries whereas in the Index of Global Economic Freedom too, India ranks 79^th among 162 countries with 108^th rank in business regulation. Economic freedom enhances wealth creation by enabling efficient allocation of entrepreneurial resources and energy to productive activities, thereby promoting economic dynamism.

4.5. The proposed reform is part of Central Government's 'Atma Nirbhar Bharat Abhiyan'- better price realization for farmers, attract investments and make agricultural sector competitive.

4.6. Lastly, Act was enacted when country was facing various challenges like poor transport infrastructure, fragmented markets etc. However, now Indian markets have increasingly become integrated and competitive. Thus, it is felt that the statute has outlived its purpose to control hoarding or black marketing.

5. Ordinance- Vaish view

Footnotes