The Hindu Business Line : Curbs and counter-pulls

We saw how fragmented the agri-commodity sector is in the spheres of production, processing and marketing. Consolidation of landholding, of processing capacities and creation of a single unified national market for agri-produce call for urgent policy attention.

After removal of a variety of restrictions (such as licensing, storage, movement, credit access) since we embarked on the economic liberalisation process , our internal markets have become more liberal. Yet, there still are controls and restrictions on the commodities market. Some of these restrictions actually distort the market rather than advance stakeholder welfare.

Market distortions

There are schemes that may not exactly be in the nature of restriction, yet impact the open market. One such is open-ended procurement of rice and wheat by the Food Corporation of India. The purport of the scheme is to build buffer stock for supply through the public distribution system, for welfare programmes and market intervention. Such procurement provides food security for the country.

On the other hand, sugar is subjected to restrictions in the form of levy obligation (producers have to surrender 10 per cent of production at below market price to the government) and monthly release of free-sale quota by government. The free-sale quota is anything but free, as mills are required to market the product within a specified time limit. There is no price restriction on sugar, but surely there is marketing restriction that impacts prices..

There are also State-level controls. Until a couple of years ago, the Maharashtra Government had implemented what was called Monopoly Cotton Procurement Scheme. Thankfully, the scheme has been completely watered down. At the local level, in terms of legislation relating to marketing of agricultural produce, the Agricultural Produce Market Committee (APMC) restricts growers from accessing private sector buyers directly by mandating sale through the mandi system.

However, this law has now been amended to allow growers to sell directly to anyone outside of the mandi system which improves the marketability of the produce.

Markets are continually undergoing changes and improvements. Market participants need to be alive and alert to these developments.

Laws governing Markets

The following laws are relevant for the commodity market. It is necessary for market participants — whether in physical or futures — to be familiar with their broad provisions. Essential Commodities Act, 1955; Prevention of Food Adulteration Act, 1954 and PFA Rules, 1955; Export and Import Policy; Tariffs and duties — Customs Tariff Act, 1975; Taxes — CST, ST, VAT, Octroi, Turnover tax, Cess, local taxes; Forward Contracts (Regulation) Act, 1952.

As can be seen from the list, many of these laws are decades old and were enacted at a time when the country began to face food shortages, high inflation was the norm, markets were distorted and the policymakers distrusted the trading community. These laws were intended primarily to curb market and price manipulation by traders, while advancing the interests of primary producers and consumers.

The country has come a long way in the last 50 years. Now, shortages are a thing of the past. Words such as ‘hoarding’ and ‘black marketing’ (favourite expressions of politicians of yore) are not heard anymore.

ECA and PFA Act are Central legislation; but implementation of the law is the responsibility of the State governments. As the law is applied with varying severity across States, there is no uniformity of enforcement. Some laws, such as the draconian ECA, enacted five decades ago, stand diluted today.

Yet, the law is in the statute book and empowers the government to impose restrictions such as licensing, stock control, movement and so on. The PFA Act lays down minimum quality standards for various food products. The intention is to protect consumers from sub-standard or adulterated goods.

Food Standards Authority

Because the market has undergone marked changes in the last few decades, new products and processes have been introduced and analytical techniques have become advanced. Several food laws have now been consolidated. The Food Safety and Standards Act 2006 has been enacted. It is a comprehensive legislation intended to advance consumer welfare and, at the same time, regulate the production and marketing of food products. Under the law, a Food Standards Authority will be established. As soon as the authority is established, the law will come into force.