How Will Amending Essential Commodities Act Help Farmers?

In the steps announced in the third tranche of the COVID-19 stimulus package by FM Nirmala Sitharaman on Friday one of the key decisions was to amend the Essential Commodities Act deregulate staple agricultural produce.

What is the Essential Commodities Act?

The ECA allows central and state governments to controls production, supply, distribution and prices of certain goods that include edible oil, pulses, sugarcane, sugar, rice, onion, potato, seeds of food crops, fruits, vegetables, jute and cotton seeds, etc.

On Friday, it was proposed to take pulses, cereals, edible oil, oilseeds, onions and potatoes out of the Essential Commodities Act.

Sitharaman said the controls set under the Act were placed when India was deficient in production and that these restrictions are no longer needed.

The Act came into being in 1955 when India was faced with food shortage and famine.

Hurdles faced

One of the purposes of the Act in recent times was to control inflation by imposing stock holding limits on the commodity and restrict its movement. It allows state governments to issue control orders related to dealer licensing, regulate stock limits and restrict the movement of goods with the power to confiscate the stock seized and imprison the trader/dealer.

However, these have created obstacles for genuine traders who wish to hold stock for at least three months for predictability in operations and honouring of contracts. Fears of being harassed by authorities for not abiding by the rules of the ECA have also slowed down warehouse infrastructure investment in the post-harvest Agri supply chain space, especially from the private sector.

Food processors and exporters have been vocal against ECA as it doesn't distinguish between them and those traders who stock food to speculate market prices.

In the past, the NITI Aayog has called ECA a hindrance to farm exports. The Economic Survey 2019-20 called it as one of the anachronistic legislations.

Further, there is no clear evidence that restrictions in stocks have helped the government keep a check on price rise. Stock limits imposed on sugar in 2009 and onions in September 2019 didn't result in the prices cooling down.

How the amendment could help agri-commodities business?

While the details on the amendment are awaited, de-regulation will encourage increased participation in the warehouse businesses, easing demand-supply variations created due to seasonality of the products and keep prices fairly predictable for farmers.

Big warehouse players will be able to directly buy from farmers giving their products a wider market to be sold in other states and countries with their well-linked transport infrastructure. It will also remove obstacles of small traders that farmers were dependent on for distribution and facing profit cuts despite surplus output.

The amendment may help participants in the agri-commodities supply chain like millers, exporters and other suppliers to stock as much as they require to keep prices predictable for the producers as well as the end consumers.

It is generally the farmers and consumers who suffer from hoarding practices of small traders who artificially raise prices of essential goods due to the absence of competition from large private players in the market.

It is hoped the amendment would help farmers sell their produce at competitive prices and increase their exports.