News Analysis

Why easing Essential Commodities Act is good for agri markets

Now private players can eye investments in the warehousing space   -  Bloomberg

Corporate entities will come forward to invest in post-harvest supply chain

Experts had for long been calling for liberalisation of agricultural markets. In fact, the recent Economic Survey (2019-20) had made it clear that the government was doing more bad than good through its interventions in the agri market.

The Essential Commodities Act (ECA) controls production, supply and trade in certain goods that include edible oil and seeds, pulses, sugarcane and sugar, rice and paddy; onion and potato; seeds of food crops; fruits and vegetables; cattle fodder; jute seeds and cotton seeds besides petroleum and essential drugs.

When the price of any of these commodities rises, the regulator can impose stockholding limits on the commodity and restrict its movement. The ECA allows States to issue control orders related to dealer licensing, regulate stock limits and restrict movement of goods. It also gives them power to confiscate the stock seized and imprison the trader/dealer.

However, food processors and exporters’ complaint against ECA is that it doesn’t distinguish between them and those traders who stock food for speculative purposes.

The food processing industry needs to hold stock for at least three months for predictability in operations and honouring of contracts. But due to the fear of being harassed for not abiding by the rules of the ECA, where stock limits are changed overnight, they avoid building large warehouses. The private sector, in fact, dreads entering the post-harvest agri supply chain space.

That said, now, with the Finance Minister indicating that agri commodities including cereals, oil seeds, pulses, onions, potato and edible oil would not fall under provisions of the ECA (except under exceptional circumstances), start-ups may step in to build storage and warehousing infrastructure.

In the next five years, the country may have more warehouses, which will help smoothen demand-supply variations created due to seasonality of production and keep prices stable.

Further, it will also see many small intermediaries between the farmer and the buyer disappear. The big buyers in the market who were fearing legal action and not stocking up produce and were preferring to buy through many small traders, would now look at direct procurement.

Banks will also not hesitate to lend to those who want to set up warehouses, here on. Until now, there were fears that ECA would spoil the business of warehouse owners, any time.

ECA is irrelevant now

The Act was promulgated at a time when the country was facing food shortages soon after independence. It checked hoarders who created artificial scarcity. But, times have changed and farmers are facing the challenge of managing surplus output, now. If a market intermediary wants to stock the produce, process and sell in domestic/export market, it should only be welcome.

Further, there is no evidence that the stock limits posed by the government can check price rise. Data shows that the stock limits imposed on dal in 2006 (third quarter), sugar in 2009 (first quarter) and onions in September 2019 didn’t result in prices cooling down; prices, both wholesale and retail prices only became more volatile.

Also, unlike in the past, today, markets do not function in isolation. If there is shortage of onions, say in Tamil Nadu, immediately supplies arrive from Maharashtra or Andhra Pradesh; restoring demand-supply balance. The job of the ECA Act is now done by the well-linked transport infrastructure.

Published on May 15, 2020

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