Stocking curbs were removed to stimulate investment in warehousing, yet the same curbs are back again for onions
All producers work on the signals that prices convey and, to the extent the ECA interferes with price-signalling, it hurts investment decisions.
For all the government’s talk of being committed to doubling farmer incomes, it is clear consumer interests—the need to keep inflation low—come first. This may not always work, but various export bans over the decades or imposition of stocking limits under the Essential Commodities Act (ECA) have all followed periods of sharp price hikes in agriculture commodities.
Any attempt to cool down prices, naturally enough, hurts suppliers—in this case, farmers—but what it also does is to slow investment in the supply chain; putting stocking limits opens up traders, exporters, etc, to prosecution, and so restricts the creation of vital storage. Since that, in turn, hurts farmer interests, as part of the reforms push after Covid-19 hit India, finance minister Nirmala Sitharaman had talked of defanging the ECA. Apart from the fact that the ECA hurt farmer interests, there were more sensible ways to tackle rising prices such as a robust futures trade and possibly even direct cash transfers to the poor who would be the worst hit; in any case, in several cases such as onions, while the jump in inflation continues to attract a lot of attention, most families consume so little of these items, the impact can easily be neutralised by small cash transfers.
All producers work on the signals that prices convey and, to the extent the ECA interferes with price-signalling, it hurts investment decisions. Ironically, if farmers grow less of a crop due to its prices falling, this will keep next season’s prices high; and if there is less warehousing space created, this will add to post-harvest price volatility. While the finance minister’s announcement cheered everyone—more so since it was accompanied by talk of amending the APMC Act etc—the reality of the ECA changes was made clear a few weeks later.
While it talked of foodstuffs including cereals, pulses, potatoes, onions, edible oilseeds and oils, it allowed imposing of stocking limits in case there was a 100% increase in the retail price of horticultural produce or 50% for non-perishable agricultural foodstuffs; the base price itself could be either the price prevailing in the preceding 12 months or the average retail price of the last five years, whichever was lower. Some more caveats were also put in place, all of which increased the discretionary powers of the inspector.
And given how low prices can fall post-harvest, a 50% or a 100% price hike may not be unusual either. What was portrayed as an extremely unlikely event—ECA limits could be imposed in the event of a war or famine—it turns out, as the events of last week make clear, not that unusual. If stocking limits can be imposed upon onions instead of pushing in money to the bottom 25-30% of badly-hit households—and what happened to the option of the government buying tomato, onions, potato (TOP) under Operation Green to stabilise prices—what hope is there of the government remaining steadfast on the other changes?
Certainly, the APMC reforms won’t be changed, but the laws mean little unless alternative markets are created and these, in turn, require allocation of land as well as interest subventions among others; and there is no law that prohibits bans on exports of agriculture produce. Agricultural produce where export bans or stocking limits are imposed may comprise a small fraction of household budgets, but for farmers, they can often be a very sizeable share of their annual income.