Essential Commodities and COVID-19 Testing: Good Intentions, Bad Incentives

Earlier this year in January, the Economic Survey was released by the Ministry of Finance with a special focus on wealth creation. Among the many recommendations, the survey also had suggested the repeal of the Essential Commodities Act, 1955. The Essential Commodities Act allows for the beneficial interference of the government in the market. The Act gives the state governments the power to come up with orders to control the production, supply, trade, and distribution of essential goods in order to ensure their availability in the market at affordable prices. The case for the repeal of the Essential Commodities Act is quite simple, like most government interventions, it leads to results that are opposite to the intended ones.

Indeed, over the years, the Essential Commodities Act has produced effects opposite to its mandate. This is because the measures under Section 3 of the Act are preventive and prohibition based. It lays down a mechanism of licenses and permits to control the manufacturing and distribution of goods, allows for price controls to ensure affordability, and even gives the power to withhold or mandate the sale of essential goods. This led to the creation of a vicious cycle. The licenses and permits under the Act required government approval. Initially, the applications were limited and cleared on time. But as more and more goods were under the ambit of the Act, the government machinery got clogged. This encouraged the practice of bribing to get the applications cleared. Since the capacity of paying a bribe is not equally distributed, only a few well-off producers and distributors were able to capitalize on the market. The limited number of producers and distributors also meant that the shortages were perennial. This led to frequent shooting-up of prices. To control these frequent spurts, the government imposed price controls. The price controls reduced the incentive to scale production as the compensation received was not optimum and low. Thus, the shortages got further exacerbated and gave rise to black marketing. In the last couple of years, the folly has been realized, and more and more products have been removed from the ambit of the Essential Commodities Act. For example, Cement faced perennial shortages until it was decontrolled in 1989. It is hard to imagine the infrastructural growth in India since the 1990s if cement was allowed to be governed by the Act.

On this account, last month, the Central Government invoked the Act to bring Hand sanitizer and protective masks under its ambit to control the shortages and over-consumption, driven by recommendations of health experts advising their usage as a precautionary measure against COVID-19 disease. The order did not lay down any harsh measure and only asked the state to ensure that the mask and the hand sanitizers were available on MRP. But the problem persists. Such caps have unintended effects. For example, a possible outcome could be that the cheaply available hand sanitizer can incentivize the consumer to use it as a substitute to the conventional soap, further increasing the demand. While we await the data to understand the implications of the order, the Economic Survey shows how similar actions to stabilize the price of onions last year, increased shortages and prices due to the application of the Essential Commodities Act.

This brings me to the recent Supreme Court order mandating that the tests for COVID-19 disease should be entirely free. The order is well-intentioned as it seeks to ensure that the test is affordable to all. But similarly, it has the potential to produce an opposite effect for several reasons. To begin with, it assumes that the only hindrance to getting a test done is the cost and disregards the capacity. In other words, it does not consider that one of the primary hindrances in a country like India is not just the cost for the test, but also the capacity to do tests. While we have scaled our testing capacity exponentially, it is unlikely that we will be able to reach the optimum capacity, where everyone who wants to get tested or needs to be tested will be to avail of the facility. Thus, we need to rationalize our testing capacity.

The best way to do it is to allow those who are capable of paying the higher cost of private testing. It limits the burden on the government testing facilities to cater exclusively to the less well-off. Since the government also cannot completely absorb the testing requirements in the later stages of the spread of the disease, there is, no doubt, a case for the private sector to share its facilities. However, as I mentioned above, the problem with the Essential Commodities Act is that it seeks solutions that are prohibitive and preventive instead of incentive-based. Here an incentive-based approach would be to compensate the private testing labs for providing their facilities, free or at a subsidized cost, to the less fortunate based on volume. The higher the volume, the larger would be the compensation. It not only incentivizes the private player to provide their facilities but also encourages them to scale-up their operations.

The second problem with free testing is that it encourages ineffective testing. In our country, flu and other forms of seasonal diseases are common. While COVID-19 symptoms are distinguishable from seasonal diseases, free testing encourages a safety-check test on the possibility of contracting the disease. Not only does this it encourages more movement, increasing the chances of contracting the disease, but in a situation of lockdown when most of the population is in a semi-isolation state, a positive result simply shifts the patient from home isolation to hospital isolation. Therefore, what is required is not just individual testing, it is certainly important, but more randomized testing covering larger population samples to know the extent of spread.

The third problem, of course, flows from the first one. So long as the testing is taken to be free, the private labs have limited options. They can either sign themselves for economic hardship as the testing increases, or they can choose to not develop the facilities at all. Both the scenarios harm the supply side, which is the primary goal as of now. Thus, the government needs to apply its mind before approaching the court for the next hearing.

Postscript – Incidentally, the constitutional validity of the Essential Commodities Act was challenged before the Rajasthan High Court in the matter of Thanmal vs Union of India. The Court held that the Act was in the public interest and the restrictions placed on Article 19 (1) (g) with respect to the right to carry business and trade were reasonable as the controls placed were necessitated by the demands of the community. The Court did not have the benefit of hindsight in its judgment. If ‘reasonable’ here signifies a restriction placed in accordance with reason, the case for retaining the Essential Commodities Act has long been defeated.

Image Courtesy – Wikimedia Commons

Anuj Aggarwal

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