Food for thought on regulation

The objective of consumer protection can be achieved by deterring the food producers and suppliers from supplying poor quality and risky products, as well as by ensuring that appropriate compensation is paid to consumers who fall prey to injurious products. There are at least two measures that can be employed to minimise the risk of health hazards from poor quality food-products: the licensing regulation and the tort liability. Licensing regulation is an ex-ante approach and involves direct regulation of production, processing and sale of products. Under this approach, producers and sellers of food items must adhere to the regulatory standards if they are to be permitted to engage in their activities. The tort liability is ex-post in nature. Erring food producers are made to compensate the victims of their products after the damage to health or life has already occurred. The draft Bill provides for licensing regulation (Sections 17-28) and liability for harm (Section 62).

If food producers and sellers are made to compensate the victims of their products, they will take care to improve quality. In an ideal setting, ex-post liability alone will provide sufficient incentives for producers and suppliers to minimise the risk. But in reality, there are limits to the deterrence effects of the liability system. It is generally difficult for consumers to assign responsibility for the harm to a particular seller. Moreover, poor quality food products can cause serious, even fatal, damage. The damage could far exceed the producers’ assets. Ex-post liability alone may not provide sufficient deterrence to erring producers and sellers.

Nonetheless, the importance of tort liability cannot be under-estimated. Even under the best of licensing based regulatory regimes, there are chances that producers and sellers of risky food will escape the notice of the enforcement agencies. This is particularly true for markets in food products where quality must be controlled on a day-to-day basis. Therefore, licensing regulation alone is incapable of realising the desired objective. However, a complex issue concerns the exact use of these two safety measures. For instance, food producers and suppliers could be required to abide by the prescribed safety standards as well as to compensate the consumers who sustain injuries. In other words, in order to avoid penalty, a producer must commit to prepare and seal the food in the designated ways. Yet, he is liable for any injury that his product may cause to consumers. Or, as is the case with the Bill, food producers and sellers could be provided with the defense of regulatory compliance, industry code practice, etc. Section 90 of the Bill provides for such defenses. This means that producers who comply with prescribed standards will not be required to compensate for injuries suffered by consumers. Such defenses make the regime less compensatory for consumers; they also undermine the deterrence objectives of the regime.

Indeed, there are several reasons for which an effective regulatory system will require simultaneous use of regulation and liability. If safety standards are weak and/or difficult to monitor, producers and sellers will invest little in food safety measures. In the absence of compensatory liability, the outcome will not be efficient. Several studies have concluded that a moderate liability induces producers to engage in the process of innovation — to search for methods that will make their products safer.

There is an independent case for compensatory liability. Consumers pay for food and therefore expect satisfaction and safety. Producers of poor quality products should be made to make up for the resulting dissatisfaction. That is why Section 62 of the draft Bill that deals with compensation in case of injury or death of consumer, should not allow for any defense.

The Bill contains several problematic provisions. Section 86 puts the burden of proof on the aggrieved consumer. Such provisions severely undermine consumer interests. Then, there are provisions in the Bill that restrict the scope for consumers for making informed decisions regarding their food basket. Regulation of genetically modified foods (GMFs) is a case in point. The nature of the risk that GMFs may pose to health have not been fully explored yet. It is desirable that consumers are informed about whether a food product contains GMFs or not. Under Section 22 of the Bill, labeling of GMFs should be made mandatory.

The writer is associate professor at the Centre for Economic Studies and Planning, JNU