Context: The Union Cabinet has approved an ordinance to amend The Essential Commodities(EC) Act, 1955, to deregulate commodities such as cereals, pulses, oilseeds, edible oils, onion and potatoes.

About the Essential Commodities Act:

  • Enacted way back in 1955, the act empowers 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.
    • Under the Act, the government can also fix the maximum retail price (MRP) of any packaged product that it declares an “essential commodity”.
  • 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 can remove them from the list once the situation improves.

Need for amendment in The EC Act:

  • Different background of enacting the EC act
    • The EC Act was legislated at a time when the country was facing scarcity of foodstuffs due to persistent abysmal levels of foodgrain production. 
    • The country was dependent on imports and assistance (such as wheat import form US under PL-480) to feed the population.
    • In this scenario, to stop the hoarding and black marketing of foodstuffs, The Essential Commodities Act was enacted in 1955.
  • Unintended outcomes: While the purpose of the Act was originally to protect the interests of consumers by checking illegal trade practices such as hoarding, it has now become detrimental for investment in the agriculture sector in general, and in post-harvesting activities in particular.
  • Change in situation now: According to the Ministry of Consumer Affairs, Food and Public Distribution production of 
    • Wheat has increased by 10 times (from less than 10 million tonnes in 1955-56 to more than 100 million tonnes in 2018-19); 
    • Rice (during the same period) has increased more than four times from around 25 million tonnes to 110 million tonnes.
    • Pulses have increased by 2.5 times, from 10 million tonnes to 25 million tonnes.
    • India has now become an exporter of several agricultural products. 

With these developments, the EC Act has become anachronistic.

Amendments made to the Essential Commodities Act:

  • Introduced a new subsection (1A) in Section 3 of the Act: The amended law provides a mechanism for the “regulation” of agricultural foodstuffs, namely cereals, pulses, oilseeds, edible oils, potato, and supplies under extraordinary circumstances, which include extraordinary price rise, war, famine, and natural calamity of a severe nature.

Definition of an ‘essential commodity’:

  • There is no specific definition of essential commodities in the Act. 
  • Section 2(A) of the act states that an “essential commodity” means a commodity specified in the “Schedule” of this Act.
  • The Act gives powers to the central government to add or remove a commodity in the “Schedule.” The Centre, if it is satisfied that it is necessary to do so in public interest, can notify an item as essential, in consultation with state governments.
  • At present, the “Schedule” contains 9 commodities - drugs; fertilisers, whether inorganic, organic or mixed; foodstuffs, including edible oils; hank yarn made wholly from cotton; petroleum and petroleum products; raw jute and jute textiles; seeds of food-crops and seeds of fruits and vegetables, seeds of cattle fodder, jute seed, cotton seed; face masks; and hand sanitisers (last two recent addition in the wake of COVID-19 outbreak).
  • By declaring a commodity as essential, the government can control the production, supply, and distribution of that commodity, and impose a stock limit.

How and under what circumstances can the government impose stock limits?

  • Only in extraordinary circumstances: Under the amended EC Act, agri-food stuffs can only be regulated under extraordinary circumstances such as war, famine, extraordinary price rise, and natural calamity.
  • Based on price trigger: However, any action on imposing stock limits will be based on the price trigger. For example, in case of horticultural produce, a 100 per cent increase in the retail price of the commodity over the immediately preceding 12 months or the average retail price of the last five years, whichever is lower, will be the trigger for invoking the stock limit for such commodities.
    • For non-perishable agricultural foodstuffs, the price trigger will be a 50 percent increase in the retail price of the commodity over the immediately preceding 12 months or the average retail price of the last five years, whichever is lower.
  • Exemptions: From stock-holding limits will be provided to processors and value chain participants of any agricultural produce, and orders relating to the Public Distribution System.
  • Impact: The key changes seek to free agricultural markets from the limitations imposed by permits and mandis that were originally designed for an era of scarcity. 
    • The move provides more choices for farmers to trade their produce, but its success will depend on how the private sector leverages the opportunity.

Possible impact of the amendments:

  • With the amendment to Essential Commodities Act, commodities like cereals, pulses, oilseeds, edible oils, onion and potatoes will be removed from list of essential commodities. 
  • This will remove fears of private investors of excessive regulatory interference in their business operations.
  • The freedom to produce, hold, move, distribute and supply will lead to harnessing economies of scale and attract private sector/foreign direct investment into the agriculture sector. 
  • It will help drive up investment in cold storages and modernization of the food supply chain.

The amendment announced will help both farmers and consumers while bringing in price stability.  It will create a competitive market environment and also prevent wastage of agri-produce that happens due to lack of storage facilities.