Date: 30/08/2022

Relevance: GS-3: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Key Phrases: Essential Commodities Act, 1955, Artificial Scarcity, Volatility in Agri-commodity Prices, WDRA Regulation, Mandating the WDRA Registration of Warehouses, Electronic Negotiable Warehouse Receipt, Futures Contract

Why in News?

• The Ministry of Consumer Affairs, Food, and Public Distribution has recently invoked the Essential Commodities Act, 1955 to curb the surging tur prices.
• The stockholders of Tur Dal (pigeon pea) have to upload the weekly data of the stocks held by them on the portal of the Consumer Affairs department.

Why the act has been invoked?

• The government aims to protect the interests of consumers by preventing the traders from creating an artificial scarcity or restricting sales in an attempt to increase the price rise.
• The government is taking pre-emptive steps to ensure overall availability and controlled prices of pulses in the domestic as well as overseas markets to control any unwarranted price rise in the upcoming high demand festival months.

What are the factors leading to volatility in agro-commodity prices?

• The short-term volatility is influenced by factors such as:
  • Droughts and floods
  • Unusual variation in temperatures
  • Policy responses
  • For example, governments promoting oilseed production or banning exports.
• There are also increasing pieces of evidence of structural supply issues that are driving long-term volatility.
• The instability of agricultural commodities prices is systemic, given that agricultural production depends on the monsoon.
• This causes uncertainty around the pricing of agri-commodities and livelihoods of people dependent on Agri value chains, be it traders, corporates, processors, wholesale merchants, or retailers.

Do short-term measures like stock limits, ban on futures, etc., actually help in controlling the prices?

• A stable policy regime requires certain clearly defined mechanisms and processes that take into account the weather and related factors.
• It must not only inform the decision-makers about the sowing and cropping trends in a particular commodity, but also provide information on stocks in hand, the current and likely prices in the crop cycle, the likely yield/consumption pattern, etc.

Way Forward:

1. Approval of WDRA regulation:
   • The Warehousing Development and Regulatory Authority (WDRA) regulation needs to be approved in Parliament at the earliest for a stable and transparent regime.
   • This regulation will help bring transparency into the system.
2. Mandating the WDRA registration of warehouses:
   • If the government mandates that all warehouses exceeding a particular capacity need WDRA registration, the WDRA and government will know the stock-holding in all WDRA-approved warehouses.
3. Promotion of eNWR:
   • The government can utilise the WDRA provision to promote eNWR ( electronic negotiable warehouse receipt) that can be traded on repositories and can be easily pledge financed by banks.
   • The eNWRs will be free from physical issues like tempering, fudging, mutilation, etc., and will eliminate possibility of multiple financing and frauds.
   • The eNWRs can save expenditure on logistics as well, because the stocks can be traded through multiple buyers without physical movements and can be split for partial transfer or withdrawal and with a proper record.
4. Futures Contract:
   • The futures contract also gives indication of expected yield, as the prices of contract might go up or down, depending on the indications from the field and the government can respond accordingly, rather than reacting in an ad hoc manner.
   • If the futures price is not as per expectations, the acreage might go down and the government would know in advance whether import or higher procurement price is essential to ensure increased planting.

Conclusion:

• A stable policy regime is the need of hour to ensure that the farmers and the value chain have capacity to withstand temporary shocks in the economy.
• The WDRA system, in conjunction with the existing tools like the commodities derivatives markets, regulated by SEBI , can provide the government with the tools to monitor the value chains in an efficient way.
• The combination would provide a reference price point to the farmers, on the basis of which they may decide on sowing a particular crop in the season.
• Further, the positions of stock in warehouses across the country and movement of commodities can be easily monitored to ensure that there is no undue cornering of commodities and profiteering by any section to take advantage of any perceived scarcity.

Source: The Hindu

Mains Question:

Q. A stable policy regime is the need of hour to ensure that the farmers and the value chain benefit and has capacity to withstand temporary shocks in the economy. Discuss in context of the Essential Commodities Act, 1955 recently evoked by the government. (250 words).