How far can Essential Commodity Act address hoarding?

No empirical evidence to prove that action against hoarders will bring down price of commodities

Doubts have been raised in the recent times about the effectiveness of the Essential Commodity Act in the current form to control prices. On the other hand, there is no empirical evidence to prove that acting against the hoarders will bring down the price of commodities.

The annual report of the Department of Consumer Affairs gives some interesting facts about the effectiveness of the Essential Commodities Act:

		2008-09	2009-10	2010-11	2011-12	2012-13
1	Raids Conducted	268,775	157,179	187,049	173,177	132,336
2	Persons Arrested	8,001	7,725	10,754	4,235	4,057
3	Persons Prosecuted	6,425	4,073	4,329	4,214	3,269
4	Persons Convicted	790	52	148	29	413
5	Goods Confiscated (Rs Cr)	60.95	164.23	104.55	61.73	229.78

Source: Compiled from the Annual Report of Department of Consumer Affairs

It is even more interesting to observe that the conviction to arrest percentage in the post-election period of 2009 was 9.87 per cent. It was 10.18 per cent during the pre-election period (2012-13) but fell dismally below 1.5 per cent during the intervening period.

The Essential Commodities Act is often supplemented by stock control orders. Thus in some cases, the regulatory authority or prosecutor are able to get direct evidence that stocking of the commodities was done with the intention for profiteering.

It is often difficult to get direct evidence – either through documents or testimony. State government has to enforce the provisions of the Essential Commodities Act.

The short-duration spurt in onion prices, which is encountered every year and seen this year too, needs to be seen whether it is a case of price rise or price gouging.

Price gouging (a term not often used) is a situation when a seller prices commodities at a level much higher than what is considered reasonable.

In the US, laws against price gouging have been held constitutional at the State-level as a valid exercise of the police to preserve order during an emergency and may be combined (like in India) with anti-hoarding measures. Laws against price-gouging have been enacted in 34 States in the US. Exceptions are prescribed for price increases that can be justified in terms of increased cost of supply, transportation or storage.

Proponents of laws against price gouging assert that it can create an unrealistic psychological demand that can drive a non-replenish able item into extinction.

As the new Government in India is embarking on enactment of changes in the Essential Commodities Act, we must understand that statutes generally give wide discretion not to prosecute. In some of the states in the US, only one-third of complaints were unfounded and a large fraction of the remainder was handled by consent decrees, rather than prosecution.

What if an anti-hoarding law is passed where arrests are non-bailable for hoarders to symbolise opposition to scarcity? Let’s abolish causes of scarcity. Will sending people to jail bring down the scarcity?

Published in the Business Line on July 31, 2014

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