Price vice: A protest against the steep rise in food prices in Hyderabad last week

Among the slew of measures the government announced last Thursday to check the galloping prices of food items, there was one perennial favourite — the crackdown on hoarders.

That involves invoking the Essential Commodities Act, 1955.

“The Essential Commodities Act (ECA) needs to be strengthened and implemented more effectively,” says Devinder Sharma, chair of the Delhi-based Forum for Biotechnology and Food Security.

Everyone is keenly awaiting the report of a working group on consumer affairs, headed by Gujarat chief minister Narendra Modi, that is discussing better implementation and amendment of the act. Set up in April 2010 by a core group of central ministers and chief ministers formed to deliberate on rising prices of essential commodities, the group’s report is expected later this month.

So how does the ECA — a Central law implemented by the states — help check price spirals or hoarding?

The act has its origins way back in 1939, when the Defence of India Rules were promulgated to address the problem of shortages during wartime and consequent hoarding. Section 3 of the act empowers the central government to control the production, supply and distribution of essential commodities listed in the act. This can be done to maintain or increase supplies of any essential commodity, to ensure equitable distribution and availability at fair prices and to ensure their supply for the defence of India or the efficient conduct of military operations.

So the government can order more of a commodity to be supplied, order any waste or arable land to be brought under cultivation for particular food crops, regulate (through licences) the storage, transportation, sale, and even consumption, of any essential commodity, and set prices of these commodities.

While the list of items is decided by the Centre in consultation with the states, the state governments decide the stockholding limits — the quantity of any item that needs to be stored for future use — after consulting the central government. Penalties for violating the act involve imprisonment or fine or both as well as confiscation of stocks.

“Experience has shown that price shocks in items under the act have been minimal,” says Ramesh Chand, director of the National Centre for Agricultural Economics and Policy Research.

Yet there is general consensus that the ECA has not served its purpose of ensuring there are no price spirals whenever there is a shortage of a particular commodity. In fact, economist Bibek Debroy goes so far as to say: “It has not served its purpose and must be scrapped.”

However, there is sharp division on what needs to be done. Sharma and others, who feel unbridled market forces are harmful, argue that there is a strong case for strengthening the act. On the other hand, those like Debroy feel that the law is simply not relevant anymore.

In 1955, such an act may have had a rationale since markets across the country were not integrated, explains S. Mahendra Dev, director of the Indira Gandhi Institute of Development Research. Ample supplies of a commodity in one part of the country could not help ease prices somewhere else, where they had risen owing to shortages. However, since the Indian markets are integrated now, state intervention isn’t needed any more.

By imposing stock limits, notes Chand, the act actually hampers private trade from keeping buffer stocks to prevent price swings between harvest and non-harvest seasons. Too many restrictions on the private sector could, warns Dev, push prices higher during times of shortage.

The act is also implemented in an ad hoc and mindless manner, says an official of the Federation of Indian Chambers of Commerce and Industry. Often, stockholding limits are applied across the board, without taking into consideration the needs of particular industries. Food processing companies buy raw stock when prices are low and keep stocks for six months to a year so that price fluctuations don’t affect them. But blanket stockholding orders make such companies liable to prosecution.

That’s why the act has often ended up as a tool for the harassment of private traders by inspectors and petty bureaucrats. In any case, the number of prosecutions under the act have been piffling, notes Debroy.

Recognising the fact that restrictions under the act benefited neither the producers nor consumers of various commodities, a conference of chief ministers recommended in 2001 that all restrictions on the movement of all commodities should go, and that the act should continue as an umbrella law that the central and state governments could use whenever necessary.

Accordingly, between 2002 and 2006, the number of commodities listed in the act, which once touched 70, came down to seven. The last amendment in 2006 allowed the government to bring in more items, but only for six months at a time. Restrictions on trading commodities not on the list were barred. Even in the case of items on the list, state governments cannot place restrictions on their transportation or movement. Between late 2006 and early 2007, wheat, rice, sugar, edible oil and pulses were brought back under the act. Wheat was taken off the list in April 2010 when supplies inproved, while sugar and edible oil remain till March and rice and pulses till September 2011.

Sharma complains that these relaxations have resulted in the present food price crisis and encouraged hoarding. But Debroy holds that there’s no need for the Essential Commodities Act to check hoarding — the Prevention of Black-marketing and Maintenance of Supplies of Essential Commodities (PBMSEC) Act, 1980, is enough for this purpose, he says. This act authorises the central and state governments to detain hoarders and black marketers.

The problem, though, is that the PBMSEC Act cannot be enforced without the Essential Commodities Act, since it is the latter that lists essential commodities and fixes stock limits (thus defining hoarding). Also, the PBMSEC Act enables action against offences punishable under the Essential Commodities Act.

There are other reasons why repealing the ECA may not be easy. The act provides the legal framework for regulating prices of bulk drugs, urea, foodgrains and kerosene sold through the public distribution system. “All countries have some measures to ensure supplies in times of crisis,” says Chand.

Others point out that the act serves a political purpose. Planning Commission member Abhijit Sen notes that at least it shows the government taking some action in times of crisis. But he concedes that it was always a tool of harassment. “We clearly need something to deal with the breakdown of normal markets (owing to law and order problems, war) in order to create conditions for public delivery and the supply of essential commodities. The act can define these situations.”

Will the working group on consumer affairs heed this? That remains to be seen.