Co-operative Societies

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Context:

• On July 6, the government constituted a new ministry of cooperation to strengthen cooperatives
• Recently, Supreme Court struck down part of the 97th Constitutional Amendment.

Relevance: Mains: GS-II

• Historical underpinnings, evolution, features, amendments, significant provisions & basic structure
• Polity Functions & responsibilities of the Union & the States, issues & challenges of federal structure, devolution of powers & finances up to local levels & challenges therein

• Cooperatives in India are mostly grassroots organizations formed to harness the power of collective bargaining for a common goal.
• In agriculture, dairy, sugar, textile, and other sectors, cooperatives have been formed with the pooled resources of farmers and other workers.

Diary and Sugar cooperatives

• India currently has 194,195 cooperative dairy societies and 330 cooperative sugar mills, acc­ording to agriculture ministry data.
• In 2019-20, dairy cooperatives around the country procured 48 million liters of milk from 17 million members and sold 37 million liters of liquid milk every day.
• As for the sugar co-op mills, they manufacture 35% of the sugar produced in India.

Financing

• For finance, the village-level primary agricultural credit societies (PACS) formed by farmer associations and front-loaded with the district central cooperative banks (DCCB), determine the grassroots-level credit flow (the PACS anticipates the credit demand of a village and make the demand to the DCCB).
• The NABARD (National Bank for Agriculture and Rural Development) 2019-20 annual report identified 95,238 PACS, 363 DCCBs, and 33 state cooperative banks in the country.
• This is in addition to the 1,482 urban and 58 multi-state cooperative banks.

Producer Companies

• It is worthwhile to note that there has been, since 2003, a concerted effort to promote another form of ‘co-operative’ organization, namely, Producer Companies as a hybrid between a private limited company and a co-operative society.
• They combine the goodness of a cooperative enterprise and the vibrancy and efficiency of a company—with a regulatory framework similar to that of a private limited company.
• This movement has picked up momentum during the last decade.
• Many farmers see producer companies as functional and better-governed institutions, free from interference by state governments. 

State funding

• The biggest beneficiaries of state funds and subsidies are the cooperatives in the finance, sugar, and dairy segments.
• In the current fiscal (FY22), the agriculture credit target was enhanced to Rs 16.5 lakh crore and the rural infrastructure development fund to Rs 40,000 crore.
• Most of these funds are routed through cooperatives.
• In addition to this, many states also provide funds through cooperati­ves to build farm infrastructure, for micro-irrigation, and to buy raw materials like seed, fertilizers, and manure.

• Delayed elections
• Nomination of office-bearers for long durations
• Reduced accountability in management
• Inadequate professionalism in many societies
• Siphoning of funds
• Excessive government interference
• Limited to few sectors and few states
• From the 1990s, primary agricultural credit societies' (PACS) contribution to institutional credit to agriculture has declined sharply from 60% to 10%. 
• The banking sector has been shying away from agriculture, forcing farmers into the clutches of money lenders and traders.
• Corruption, poor management and political manipulation have been rampant in the cooperatives

Reforms

• In 2002 both Houses of Parliament passed the Multi-State Cooperative Societies Act to regulate the function of cooperative societies functioning in more than one state by the Union government.
• The Centre has been pushing reforms in the financial sector cooperatives after the Rs 6,500 crore PMC (Punjab & Maharashtra Cooperative) Bank scam broke in 2019 in Mumbai.
• In September last year, the Banking Regulation Act, 1949, was amended and the RBI was given powers to regulate operations of urban and multi-state cooperative banks.
• On June 25 this year, the RBI tightened the screws and set the standards for appointments of CEOs and whole-time directors, aligning them with norms for private banks.
• This means no mainstream politician—elected to the state assembly or Parliament—can be appointed to these posts.
• Some state governments are against these provisions

State control

• The cooperative sector has always been in the domain of the States or provinces.
• The organizing principles and mechanism of these cooperatives differ from area to area and depend on the industry or crop which forms the fulcrum of the cooperative
• The idea that the cooperative sector ought to be controlled at the State level and not at the central or Union level goes back to the Government of India Act, 1919 which placed cooperatives in the provincial list.
• This scheme carried forward into the Constitution with Entry 32 of the State List in the Seventh Schedule of the Constitution conferring power on the State legislatures to make laws on incorporation, regulation, and the winding up of cooperative societies.
• Cooperatives have been under the regulatory control of the Registrar of Cooperatives of different states.

Increasing central control

• But the Union government has been acquiring incrementally greater control of cooperative societies over the years.
• Cooperative banks have been brought under the purview of the Reserve Bank of India (RBI).
• The political intent of the Union Government for more active involvement in the cooperative sector is also apparent from the recently established Union Ministry for Cooperation.
• Some justify the formation of a separate ministry and the RBI monitoring on grounds that in the past there have been allegations of scams in several cooperatives—in the absence of regulations, money was siphoned off to fund businesses of politicians, bureaucrats and, in many cases, cooperative leaders themselves

• On July 6, the government constituted a new ministry of cooperation.
• It has been hailed as a step towards “sahakarita se samriddhi” (cooperation to prosperity)
• The new entity would help cooperatives across states progress as a true people-based movement reaching the grassroots.
• Union home minister Amit Shah was given charge of the new ministry.
• It is to give a fillip to the cooperative movement and reforming the functioning of cooperative societies.
• Until now, the subject was dealt with by the Agriculture Ministry.
• It administered the Multi-State Cooperative Societies Act, 2002.
• The new Ministry will continue this work

Objectives

The new ministry has, inter alia, the following objectives:

• General Policy in the field of co-operation
• Co-ordination of co-operation activities in all sectors
• The realization of sahakarita se samriddhi.

It will also deal with the NCDC and multi-state cooperatives (IFFCO, KRIBHCO, etc). On the face of it, the new ministry will have an expanded development function and not a regulatory role.

Need for new ministry

• As the cooperatives are diversifying in the past few decades to non-agricultural sectors like housing, urban finance, and labor, the logic of retaining them under the agriculture ministry has become untenable.
• The other reason proffered for a central ministry is that cooperative institutions currently get capital from the Centre, either as equity or working capital, for which the state governments stand guarantors.
• This formula has seen most of the funds going to a few states such as Maharashtra, Gujarat, and Karnataka while others are left playing catch-up.
• Under the new ministry, the cooperative structure could get a new lease of life and more clarity on access to fresh capital.
• Also, some of the biggest names in cooperatives are the Gujarat Cooperative Milk Marketing Federation (Amul) and the Tamil Nadu Handloom Weavers’ Co-operative Society Ltd. (Co-optex).
• Despite having a healthy balance sheet, these entities are not listed on the stock exchanges because of complexities in the co-op space.
• With a central ministry overseeing matters, stakeholders feel doors could open (with changes in the laws) for the cooperatives to access capital markets

Most state co-operative institutions have become quasi-PSUs.  For co-operatives to become vibrant business organizations, they need to be decontrolled and de-bureaucratized. The new ministry can 

• Enable members of co-operatives become effective owners
• Ensure members’ financial interests are not taken away without their consent
• Give freedom to co-operatives to take all commercial and personnel decisions
• Encourage formation of co-operatives in many areas of economic activity (workers, artisans, farmers, employees, etc)
• Promote women’s co-operatives
• Truly make co-operatives autonomous and member-managed
• Create a co-operative of co-operatives

The 97th Constitutional Amendment came into effect on February 15, 2012, and made three important changes:

1. Fundamental right
   • The amendment added “cooperative societies” to the protected forms of association under Article 19(1)(c), elevating it to a fundamental right.
   • Article 19(1)(c) now reads: All citizens shall have the right to form associations or unions or cooperative societies.
2. Directive Principles of State Policy
   • The amendment introduced Article 43B (in Directive Principles of State Policy) which says 'that states shall endeavour to promote voluntary formation, autonomous functioning, democratic control and professional management of cooperative societies.' 
3. Framework
   • Recognizing that ‘cooperative societies’ came under Entry 32 of the State List in the Seventh Schedule, the Amendment proposed to create a framework for the functioning of cooperative societies.
   • State laws on cooperatives should conform to this framework.
   • It introduced Part IXB in the Constitution so that the concept of cooperative societies gains constitutional recognition.
   • It was on the lines of Part IX, which deals with panchayats, and Part IXA, which deals with urban local bodies.
   • The idea was to empower Parliament to frame laws for cooperative societies that function across States (multi-State cooperative societies) and State legislatures to make laws for all other cooperative societies falling under their jurisdiction.

Rules

The Amendment set out basic rules such as 

• A maximum of 21 directors in a society,
• A fixed term of five years for elected members
• A six-month cap on the time limit for which a society’s board of directors can be kept under supersession or suspension
• Reservation of one seat for the Scheduled Castes or the Scheduled Tribes, and two seats for women on the board of every cooperative society, that is, every society that has members from these sections.

The rationale behind the amendment

• The Union government, in its Statement of Objects and Reasons for the amendment, referred to the “weaknesses” in safeguarding the interests of members of cooperatives and the fulfillment of the objectives of these institutions
• It spoke of the need to initiate fundamental reforms to revitalize these institutions and ensure “their autonomy, democratic functioning, and professional management”.

Issue regarding ratification by the states

• The main ground of challenge hinged on the question of lack of ratification by state legislatures
• The Constitution can be amended only by the procedure provided in Article 368.
• The amendment procedure requires a majority of the total strength of each of the Houses of Parliament and a two-thirds majority of those present and voting.
• As per Article 368(2) of the Constitution, a Constitutional Amendment that alters an entry in the state list (List II, Schedule 7) will need ratification of at least half of the state legislatures.

Other concerns associated with the amendment

• It is argued that the powers defined under Part IX B would “restrict” the power of the states to regulate the cooperative societies since the states already had the power to regulate cooperative societies as they fall under Entry 32 of the State List.
• It was also argued that Part IXB  impinged upon the legislative power of the States by casting mandatory obligations upon the State legislatures to legislate in a particular way in areas in which they ought to have had freedom.
• Some clauses of the newly inserted part of the Constitution would also override some existing State legislations

Response of the centre

• The Centre’s defense was that the Amendment did not alter the entry in the State List on ‘cooperative societies’.
• It specified that the State legislatures would enact the relevant laws based on a common framework.
• There was no need for ratification by the Assemblies, as no subject was shifted from the State List to the Central or Concurrent List

Gujarat High court judgment

• The Gujarat High Court struck down the amendment in 2013 because it had failed to comply with the requirements under Article 368(2) by not having been ratified by the States and had also given an additional finding that the 97th Amendment violated the basic structure of the Constitution.
• The court took the example of the 73rd and 74th Amendments which introduced the chapters on panchayats and municipalities, respectively.
• Those amendments, similar in impact on the legislative power of the States, had been passed by the special procedure involving ratification by State legislatures.
• The court noted that the procedure had not been followed in this case but clarified that the judgment is confined to the procedural lacuna and does not go into the question of the amendment being violative of the basic structure of the Constitution.

Supreme court judgment

• The Union Government challenged the Gujarat High Court judgment before the Supreme Court, arguing that the amendment neither directly nor effectively changed the scheme of distribution of powers between the Centre and the States.
• All three judges on the Bench that heard the Union government’s appeals agreed with the Gujarat High Court that the ratification by the State legislatures was required for Part IXB, and in the absence of such ratification, the Part had to be struck down.
• The majority, comprising Justices Rohinton F. Nariman and B.R. Gavai, declared the Part inoperative only in respect of cooperative societies that came under the States.
• It would be valid as far as multi-State cooperative societies were concerned as Parliament had the power to regulate their functioning.
• Since the states had not ratified the amendment, the Supreme Court struck down the provisions under Articles 243ZJ-243ZS, which prescribed the rules under which the state governments could regulate societies
• The court thus held that cooperatives working within a state are the exclusive domain of the state governments.
• Here the ‘doctrine of severability’ was applied
• The judgment strengthened the quasi-federal nature of the Indian polity, stopping any abridgment of the rights of the states, and also clarified the ambit of the working of the new Union ministry of cooperation.

What can the government do?

• The amendment has only been struck down on account of the right procedure not having been followed and another amendment can be brought, but this time, going through the rigor of ratification by State legislatures.
• The central government can initiate a process of getting the amendment ratified by at least 15 states, and, in the meantime, focus on multi-state cooperatives.
• RBI's right to regulate large cooperative banks remains intact.

Role of new ministry in light of the judgment

• The bench by a 2:1 majority held that “Part IXB of the Constitution of India is operative only insofar as it concerns multi-state co-operative societies both within the various states and in the Union Territories of India.”
• Thus, when it comes to multi-State cooperative societies, the legislative power would remain with the Union as contained in Entry 44 of List 1.
• This means that the newly created central government ministry could well have a huge impact in regulating the large multi-state corporations that are cooperative societies
• For now, it will not be in a position to compel States to bring their cooperative laws in conformity with the Centre’s vision

• In India, apart from some states, the cooperative movements have failed.
• But they must succeed if the country has to chart an inclusive growth trajectory.
• The central ministry can play a positive role by synergizing efforts of several ministries and weeding out contradictions
• There is a need for capacity building, skill development of management, upgrading infrastructure along with developing access to the capital markets