Last week, the Union food minister talked about considering imposing limits on retail prices of certain essential commodities. While India is a market economy where prices are ostensibly decided by demand and supply, certain laws empower the Centre to intervene in the market to protect consumer interests. The Essential Commodities Act (ECA) is one such key law.

What is it?

The ECA was enacted way back in 1955. It has since been used by the Government 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.

Here’s how it works. 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. Anybody trading or dealing in a commodity , be it wholesalers, retailers or even importers are prevented from stockpiling it beyond a certain quantity.

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. This improves supplies and brings down prices. As not all shopkeepers and traders comply, State agencies conduct raids to get everyone to toe the line and the errant are punished. The excess stocks are auctioned or sold through fair price shops.

Why is it important?

The ECA gives consumers protection against irrational spikes in prices of essential commodities. The Government has invoked the Act umpteen times to ensure adequate supplies.. It cracks down on hoarders and black-marketeers of such commodities.

But there is another side to the story. Given that almost all crops are seasonal, ensuring round-the-clock supply requires adequate build-up 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.

With too-frequent stock limits, traders also may have no reason to invest in better storage infrastructure. Also, food processing industries need to maintain large stocks to run their operations smoothly. Stock limits curtail their operations. In such a situation, large scale private investments are unlikely to flow into food processing and cold storage facilities.

Why should I care?

Without the ECA the common man would be at the mercy of opportunistic traders and shopkeepers. It empowers the government to control prices directly too. The recent amendment to the Legal Metrology (Packaged Commodities) Rules 2011 is linked to the ECA. The Government can fix the retail price of any packaged commodity that falls under the ECA.

Bottomline

If what you sell happens to qualify as ‘essential’, keep away from unfair profiteering.

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