The fear of the Essential Commodities Act may explain the lack of formal warehouses and silos in India.
Successive governments in India have tried to help farmers through large subsidy programmes and loan waivers while a legislation like the Essential Commodities Act (1955) (ECA) disincentivises investment in crop warehouses and storage. It is high time that the harsh legislation is repealed.
The restrictions under the ECA are both draconian and unpredictable, giving powers to the executive to control price and volume. As a result, incentives to improve income from agriculture are counteracted by a harsh essential commodities law.
Crop loan waivers, crop investment support, income support and Direct Benefit Transfer for subsidies will not solve the mismatches between seasonal demand and supply in agriculture. In fact, these mismatches are bound to increase as both demand and production increase each season. It is evident we need more warehouses and storage — and the ECA deters investment on these fronts, which are essential for supporting agricultural incomes. And therefore, the government needs to repeal the ECA.
In addition to debt relief, central and state governments intervene in the agricultural markets through multiple channels. The government subsidises inputs like fertilisers, water and electricity. It provides minimum support price, procurement and regulated agricultural markets besides agricultural research. Yet, despite these efforts, why are farmers facing falling incomes? One factor that contributes to the agrarian stress is existing legislations, which create conditions that prevent agricultural markets from functioning well.
What Essential Commodities Act does
Agriculture, unlike manufacturing, is seasonal. At harvest, supply is maximum, and consequently, prices are at their lowest. If farmers (or traders) store produce, supply is smoother and price volatility reduces. However, the ECA effectively criminalises this supply smoothening through storage of agricultural goods.
The ECA is a successor of a series of war-time regulations passed by the British government during World War II to control the supply of goods essential to the war effort. These laws were draconian, as war-time legislations often are. Sadly, post-war and independent India re-enacted many components of this legislation and made them a permanent feature of our legal system.
Powers of the ECA
The ECA empowers the government to control the storage and sale price of any good which is included in the list of commodities. All food items including oil seeds are included in the list. Another extreme feature of this law is that the restrictions on price or quantity are not placed in the primary legislation.
The ECA delegates this power to the executive at the Centre and the states to set prices through delegated legislation called Control Orders. This delegation means no debate or deliberative process in any legislature is required to place any restriction.
Without notice, the government can change the quantity of food that a trader can store or the price at which s/he can to sell it. The government can even force traders to sell. Sometimes, such orders are made overnight.
A trader may have existing contracts to purchase from farmers, but if s/he honours those contracts, s/he may exceed the holding limit. Sometimes, traders buying forward contract goods would get arrested for entering into contracts when there were no limits but taking delivery of the goods (at a later date) when a Control Order was in effect (made in the time between the contract and the delivery of goods).
Many see this legislation as a justified tool to protect consumers from profiteering by unscrupulous traders or intermediaries. However, unlike modern competition law, where the government must prove that a person has cornered the market and is abusing a dominant position, the ECA requires no analysis from the government before a Control Order is issued.
In effect, it becomes a tool to expropriate traders who may have stored products during harvest to sell during the lean months.
If the government can prevent any person from storing any food item, force any person to sell it at a government-set price to a government official, does it make sense to build large warehouses to store food?
Such warehouses will naturally become the prime target of raids by officers. Note that violators of certain provisions of the ECA may be imprisoned for up to seven years.
Infrastructure like warehouses and silos are expensive, and revenues from them are usually low. It takes decades to recoup the initial investment in a warehouse.
In 2002, the government formally announced that sugar would be de-controlled and repealed many Control Orders under the ECA. But by 2015, the Control Orders were back and stock holding limits placed on traders. Any person who built sugar holding facilities (warehouses or silos) based on the 2002 decision of the government would be losing money now.
In 2015, the government of West Bengal placed stock holding limits on onions. In 2013, it was on potatoes. The fear that the government will do this again in the future is not misplaced.
Incentives created by the ECA
The incentives created by the ECA lead to rational responses from the market. The first response is to not invest in warehousing and storage infrastructure, at least those that are visible (like large, efficient warehouses and silos) and can be easily raided.
Usually, intermediaries who do not mind taking the risk of being raided in the event of a Control Order enter the business of warehousing. This encourages a group of grey market intermediaries between the farmer and the end consumer to come up.
Since storage of large quantities of goods under the ECA carries the risk of raids and expropriation, intermediaries normally demand a risk premium that has to be ultimately paid by the producer and the consumer.
The rise of multiple levels of intermediaries and the lack of direct buying by large food processors from farmers may be a rational response to the ECA. While individual traders with the hope of making excess profits may be lured into the legal risk of holding excess stock, large corporations who care about their reputation are unlikely to take that risk.
The fear of the ECA may explain the lack of formal warehouses and silos in India. To counter this problem, the government through public sector banks provides interest and capital subsidies to any person setting up warehouses and other storage facilities for agricultural goods.
This subsidy creates another set of problems. Now, the risk of ECA orders shifts from the owner of the warehouse to the banks. Since the owner has put in less capital, s/he can recoup his costs quicker.
Consequently, if the government places Control Orders on agricultural goods, the warehouse owner can default on the loan. This makes the ECA order the problem of the public sector bank and the government entity providing interest subvention—in effect, completing a circle of government subsidising a business and then destroying the same business with its Control Orders.
There have been many recommendations to reduce the arbitrariness of the ECA. But ECA at its core is a draconian law, which discourages people from creating assets in agriculture.
Sadly, as long as the ECA remains, in any form, its deterrent effect will continue. The only solution is a complete doing away of this draconian law.
The authors would like to thank Anirudh Burman for valuable contributions.
Shubho Roy is a consultant at NIPFP
Ila Patnaik is a Professor at the National Institute of Public Finance and Policy
This is the second in a series of articles the authors will write on law and economics in India. Read the first one here
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