Essential Commodities Act needs more teeth

Recently, a godman was caught in a video with an actress which made national news. Sometime later, cases were booked against him under the Essential Commodities (EC) Act near Bangalore. It so happened that the godman had prayed with fire around him as penance. Officials of food and civil supplies department had seized blue kerosene (used in PDS for BPL family) which was being used for his meditation penance. If convicted, the godman could invite seven years of rigorous imprisonment along with fine. Strange are the uses of the EC Act…., stranger are the ways how the act is often used by the local officials which are in variance with the main objectives.

The commodity sector not only faces multiple laws but the laws are often archaic. Ever since the commodities boom began, financiers & NBFCs have been setting up funds to “invest” in physical commodities. The EC Act was conceived with a naïve understanding of the fact that the merchant hoarders are the cause of price rise. The annual report of the Ministry of Consumer Affairs (concerned ministry) gives amusing facts about the action under EC Act which looks more like the statistics of a police station.

When the prices rise, there is a clockwork reflex on the part of politicians to blame speculators or speculation which is followed by kneejerk raids. The raids not only disrupt normal commodity supply chain but also hamper its organized growth. It affects warehousing and it discourages large and honest players to operate in the market. As the implementation of the EC Act remains in the hand of the local bureaucracy who have very poor understanding of the trade, the reactive actions disrupts the supply chain further. Under the EC Act, if a person against whom prosecution has been launched is acquitted, the confiscated stock has to be returned or the value thereof should be paid. Interestingly, in most of the cases where confiscation is ordered, the parties ensure that the prosecution is not launched or the prosecution loses the case and thus confiscation becomes null and void.

The raids which are often conducted before festivals of Diwali & Holi, should have acted as a deterrent against the unscrupulous dealers. However, these raids often ensure that ample “bachae ke liye mithai” (sweets for the kids) are available for the local executive powers during festivals and all these are done “khushi se” (happily with consent).

Essentially, the EC Act aims to ensure easy availability of important commodities to consumers; however doubts have been raised about the effectiveness of the Act. India is ill equipped to handle financial speculation in commodities market. As in the financial sector, the clear boundaries between brokers, physical traders, commodity producers and banks are tending to become blurred. We are yet to see the activities on the scale conducted by the likes of Vampire Squids (Goldman Sachs) and others to manipulate the commodity prices internationally. However, financial speculation can substantially increase commodity price volatility as the speculators follow a price trend (up or down) with systematic financial engineering. We have learned the hard way that scholarship on financial crises tends to be reactive, meaning we are less than prepared for the next “Big One” in India.

Published in The Economic Times 23 Aug, 2010