On 5 June, the government notified three ordinances as a follow-up to the reforms announced in the ‘Aatmanirbhar Bharat’ package. The ordinances govern agricultural produce marketing, contract farming and an amendment to the Essential Commodities Act (ECA).
These ordinances are part of the government’s reform agenda as a response to the Covid-19 crisis. It must be commended that the government is taking steps to follow through with its policy statements with actual legal changes. Too often in India, policy decisions are announced, but don’t translate into actual legal changes.
An amendment to the ECA is not a new issue. In 2001, Narendra Modi was a member of a BJP committee on agricultural policy that proposed:
“All these restrictions should be removed bringing the necessary amendment to the Essential Commodities Act, 1955. In case it is necessary, such laws could be retained for use under emergency conditions,” stated a resolution passed by the BJP’s National Executive Resolution in its 2-3 November 2001 meeting in Amritsar.
The Essential Commodities Act has its roots in World War II, when laws were used to control the Indian economy. It was retained by independent India’s first government. The law was so restrictive that it fell afoul of India’s new Constitution, and two constitutional amendments had to be passed to ensure that the government could continue with the powers: In addition to curtailing the freedom to carry out trade and commerce (Article 19), Parliament had to take upon itself the power to regulate essential commodities by inserting a new entry in the Concurrent List (Entry 33, List III, Schedule VII).
The new ordinance
The new ordinance amends Section 3 of the Essential Commodities Act, which is what gave governments, both state and central, the power to regulate these commodities.
The ordinance introduces a new sub-section (1), which overrules the general powers of section 3 by limiting when regulations, or stock limits, may be imposed.
As a consequence, regulations can be imposed only under extraordinary circumstances (like war, famine, extraordinary price rise and natural calamity of grave nature). Some (like pulses and grain) are mentioned in the law, and the central government can notify more.
The second change is that instead of complete discretion, the regulations can now be imposed based on price rise: For vegetables, the figure is a 100 per cent rise, while for lentils and cereals, it has to be 50 per cent.
Even when the conditions are met, stock limits cannot be less than what an intermediary deals in during normal times. For processors, the limit will be the installed capacity, and for exporters, it will be the demand for export.
The idea behind the amendments is to (i) reduce the unpredictable and frequent interference in foodstuff markets, and (ii) protect intermediaries from stock limits, which hurt their ability to conduct business.
While the ordinance is undoubtedly a move in the right direction, it leaves two loopholes.
While the central government can notify which commodities can be regulated under section 3 — only in the case of “war, famine, extraordinary price rise and natural calamity of grave nature” — it is still left to the absolute discretion of the state government.
Consider a case where the central government notifies rice as one of the protected commodities (not subject to regulation in normal times). A state government can still decide that there has been an extraordinary price rise and start regulating it.
The second provision of the ordinance restricts conditions under which stock limits can be imposed under section 3. However, imposing stock limits is just one of the many powers under section 3. The state government may also impose price controls, ban transportation, force sales at below-market price, make trading in a commodity illegal, demand licences or bonds before trading, and many more.
While stock limits have been common in the recent past, other powers have also been used. In the 1970s, it was common for state governments to impose a limit on the number of people who could attend a banquet to control food consumption. In June 2014, the West Bengal government instructed traders to sell potatoes at below-market prices using the law.
The amendment to the act is a welcome reform agricultural sector, if enacted, it will give more confidence to the participants in the market; be it farmers, traders, or processors. But the loopholes provide opportunities for governments to impose unpredictable restrictions on domestic and international trade.
Countries have repealed laws that gave draconian emergency powers to governments at the time of World War II. Either ECA should be amended further to be applicable only when a war is declared, or, ideally, it should be repealed.
Export controls through other laws
While the ordinance extends its protection to exporters, arbitrary export restrictions do not arise as much from the Essential Commodities Act but the Foreign Trade (Development and Regulation) Act, 1992.
This law empowers the central government to institute export and import bans in any commodity. The most common victim of export bans are agricultural products. Between 2014 and 2019 (five years) the government changed the rules on export of onion 17 times. Rice, another Indian staple with export potential, saw 14 changes over the same period.
The BJP committee that proposed the amendment to the ECA in 2001 also proposed that all export restrictions on agricultural commodities should be removed. This should also be a part of the reform package to unleash the full potential of Indian agriculture.
Ila Patnaik is an economist and a professor at the National Institute of Public Finance and Policy.
Shubho Roy is a researcher at the University of Chicago.
Views are personal.