The Fine Print of the Essential Commodities Act Ordinance Must be Carefully Parsed

More clarity is needed on what will be considered an export order in case stock limit has to be imposed.

Out of the three game-changing ordinances issued by the Centre on June 5, 2020, the shortest and the most critical to the future of investment in agriculture is “The Essential Commodities (Amendment) Ordinance, 2020”.

The ordinance seeks to specify and restrict the conditions under which the government will be empowered issue regulations under the EC Act.

This year’s Economic Survey devoted one full chapter to the distortions in India’s agricultural economy. In particular, it noted that “blanket stock limits on commodities under Essential Commodities Act (ECA) neither brings down prices nor reduces price volatility”.

It is heartening that the government heeded the advice and undertook actual steps to accept some of the ideas from the survey.

Under the Essential Commodities Act, 1955, there are eight categories of items on which the Centre can enable control by the state governments. These are: (1) drugs; (2) fertilisers (3) foodstuffs, including edible oilseeds and oils; (4) hank yarn, made from cotton; (5) petroleum and petroleum products; (6) raw jute and jute textiles; (7) seeds of food-crops and fruits and vegetables, seeds of cattle fodder and cotton seeds and jute seeds; (8) face masks and hand sanitisers.

The Centre, by using its powers under the Act, enables the state governments to issue ‘control orders’ which then inter-alia, regulate the movement of goods within and across states and fix stock limits. It could make licensing compulsory and even impose a levy on production of goods. The states made full use of these powers and thousands of police cases were registered every year for alleged violations of ‘control orders’.

This is not the first time that the Centre has decided to liberalise its provisions. For instance, the Vajpayee government in 2002, eliminated the licensing and stock limits on wheat, paddy, rice, coarse grains and edible oils.

Also read: What Will the End of the Road for APMCs Look Like?

The global food crisis of 2006-07, however, brought many provisions back as food prices were rising and wheat stock with the Government had fallen to just about two million tonnes against the buffer norm of four million tonnes on April 1, 2006. The states made full use of their powers and in one instance, the government of Andhra Pradesh restricted the movement of superfine varieties of paddy and rice.

The present ordinance provides for regulation only under extraordinary circumstances which may include war, famine, extraordinary price rise and grave natural calamity. In such situations, the governments can impose stock limits, though certain specific conditionalities have been prescribed under clause 2 (1A) the ordinance which will attract such action.

In all likelihood, the pre-conditions of price rise (100% increase in retail price for perishables, 50% increase in non-perishables, over preceding 12 months or average of last 5 years, whichever is lower) will be frequently met in case of any failure of monsoon (as in 2014-15 or 2015-16) or excessive rain (as for soybean in 2019-20) or pest attack (as in case of the Fall Armyworm attack on maize in 2019-20).

To reach a decision on this, the government will continue to depend on Agmarknet prices.

There is an urgent need to make this more robust as the trend of prices and quantity of arrival of produce in mandis will determine the policy by the government under the EC Act. Therefore, till an alternative system is in place, it will have to be ensured that the Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Ordinance, 2020 does not destroy the system of data collection from APMCs.

According to a 2018 OECD-ICRIER report, restrictions on wheat, maize, rice, chickpea, potato, onion, sugar, cotton and milk were imposed umpteen times between 2000 to 2105. It is, therefore, no surprise that India is not considered a reliable exporter of agricultural produce.

A farmer transports vegetables on an improvised tricycle towards a wholesale agricultural market in Kolkata. Credit: Reuters/Rupak De Chowdhuri

A farmer transports vegetables on an improvised tricycle towards a wholesale agricultural market in Kolkata. Photo: Reuters/Rupak De Chowdhuri

On the exemption from applicability of any such decision in future, there are caveats which will be exploited by the Centre and the states. The ordinance says that order for regulating stock limit shall not apply to a processor or value chain participant of any agricultural produce. But such a processor etc. cannot keep stock which is more than the installed capacity of processing. In case of an exporter, the ordinance says that the stock up to demand for export will not be subject to stock limit.

Also read: Will India’s Contract Farming Ordinance Be a Corporate Lifeline for Agriculture?

Normally, processors of commodities keep several months of raw material, either in their own account or with traders who keep the stock in warehouses. The ordinance is silent on whether annual installed capacity will be considered for exemption from any future limit of stock or it will be monthly installed capacity or daily stock capacity. In the past, there have been instances when edible oil refiners have had to liquidate their stock when stock limits were suddenly introduced.

Similarly, in case of exporters, will it be confirmed export orders in hand or only the export orders for which letters of credit have been opened.

During 2000-2004, several unscrupulous wheat exporters used similar loopholes to continue exporting wheat under open market sale scheme (export), which finally led to the depletion of wheat stock in the central pool to half of buffer norm on April 1, 2006. Finally, the government had to import about 5.5 million tonnes of wheat in 2006-08.

Therefore, a lot more clarity is needed on what will be considered an export order, in case a stock limit has to be imposed, due to extraordinary price rise due to shortfall in production. It could be on account of floods or failure of monsoon or pest attack any other natural calamity.

One of the major deficiencies in our management of food stocks is that the government just does not know the stocks which are held by the private sector. In case of central pool stocks of wheat and rice, not only the stock position is in the public domain but even the location of such stocks is known to the government through a computerised stock management system of FCI. No such system exists for privately held stocks.

In a liberal trade environment where a farmer’s produce can be purchased by someone outside of APMC, only on the strength of a PAN card, it is essential for the government to keep a tab on private stocks. This is easily achievable by making registration of warehouses with WDRA mandatory. India already has a provision for the issue of electronic negotiable warehousing receipt which can be traded and which can be used to raise loans.

Also read: Centre’s Agricultural Marketing Reforms Are an Assault on Federalism

While removal of restrictions on trading through ‘Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Ordinance, 2020 is welcome, the government must have more information on private trade about the demand of a commodity, stocks held by the private sector and the estimated production and availability of crops.

Then only the government can formulate meaningful policies to ensure a fair price to farmers and to keep hoarding and undue price rise by unscrupulous elements in check.

India’s surpluses of most agricultural commodities are marginal. Therefore, the government has to have more information than private trade about the emerging scenario of a commodity at least over a one-year period.

Siraj Hussain is a Visiting Senior Fellow at ICRIER. He retired as the Union Agriculture Secretary.