Baba’s Explainer – India’s Cooperative Sector

  • IASbaba
  • December 14, 2022
  • 0
Governance, Indian Polity & Constitution
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  • GS-2: Issues with Federalism
  • GS-2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation. 

Context: The Bill to amend the Multi-State Cooperative Societies (MSCS) Act, 2002, was introduced in the Lok Sabha on the first day of the Winter Session on 07 December 2022.

  • Opposition parliamentarians alleged that the Bill’s provisions encroached upon the rights of State governments, demanding that it be referred to a Standing Committee for scrutiny.
What is the history of India’s cooperative movement?
  • According to the International Cooperative Alliance (ICA), cooperatives are people-centred enterprises jointly owned and democratically controlled by and for their members to realise their common economic, social and cultural needs and aspirations.
  • Friedrich Raiffeisen, who along with compatriot Schulze-Delitzsch in Germany, and Luzzatti of Italy, pioneered cooperatives in Europe.
  • Raiffeisen based them on the principles of self-help, self-governance, and self-responsibility.
  • Known for their trustworthiness and resilience against financial crises, most were known as Raiffeisenbanks, spreading to other parts of Europe and America.
  • India’s cooperative movement originated in the agriculture and related sectors as a means for farmers to pool their resources to prevent exploitation by money lenders.
  • India’s cooperative movement was formalised at the end of the 19th century, inspired by the German model of agricultural credit banks.
  • In 1904, the British government in India enacted the Cooperative Credit Societies Act. While this Act dealt solely with the extension of credit, the sector was opened up to other activities in 1912. Administrative reforms in 1919 transferred cooperatives to provincial control.
  • After Independence, the framers of the Constitution placed cooperatives in the State list. They came to be considered instruments of socio-economic development and became an essential focus of the initial Five-Year Plans. As a result, States made their own laws to regulate cooperatives within their jurisdiction.
  • Article 43B of Indian Constitution inserted by the 97th Amendment says that “states shall endeavour to promote voluntary formation, autonomous functioning, democratic control and professional management of cooperative societies”.
  • According to the Ministry of Cooperation, there are around 8.5 lakh cooperatives in India, with about 1.3 crore people directly attached to them.
    • Union government has created a new Ministry of Cooperation in 2021 for strengthening cooperative movement
    • Also, the percentage of cooperative members in proportion to the total population increased from 3.8% in 1950-51 to 22.2% in 2016-17.
  • Today, Cooperatives in India range from those providing credit to those producing, procuring, or marketing products like fertilisers, milk, sugar, and fish.
    • Indian Farmers Fertilisers Cooperative (IFFCO) has around a third of the market share in fertilizers, while Gujarat’s Amul is a highly profitable dairy cooperative.
What are Multi-State Cooperative Societies?
  • Cooperatives are a state subject, but there are many societies such as those for sugar and milk, banks, milk unions etc whose members and areas of operation are spread across more than one state.
  • For example, most sugar mills along the districts on the Karnataka-Maharashtra border procure cane from both states. They draw their membership from both states, and they are thus registered under the Multi-State Co-operative Societies Act, 1984 (amended in 2002)
  • Their board of directors has representation from all states they operate in.
    • The board of directors are from all the States these collectives operate in and controls all finances and administration function.
  • Administrative and financial regulation & monitoring of these societies is with the central registrar, with the law making it clear that no state government official can wield any control on them.
  • Since the law was enacted, 1,479 such societies have been registered, of which 9 have been deregistered since.
  • Maharashtra has the highest number at 567, followed by Uttar Pradesh (147) and New Delhi (133).
  • Credit societies constitute the bulk of registered societies at 610, followed by agro-based ones (which include sugar mills, spinning mills etc) at 244. There are 96 multistate cooperative dairies and 66 multistate cooperative banks.
What was 97th Constitutional Amendment Act and what was the judicial verdict on it?
  • The Constitution (97th Amendment) Act, 2011 made following changes
    • New Part IXB regarding the cooperatives working in India added
    • Part IXB dictated the terms for running co-operative societies like the number of directors a society should have or their length of tenure and even the necessary expertise required to become a member of the society.
    • In Art. 19(1)(c) the word “cooperatives” was added after “unions and associations”.  This enables all the citizens to form cooperatives by giving it the status of fundamental right of citizens.
    • A new Article 43B was added in the Directive Principles of State Policy (Part IV) regarding the “promotion of cooperative societies”
  • Gujarat High Court in 2013 had struck down certain provisions of the 97th CAA by reasoning that Parliament cannot enact laws with regard to cooperative societies as it is a State subject. This was appealed by Centre in Supreme Court.
  • Supreme Court in July 2021 upheld the validity of the 97th constitutional amendment Act, 2011  but struck down certain provisions of it
    • Struck down part of Part IXB which dealt with cooperative societies confined to states. Court held that co-operative societies come under the “exclusive legislative power” of State legislatures and Centre can’t shrink State’s exclusive authority.
    • However, Part IXB of the Constitution is operative only in so far as it concerns multi-State co-operative societies. This is because Multi-State Cooperatives comes under Union List.
    • The court also took exception to the fact that the 97th Constitutional Amendment was passed without ratification from the States.
  • Significance of the verdict
    • It allays States’ fears that new Union Ministry of Cooperation would have dis-empowered them.
    • Judgement reiterates State’s exclusive legislative power over cooperatives within their territories.
What are the issues with the cooperative sector?
  • As envisioned by the Indian constitution, the independent and autonomous character of cooperative societies was crucial to their functioning.
  • However, as government and legislative control of cooperatives increased over the years, there were increasing reports of mismanagement and corruption.
  • Their inclusion in the planning process as development instruments made the sector an avenue for dispensing patronage to the supporters of ruling political parties, either by way of nomination to governing boards or sanctioning schemes specific to the cooperatives.
  • Also, providing various forms of financial assistance enabled State governments, “in the name of public interest,” to directly intervene in the working of cooperatives which are legally autonomous.
    • Not surprisingly, the most successful Indian cooperatives such as the AMUL, ndian Farmers Fertiliser Cooperative Limited (IFFCO) and Krishak Bharati Cooperative Limited (KRIBHCO), are outside government control.
  • Globally, seven of the top 10 cooperatives by asset size are from the financial sector. The Indian financial sector is nowhere in the picture going by asset size.
  • When a cooperative bank scales up, maintaining its cooperativeness is a challenge. Cooperatives have also become avenues for regulatory arbitrage, circumventing lending and anti-money laundering regulations.
  • MSCSs are facing issues regarding trust, which is the very basis of cooperation. MSCSs were, therefore, brought under the Prevention of Money Laundering Act, 2002 in 2018, and all urban and MSCS banks were brought under the radar of the Reserve Bank of India in 2020.
  • These developments have brought MSCSs under multiple controls from the Centre, giving rise to fears that monitoring would take a top-down approach as opposed to a grassroots one.
  • Cooperative banking suffered from the top-down quality. Recent initiatives such as an umbrella organisation for urban cooperatives and a new Ministry of Cooperation at the Centre threaten to further this approach in the absence of safeguards.
Why does the government plan to amend the Multi-State Cooperative Societies Act?
  • Experts on cooperatives talk of loopholes in the Act.
  • The exclusive control of the central registrar, who is also the Central Cooperative Commissioner, was meant to allow smooth functioning of these societies.
  • The central Act cushions them from the interference of state authorities so that these societies are able to function in multiple states. What was supposed to facilitate smooth functioning, however, has created obstacles.
  • Experts pointed out for state-registered societies, financial and administrative control rests with state registrars who exercise it through district- and tehshil-level officers.
    • Thus if a sugar mill wishes to buy new machinery or go for expansion, they would first have to take permission from the sugar commissioner for both. Post this, the proposal would go to the state-level committee that would float tenders and carry out the process.
  • While the system for state-registered societies includes checks and balances at multiple layers to ensure transparency in the process, these layers of checks & balances do not exist in the case of multistate societies. 
    • Instead, the board of directors has control of all finances and administration. For expenditure above a certain level, the annual general body meeting of the society has to be called.
  • Many experts have noted there is an apparent lack of day-to-day government control on such societies. Unlike state cooperatives, which have to submit multiple reports to the state registrar, multistate cooperatives need not.
  • The central registrar can only allow inspection of the societies under special conditions — a written request has to be sent to the office of the registrar by not less than one-third of the members of the board, or not less than one-fifth of the number of members of the society. Inspections can happen only after prior intimation to societies.
  • The on-ground infrastructure for central registrar is thin — there are no officers or offices at state level, with most work being carried out either online or through correspondence.
  • For members of the societies, the only office where they can seek justice is in Delhi, with state authorities expressing their inability to do anything more than forwarding their complaints to the central registrar.
  • There have been instances across the country when credit societies have launched ponzi schemes taking advantage of these loopholes. Such schemes mostly target small and medium holders with the lure of high returns. Fly-by-night operators get people to invest and, after a few instalments, wind up their operations.
    • In Maharashtra, the state commissioner used to get multiple complaints of this nature but could not take any action, given the lack of ground staff necessary for verifying the antecedents of such societies.
What are the key provisions of the proposed Multi-State Cooperative Societies (Amendment) Bill, 2022?
  • To plug the “loopholes” in the MSCS Act, the Centre introduced a Bill seeking to amend the 2002 law for more “transparency” and increase the “ease of doing business”.
  • The amendments have been introduced to improve governance, reform the electoral process, strengthen monitoring mechanisms and enhance transparency and accountability.
  • The Bill provides for the creation of a central Co-operative Election Authority to supervise the electoral functions of the MSCSs.
  • The Bill also seeks to improve the composition of the board and ensure financial discipline, besides enabling the raising of funds in MCSCs.
  • It envisages the creation of a Co-operative Rehabilitation, Reconstruction and Development Fund for the revival of sick MSCSs , financed by existing profitable MSCSs which will have to deposit either Rs. 1 crore or 1% of their net profit.
  • In order to make the governance of these societies more democratic, transparent and accountable, the Bill has provisions for appointing a Cooperative Information Officer and a Cooperative Ombudsman.
  • To promote equity and inclusiveness, provisions relating to the representation of women and SC/STmembers on MSCS boards have been included.
  • The Bill makes only members eligible to be elected to the board or as office bearers of the cooperative society.
  • The Bill also increases the penalty amount for violation of the law to Rs. 1 lakh and potential imprisonment from six months to a year.

Main Practice Question: Why cooperatives are a necessity to realise Gandhiji’s decentralisation dream?

Note: Write answer his question in the comment section.

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