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RURAL SOCIETY AND SUSTAINABLE DEVELOPMENT

SRD II (N) 6

BLOCK - I : RURAL DEVELOPMENT AND ITS STAKEHOLDERS

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BLOCK -1: RURAL DEVELOPMENT AND ITS STAKEHOLDERS

Introduction
Any development programme involves different stakeholders and to find proper
solutions to the problems of development would necessarily involve understanding of who
these stakeholders are and good understanding of stakeholder analysis. It is also essential to
know that rural development involves different types of partnerships and an understanding
and analysis of partnerships would help in better planning of rural development. There are
Acts like the RTI and Consumer Protection Act that have been basically adopted to ensure the
interests of the stakeholders. Further, the farmers organisations play an important role in rural
development. Thus this Block deals with the above aspects in detail under four Units as described
below:
Unit-1: Stakeholders Definition and Analysis This Unit discusses the definition of
stakeholders and also describes how to conduct a stakeholders analysis, which is an important
tool of analysis of any developmental programme.
Unit-2 : Partnerships This Unit describes what is partnership, the principles of
partnership, various types of partnership, institutional framework for analysing partnerships. It
helps the reader to understand the significance of partnerships and their utility in rural
development.
Unit-3: Stakeholders Interest: Right to Information Act and Consumer Protection Act
Under this Unit the reader is exposed to the emergence of RTI and Consumer Protection Acts
and their usefulness in protecting the interests of the stakeholders in rural development.

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Unit- 4 : Farmers Organisation This Unit systematically discusses the need for farmers
organisation in rural development, how to form farmers organisation, steps involved in forming
farmers organisation, types of farmers organisations, the linkages between farmers organisation
and development agencies, sustainability of farmers organisations and problems involved in
farmers organisations.

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UNIT - 1 : STAKEHOLDERS : DEFINITION AND ANALYSIS

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Structure
1.

Introduction

2.

Objectives

3.

Stakeholder: Definition and Analysis

4.

Peoples Participation in Stakeholder Analysis

5.

Keywords

6.

Summing up

7.

Know your Progress

8.

Further Reading/References

9.

Model Answers

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1. Introduction
The goal of Sustainable Rural Development [SRD] is to enable all sections of people in
rural communities to meet with their basic needs and have a better quality of life, without
compromising the quality of life of future generations. Emphasis is on economic utilisation of
all type of resources so as to meet the basic needs and for their development. The underlying
principles of SRD are focusing on resources use within environmental limits and achieve a just
society, means of sustainable economy, good governance, and sound science. Thus, while
meeting the needs of all sections of the rural society it calls for :
*

Preserving natural resources and environment for future generations

Promoting well-being, social inclusion and equal opportunities

Building strong, stable and sustainable economy which provides growth with social justice

Promoting Active participative system of Governance

Thus, the sustainable development aims at effective use of natural resources with
appropriate methods to meet present needs and also future demand. It also calls for equal
opportunities to all people in management of such resources to achieve growth with social
justice. Any sustainable rural development efforts shall be people centred development.

Preserving natural resources and


environmental resources for the
use of future generations
Use of environment friendly
methods for management of
natural resources

Sustainable
Rural
Development
Promoting
Active participative
System of
Governance

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Building strong,
Stable and
Sustainable economy which
provides growth with social
justice

Promoting well-being, social


inclusion and equal opportunities,
Thereby meeting the present needs
and also needs of future
Generations

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2. Objectives
The SRD laid emphasis on involvement of people in benefit sharing and management
of resources while keeping the future generation, their needs and welfare in mind. Thus,
sustainable rural development is possible only with stakeholders participation in its process
and management. Hence, it is important to understand the various aspects of stakeholders in
SRD. Therefore, the main objective of this Unit is to introduce the concept of stakeholder in
sustainable rural development. The specific objectives of the Unit are :
1.

To understand the definition and meaning of the stakeholder

2.

To differentiate the stakeholders from beneficiaries

3.

To familiarize various type of stakeholders and assess their influence and importance

4.

To provide framework to analyse the stakeholders participation in SRD

5.

To understand various methods in Stakeholders analysis

3. Stakeholder : Definition and Analysis


In this Section, we will understand the meaning and definition of the term stakeholder,
difference between beneficiaries and stakeholders, type of stakeholders and their importance
in the context of sustainable rural development. It would help us to know how to undertake
stakeholder analysis and different methods used in such analysis.

Definition and Meaning


The word stake means interest, concern and involvement. The term holder means owner
or controller. Therefore, term stakeholder means those who are involved in controlling their
own interest and concern in any organization, process or programme. The dictionary meaning
of stakeholder shows that stakeholder is a person or a group that is involved in a particular
organisation, project, and system, especially, because, they have invested in it1.
So, the term stakeholder symbolises those who have their interest in any programme
and get involved due to such concern of their own. The Stakeholder could be any individual,
group or institution affected by a project / programme in a positive or negative way; or any
individual, group or institution that has an interest (or stake) in the project or programme.

Difference between beneficiaries and stakeholders


The stakeholders are different from beneficiaries of any project or programme. The term
stakeholder covers all those who are directly and indirectly affected by the programmes. The
term Beneficiaries refer to those who are directly getting benefits from a programme. Whereas

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Hornby, A. S., Oxford Advanced Learners Dictionary of Current English, Oxford University Press, 6th Edition, 2000

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the stakeholders not only cover those who are getting benefits, but also those who are affected
in anyway in the process or ultimate implementation of the programme.
The concept of stakeholders has wider encompassed meaning that bring in more section
of people who are part of the programme or organisation. They could include those who are
directly taking benefits and indirectly affected by the programme in more than one way or
other. There are different types of stakeholders.
Example : In the Mahatma Gandhi National Rural Employment Guarantee Scheme
(MGNREGS), Job-card Holders are beneficiaries. The landless, unemployed labour
and farmers in rural areas are stakeholders of the scheme. Because, MGNREGS is
impacting not only on the employment, but large extent the farmers and others
sections in rural areas. Beneficiaries of the programme are those directly and
positively taking advantage, but stakeholders who are not only positively affected,
but also put up with adverse effects of the programme.

Type of stakeholders and their importance


Let us understand that stakeholder refers to those who are all affected by any process,
programme and organisation. Stakeholders are persons, groups or institutions with interests in
a project or programme. They can be classified into Primary, Secondary and Key stakeholders.
Primary stakeholders are those ultimately affected, either positively (Job-card holders
of MNREGS) or negatively (those who are not getting employed).
Secondary stakeholders are the intermediaries in the aid delivery process. This definition
of stakeholders includes both winners and losers, and those involved or excluded from decisionmaking processes. For example, in case of MGNREGS, farmers, Panchayat Raj Institutions,
government departments, and those who are using services of the labour in rural areas are the
secondary stakeholders.

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Key stakeholders are those who can significantly influence, or are important to the
success of the project. In the case of MGNREGS, Non-governmental Organizations, Common
Interest Groups, such as SHGs, Water Users Associations and those who are dealing with
agriculture inputs and commodities are the Key stakeholders.
Primary stakeholders are directly affected both positively and negatively by the
programme, whereas the Secondary stakeholders are involved in delivery system of programme
and could influence the programme implementation. However, the Key stakeholders are those
who could manipulate the entire behaviour of the programme and stakeholders. The Key
stakeholders can be useful for other stakeholders both in positive and negative manner. The
secondary and Key stakeholders are significant in ensuring delivery programme components
to the primary stakeholders.

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Framework to analyse the stakeholders participation
Sustainable Rural Development requires active participation of all stakeholders
in managing development process. In this context, it is significant to understand the various
stakeholders in term of their interest and subsequent influence on the implementation of
programme. Stakeholder analysis is the process of identification of a projects various
stakeholders, an assessment of their interests, and the ways in which these interests affecting
the viability of the project and also possibility of occurrence of different risks. It is linked to
both institutional appraisal and social analysis.
Stakeholder analysis contributes to project design through the logical framework, and
by helping to identify appropriate forms of stakeholder participation. This includes how to
protect the interest of primary stakeholders and reduce the effect or impact of the risk. It would
help to increase the active participation of the stakeholders.

Why stakeholder analysis(Purpose) ?


The main goal of stakeholder analysis is to understand how and to what extent
stakeholder groups are possibly affected by a proposed development programme, how a
proposed development programme can be tailor-made in the light of more of positive impacts,
and how potential negative impacts can be addressed by modifying the proposed programme
or project action. Stakeholder analysis is basically anticipatory and looking forward, rather than
explaining a current situation or documenting one that has already taken position. On account
of forward-looking nature of stakeholder analysis it is much valuable to decision makers who
are involved in planning and managing a programme.
Thus, Stakeholder Analysis (SA) has purpose and it is mostly used as a technique to
enhance the participation of stakeholders in sustaining the development programme.

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Stakeholders analysis has three different uses, they are :


1.

Identify people, interest groups, and institutions that are influencing the development
programme, either positively or negatively. This process also appreciates the interests, needs
and capabilities of the clients or beneficiaries of the programme.

2.

Analyse the kind of influence that the interested groups could have on the development
programme, so as to identify the potential opportunities and threats to programme
implementation.

3.

Develop ways and means to get the most effective support that is possible from various
people / groups for programme implementation. It also serves the purpose of determining
the extent to which certain groups should participate in programme planning,
implementation and evaluation.

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The SA is meant to draw out the interests of stakeholders in relation to the problems,
and further identify conflicts of interests between various stakeholders, which could particularly
influence proposed projects process. The SA also focuses on relations between stakeholders
who can be built upon coalitions / partnership of project sponsorship, ownership and
cooperation. SA helps to assess the appropriate type of participation by different stakeholders,
at successive stages of the project cycle.

Basic Principles of Stakeholder Analysis


Stakeholder analysis rests upon three basic principles:
1.

The impact of a proposed action on various stakeholder groups has to be assessed


systematically. The use of such assessment is to gather reliable data on how stakeholder
groups are likely to be affected by a proposed action.

2.

Stakeholder groups have to be identified comprehensively. If any stakeholder groups are


omitted from the analysis, the findings will be incomplete and inaccurate. The stakeholder
identification process should ensure that the analysts identify all stakeholder groups affected
by the proposed action. This requires the use of systematic stakeholder identification
techniques in the process.

3.

Stakeholder analysis information should be used to evaluate and modify the proposed
action. Stakeholder analysis information helps decision makers weigh the costs and benefits
of implementing an action as originally proposed, and suggests ways to modify the action
that can mitigate its adverse impacts.

Steps in Stakeholder Analysis


The SA is primarily meant for understanding the behaviour of the stakeholders in the
programme management. It is always necessary to keep in mind that stakeholder participation
is significant for the sustainability of the rural development programme. Therefore, the SA
includes all steps that could provide better understanding the stakeholders in the programme
environment.

Methods of stakeholder analysis - preliminary stage

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Method of SA has various steps and tools. Stakeholder Analysis requires preparing a
Stakeholder Identification Matrix. It is aimed at understanding the behaviour of the stakeholders
in the management of development process. Before learning how to use the stakeholder matrix,
it is necessary to understand some of the significant steps in the preliminary stage of the SA.
They are given below:
First Step: Review the relevant literature : The first step in the preliminary phase is a review
of secondary data and related information on the proposed action in development programme.
The literature review familiarizes analysts with the proposed development action itself, possible
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stakeholder groups, and relevant methods and data sources. It would sensitise the experts doing
SA with possible ways in which proposed action affects the stakeholders and who they are.
Second Step: Assess the likely impacts of the proposed action: It is significant to get to know
that what kind of impact the proposed development action can create. Preliminary
brainstorming can serve as a first attempt to identify likely impacts and their pathways. The
impact could be first, second and third level impact by the proposed action in rural areas. First
level impact can be understood as Output of the activities and those are directly attributable
to the proposed action. The second level impact could be known as effect due to the use of the
outputs of the activities. The third level of impact would be impact of the first and second level
effects and also its indirect influence.
Third Step: Systematically identify the stakeholder groups: Stakeholder groups have to be
identified in a systematic way to avoid by mistake overlooking possibly influenced people. While
identifying stakeholders by looking at likely effect of a proposed action, the process should
also identify stakeholders by considering the areas of influence by the proposed action. Who is
concerned about it, if the action is taken? Who would like to be informed about the action is
under consideration? Answer for these questions have to be found out in a systematic manner.
This process or exercise would help to identify the stakeholder groups for the proposed action.
A stakeholder analysis does not focus on organisations as a unit of analysis because the
analysis is not sought to describe organizational behaviour, except in the case of trade union or
workers associations who speak for stakeholder groups. Instead, stakeholders groups are
identified in relation to their domains of interest in the proposed action.
To identify the stakeholder groups who need to be included in the analysis, first we
need to identify domains of interest. The sphere of interest can be (1) the functions that the
proposed action affects, and (2) the geopolitical domains of influence. Here the Functions have
to be understood as those activities that the proposed action is attempting to change or that
might unintentionally change. Geopolitical domains of interest also should be identified.
A stakeholder identification matrix2 can be used to combine both the domains of interest
and functional domains. The matrix can be a tool for stakeholder identification, as the matrix
would provide clear picture and visually organise stakeholder groups.

Stakeholder Identification Matrix


Primary
stakeholders
Positive
Affected

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Negative
Affected

Secondary
stakeholders
Positive
Affected

Negative
Affected

Key
stakeholders
Positive
Affected

Negative
Affected

This is adopted from William M. Babiuch and Barbara C. Farhar, Stakeholder Analysis Methodologies Resource Book,
March 1994. http://frames.nbii.gov/documents/hdfss/babiuch_farhar_1994.pdf Accessed on December 22, 2009.

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Important Questions to be Kept in Mind While Identifying Stakeholders :
*

Who are the potential beneficiaries?

Who will be negatively affected?

Who has existing rights?

Who is possibly to be voiceless?

Who is expected to mobilize resistance?

Who is responsible for the intended plans?

Who has the money, skills, or key information?

Whose behaviour has to change for success to be reached?

To draw up a stakeholder identification matrix, it is essential to pass through the


following steps :
*

Identify and list all potential stakeholders.

Identify their interests (explicit and hidden) in relation to the problems being addressed by
a project and its objectives. Note that each stakeholder may have several interests.

Briefly assess the likely impact of the project on each of these interests (positive, negative,
or unknown).

Indicate the relative priority which the project should give to each stakeholder in meeting
their interests

The two stakeholder identification techniques are self-identification and staffidentification. These stakeholder identification techniques can assist in making more complete
identification of parties affected by any proposed action. By using more than one technique,
analysts can increase the likelihood that all the affected stakeholder groups are identified.
Generally, techniques will be selected in a context of a specific analysis situation.

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Self-identification techniques provide information that enable individuals, groups, and


organisations to come forward and inform programme managers and analysts that they have
an interest in the proposed action. This is possible through representation by interested persons,
focus group discussions, meetings, and public hearings.
Example : The farmers identifying themselves in the village with watershed development
programme, agriculture labour identifying with MGNREGS, SHG women identifying with banks
are some of the instance for self-identification by the interest groups
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Staff-identification techniques depend primarily on officials records, analysts, researchers and
readily available written materials in the form of document or publication to assist in identifying
stakeholder groups affected by proposed actions.
The above two technique need to use a check-list for easy guidance for identification
process. The indicative check list would consist of the following items:
*

Have all primary and secondary stakeholders been listed?

Have all potential supporters and opponents of the project been identified?

Has gender analysis been used to identify different types of female stakeholders (at both
primary and secondary levels)?

Have primary stakeholders been divided into user/occupational groups or income groups?

Have the interests of vulnerable groups (especially the poor) been identified?

Are there any new primary or secondary stakeholders that are likely to emerge as a result of
the project?

Fourth Step : Expand the impact assessment : The information obtained in previous steps to
assess how stakeholders groups are likely to be affected by proposed actions. Following steps
are used in the process of identifying how stakeholder groups are probably to be affected by
the proposed action.
1)

Estimate the future conditions of the stakeholder groups if the proposed action is not taken.
It is something like predicting how would be their position.

2)

Estimate the impact the proposed action is likely to have on the baseline conditions of the
stakeholder groups if the proposed action is carried out. It is something like predicting what
would be their socio-economic condition.

3)

Document the differences between the projected baseline conditions of the stakeholder
groups with and without the proposed action.

Throughout these steps, a variety of impact identification techniques will be useful. Let
us briefly understand these techniques Delphi Technique, Brainstorming, Trend extrapolation
technique and Analogues.

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Delphi Technique: This is a group of related procedures for eliciting and refining the opinion of
experts. For this purpose, data collection methods, such as interviews, questionnaires, and focus
group discussion, are used to obtain input. This technique is more appropriate as it could get
the expert views in a given field of proposed action programme.

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Brainstorming: SA can be conducted in group meetings amongst experts with a set of simple
rules designed to create an environment conducive for non-interventionist speculation about
how the proposed action is likely to affect stakeholder groups. Brainstorming relies on reflective
technique like focus group discussion to generate information that is further examined to
identify the expected impacts of a proposed action. A trained group leader is usually needed
to make a brainstorming session work effectively. The leaders job is to referee, remind the
participants of the rules, and otherwise facilitate the presentation of ideas. Five basic rules apply
to a brainstorming session:
*

It should focus on a single, well-defined problem.

All ideas should be considered regardless of apparent relevance.

Participants should not criticise or evaluate ideas.

Participants should not explore the implications of ideas.

Participants should develop a generic relevance tree or list to stimulate ideas.

Brainstorming is advantageous because it facilitates to obtain a broad range of views


on how the proposed actions may affect society. Because the level of knowledge about the
proposed action may vary among the participants, analysts should scrutinise the input after
the brainstorming session is completed.
Trend extrapolation technique: This technique assesses future impact patterns in the affected
area by extrapolating future trends from present patterns. It usually relies on unobtrusive data
collection, such as secondary data collection and archival investigation, to accumulate the data
necessary to extrapolate trends. Trend extrapolation is advantageous because it typically
provides clear estimates of incremental trends. Analysts should be cautious of swings or cycles
when analysing past trends and refrain from extrapolating trends from such data.

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Analogs: Analysts identify a geographical locality that has already implemented an action similar
or analogous to the proposed action. This technique typically uses modest data collection to
obtain information about a place similar to the area affected by the proposed action. The analysis
would help to know how a similar proposed action affected various parties-at-interest in a similar
place and use this information to estimate how stakeholder groups similar to the parties-atinterest are likely to be affected by the proposed action.
The analogue stakeholder technique has the advantage of providing a sense of reality
for decision makers by identifying a real place situation in which stakeholder groups have been
affected by a similar action. By focusing on actual stakeholder groups, analysts develop a greater
sense of the total impact of the proposed action, rather than understanding the impacts
piecemeal and in the abstract. However, the similar analogue technique can be problematic if
it is difficult to locate a place that has already implemented an action similar to the one under

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review. By using a variety of impact assessment techniques, the analysts can develop tentative
conclusions about the likely impacts of the proposed action on the stakeholder groups; this
information is, in turn, used in the final step of the preliminary phase of the analysis.
Present mitigation recommendations: In the final step of the preliminary phase of analysis,
the analysts present their best professional appraisal of measures that could lessen the adverse
impacts of the proposed action. The analysts recommendations are based on the information
accumulated through earlier analysis. The recommendations are intended to be useful to
decision makers in clarifying the magnitude of change required to moderate the adverse effects
of the proposed action. The recommendations would help the decision makers to make
adjustments in the programme or proposed action.

Methods of stakeholder analysis canvassing phase


In the field of sustainable rural development major focus is being around the issue of
sustainable development with stakeholder participation and use of their diverse forms of
knowledge and expertise is a predominant input for successful management of the
development3. This phase involves participation of stakeholder representatives in the analysis
process. It would facilitate to obtain original information on how the stakeholder groups think
that they will be affected by the proposed action. This stage includes steps like (1) Obtain
stakeholder input about the proposed action and (2) Present recommendations for mitigating
the adverse effects of the proposed action.
Obtain stakeholder input about the proposed action: In this step, the SA analysts involve the
respondents or informants of the identified stakeholder groups in the analysis process to assess
how these groups think that they will be affected by the proposed action. The analysts commonly
use data collection techniques, to obtain stakeholder input about the baseline conditions
(existing situation) and the impacts of the proposed action (desired / expected change from
current situation). Before taking up the task of collecting data, analysts need to select a sample
of respondents or informants in case they are not including all the identified stakeholder groups
in the analysis.
Sampling Method: An appropriate sampling method can be used to draw sample respondents
amongst the stakeholder groups. This depends on the factors such as size of the stakeholder
groups, geographical spread of their location, time available for the SA process. Either random
sampling or non-random sampling method can be used for selection of respondents.
Data collection: For data collection, various social science research techniques can be used
that includes interview with structured or semi-structured schedule, observation, interactions
and discussions. Each of these data collection techniques or combinations of them is used as
applicable and appropriate to particular stakeholder analysis. It depends on the literacy level
of the stakeholders, time at their disposal, resources available with SA experts. The data collection
tools include the following:
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Bernd Siebenhner, 2004, Social Learning and Sustainability Science: Which role can stakeholder participation play?
Int J. of Sustainable Development, Vol. 7, No. 2.

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*

Interview - with stakeholders either structured or semi-structured schedule

Questionnaires - Respondents or informants answer written questions in a structured


sequence.

Focus groups - Groups of respondents are assembled to share their experience and discuss
about the proposed action. This would generate more of qualitative data.

Observational Techniques either participant or non-participant. In this technique the SA


experts would observe the behaviour of the various stakeholders either being party for the
discussion or keeping outside the group discussion.

Other source of information includes secondary data in the form of written documents as
data sources, such as organisational resolutions, speeches, papers, public records, media
sources, and books.

Present recommendations
Similar to first phase, at the end of the second phase of the SA process, as a last step
based on the outcome of the analysis of the data collection from stakeholder groups,
recommendations have to be developed for lessening the adverse effects of the proposed action.
It is useful as the recommendations are based on the data provided by the stakeholders who
would be affected by the proposed action. Hence, the decision maker could have pragmatic
picture about what the people-at-interest think about proposed action and how it should be.
How Participation of stakeholders in SA Process could be ensured and increased
allow stakeholders to assist in the process of analysis

ensure that stakeholders trust the team

enable discussion among the Participants

ensure parties are sufficiently prepared and briefed

create incentives for participation

create feeling of belonging through shared vision / objectives

allow stakeholders to voice their views

help to give a voice to marginalized and minority persons and groups

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4. Peoples Participation in Stakeholder Analysis
Peoples participation in SA is a key process by which the decision makers explicitly get
inputs about a proposed action from interested and affected parties. There are three aspects of
the participation process that require attention by the experts who are involved in SA Process.
The aspects are - seeking participation, forming groups for meeting, and demonstrating
responsiveness.
Seeking Participation: Efforts should be made to include peoples participation in the decisionmaking process. By bringing peoples participation, experts and programme managers can
increase attention of the diverse audience who participates in the discussions and interactions
to obtain a broad range of input. In such a process, the experts and program managers can use
varied tools and methods to disseminate information. Some of the most commonly used
communication channels are:*

Written invitations to comment or show

Mass media advertising about public meetings or hearings

Published notices in the form of posters, wall writings

Inform through electronic media as announcements

Newsletter articles in which announcing existing opportunities for peoples inputs in the
form of views and perceptions

Announcements at meetings that interested audiences are likely to attend.

Although each communication vehicle can be effective in inviting participation of people


whose interest is involved, programme managers can use mix of channels to increase the
possibility of reaching more number of diverse audiences of stakeholders.
Forming groups for meeting : Meeting groups is a valuable aspect of the process of peoples
participation, as it provides an understanding of the structure. Several types of working groups
can be used to encourage participation.
Working Group meetings are held with definite objective. The individuals attending the meeting
focus in their deliberation on an agenda of work to be accomplished. The organisers need to
design the attendance, agenda, and prepare for the meeting to maximize the chances of realizing
the objective. The size of the group meeting remains as small, usually about 10 people to increase
the likelihood that the participants will be able to discuss and decide on the points to be
discussed in the meeting agenda.

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Open meetings are similar to working meetings in all respects, except there is an audience
present. These types of meetings are ideal when it is important that the decision-making process

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be open for peoples observation. The public nature of these meetings, however, usually means
they are more formal than working meetings. Participants are more likely to guard their remarks
and adhere strictly to the meeting agenda.
Workshops are generally comprised of at least 25 individuals representing a broad range of
stakeholder groups. These individuals participate in workshops made up of four to seven people
who work together to identify problems associated with the proposed action. The participants
review all the problems and vote on those they think will present the most significant difficulties.
The votes are tallied and the issues with the highest number of votes are presented to the
participants in descending order. A moderator then asks participants to lobby for or against
the top issues. After a round of lobbying is completed, the participants vote on the issues again
and a new priority list is developed. This technique is a good way to identify a broad range of
problems associated with the proposed action while providing constructive input toward their
resolution.
Popularity advisory groups are created to tell decision makers how popular or unpopular
ideas are in the eyes of affected stakeholder groups. The members of the advisory group should
reflect the feelings of the affected groups and be composed of representatives from a broad
range of stakeholder groups. This technique is useful when decision makers do not have the
time or money to solicit input from all affected stakeholders but want some stakeholder input
on the proposed action.
Demonstrating Responsiveness
Throughout the peoples participation process, experts and programme managers need
to make an effort to educate them about the proposed action and also about the decisionmaking process. The techniques to demonstrate responsiveness are similar to the
communication channels presented earlier for seeking participation of people. In the earlier
step, through different channels awareness about the proposed action is created among the
people, whereas the techniques to demonstrate responsiveness attempt to educate the people
about the proposed action and keep it informed about the outcomes of the decision making
process.

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Materials relating to the program are disseminated through the media, informing the
public about the proposed action. Mass media coverage is a convenient way to reach a large
number of affected parties, but government officials should take precautionary steps to ensure
that the information they present is not distorted in the medias editing process.
In closing, whatever the methods chosen for participation, experts can take the input
generated, classify it by stakeholder group, and subject it to content analysis. In this manner,
decision makers can receive the benefit of a systematic presentation of information from the
public participation process, rather than that of an impressionistic or anecdotal nature.

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5. Keywords
Stakeholder, Sustainable Rural development, Participation, Beneficiaries

6. Summing up
When development programme is taken up in a rural area, there is every possibility of
some people are positively affected and some are in negative way. Therefore, through
stakeholder analysis, first, experts and programme managers make efforts to understand how
proposed action could affect the people. At second stage, the stakeholders themselves reveal
their perception and views. The unit provided an overview of the concept and a sketch to
understand the concept.

7. Know your Progress


1.

Who is a stakeholder? Define.

2.

What is the difference between beneficiaries and stakeholders?

3.

What are the basic principles in stakeholder analysis?

4.

Describe different steps in the identification of stakeholders.

5.

Use the Stakeholder Identification Matrix for identifying various stakeholders with any
suitable example.

6.

Describe the methods of stakeholder analysis.

7.

What are the different techniques employed in stakeholder analysis?

SRD II (N) 6

8. Further Reading/References
1.

Siebenhner, Bernd. 2004. Social Learning and Sustainability Science: Which role can
stakeholder participation play? International Journal of Sustainable Development, Vol. 7, No.
2.

2.

Babiuch, William M. and Barbara C. Farhar. 1994. Stakeholder Analysis Methodologies Resource
Book. Colorado: National Renewable Energy Laboratory. http://frames.nbii.gov/documents/
hdfss/babiuch_farhar_1994.pdf.

3.

John, Riley M. 2002. Stakeholders in Rural Development: Critical collaboration in State-NGO


Partnerships. New Delhi: Sage Publications

4.

Rao, D. Vasudeva. 1997. Stakeholders Role in Development Programme. Rohtak: Spellbound


Publications.

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9. Model Answers
One directly or indirectly affected by the development intervention

2.

Beneficiaries are those who get positive effects of the intervention. Stakeholders are those
who are affected by intervention, both positively and negatively.

4.

Different steps in the identification of stakeholders include identifying possible


stakeholders who are affected, assessing the likely impact of the project, and indicating the
relative priority.

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1.

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UNIT - 2 : PARTNERSHIPS

SRD II (N) 6

Structure
1.

Introduction

2.

Objective

3.

What is Partnership?

4.

Principles of Partnership

5.

Types of Partnership

6.

Institutional Framework for Public-Private Partnership in India

7.

Gaps in India compared to elsewhere

8.

Strengthening Public-Private Partnerships in India

9.

Keywords

10.

Summing up

11.

Know your Progress

12.

Further Reading/References

13.

Model Answers

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1. Introduction
The Millennium Development Goals (MDGs) strategically represent global strategic
partnerships which are formulated to respond to the worlds development challenges. The key
development challenge is to reduce poverty and hunger by 50 percent by 2015. As per UNDP
estimations, three out of every four poor people in developing countries are in rural areas. Thus
rural development is the focused area essentially to reduce poverty by promoting better
standards of living. Reducing the rural poverty will help in meeting the MDGs. This requires
broad-based investments in rural areas that benefit the entire community.
In rural development, besides agricultural development, rural infrastructure, access to
safe drinking water and improved sanitation, and promoting non-farm employment are some
of the key elements playing important role in reducing poverty and promoting rural
development. To decrease poverty in rural areas, no single agency or organisation alone can
tackle the challenges associated with rural development. Therefore, partnerships are vital to
address the challenges and to achieve sustainable rural development.
During the year 2003 UN Economic and Social Council emphasised the importance of
partnerships between different stakeholders at national and international level. The idea behind
this is to promote integrated approach to rural development through fostering collaborations
among actors in different sectors.

2. Objective
The main objective of this Unit is to introduce the reader to the concept of partnership,
types of partnerships, and usefulness of partnerships in development programmes.

3. What is Partnership?

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The word partnership means different things to different people. Mostly, a partnership
may be defined simply as a collaborative endeavor between two or more organisations that
pool resources in the interest of common objectives1. Partnerships, by their very nature, represent
a sustained commitment to move forward together to reach a common objective. The term
partnership does not imply an equal distribution of power, resources, skills and responsibilities.
In fact, partnerships may encompass a broad array of arrangements, from informal associations
or networks to formal legal agreements. A successful partnership values and openly
acknowledges different types of power that each individual or organisation brings into the
work environment2. While working in partnership situation among a set of organisations,
understanding is essential to sustain collective efforts to carry forward the development.
1

Laura Edgar, Claire Marshall and Michael Bassett, Institute On Governance August 8, 2006.

Frank, Flo and Anne Smith. 2000. The Partnership Handbook, Canada : Minister of Public Works and Government
Services, p.15.

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Partnership is critical to sustain rural development initiatives. Unlike business contractual
relationships that often involve an exchange of goods and services, some elements of a
partnership are intangible, which makes trust and transparency even more important. In the
context of the good governance, working together is very much an essential component.

Why Partnership?
The civil society organisations have become new channel for enlisting peoples
participation and also to manage the resources and services in the rural areas 3. Partners from
different background can contribute complementary skills and resources to the solution for
difficult problems that no organisation could effectively address on its own4. The partnership
enables to have better management of the programme through enrichment and sharing of
knowledge among the partners.

4. Principles of Partnership

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According Linda Spink and Deborah Merrill-Sands5, elements of successful partnership


are divided into 1) basic or foundation elements and 2) sustaining elements. Foundation
Elements are those actions that need to be addressed in the initial stages of forming partnerships.
They are:
*

Compelling Vision: It defines the problems to be addressed and the strategies to be used.
It defines the scope of work, clarifies boundaries, and helps to keep the partnership.

Leadership needs to help the members of different collaborating organisations to


understand and appreciate the different motivation and interests, concerns of the individual
members and their organisations.

Problem Definition by partners: All the partners need to be involved in the initial definition
of the problem being addressed. Agreements must be reached on the specific problem to
be solved, the analytical framework to be used to solve the problem and possible strategies
for implementing the agenda.

Power equity: All parties in a partnership need to feel they are respected by the other
partners and that their contribution is valued.

Benjamin Powis, (2003), Grass Roots Politics and Second Wave of Decentralization in Andhra Pradesh, Economic
and Political Weekly, Vol. 38 (26), June-July, Pp. 2617-22.

Heather Creech et al. (2008). The Governance of Non-Legal Entities - An exploration into the challenges facing
collaborative, multistakeholder enterprises that are hosted by institutions, International Institute for Sustainable
Development (IISD).

Linda Spink and Deborah Merrill-Sands. (1999). Successful Collaborative Partnerships: Key Elements and a SelfAssessment Inventory, Organizational Change Briefing Note No. 5. Boston : Simmons Institute for Leadership and
Change, Simmons College.

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*

Interdependency and Complementarities: The interdependency is especially appropriate


and necessary when the problem being addressed is complex and requires a broad
knowledge base, new technology and diverse expertise. Each member needs to bring skills,
knowledge, or resources into the partnership which complements those of other members.
It would add to the combined strengths of the partnership in solving the problems.

Mutual Accountability: Given the interdependency of partnerships, success depends on


each contributing member fulfilling their responsibilities and commitments in a timely
fashion.

Apart from the above, the following elements are also required for sustaining the
partnership :
*

Attention to Process: It means developing and reaching agreement on guidelines that


help the group deal with communication within the group, how to make decision to solve
the problems, giving and taking feedback in the group. It is to familiarise how the activities
are taken up within the group framework.

Communication Linkages: It is necessary to create links between the partners at the senior
leadership level as well as with the partners at the grassroots level. These links establish a
climate for frequent and in-depth information sharing, increase understanding of the scope
of talent and skill each partner can contribute.

Explicit Decision Making Process: The decision-making process needs to allow for active
participation and consensus building, and at the same time be efficient. Real or perceived
power imbalances among members can aggravate conflict and need to be taken into account
when designing decision-making structures.

Trust and Commitment: It is essential to understand and protect the interests of all
members, listening with the intent to understand what others are saying in a group so as to
keep the partnership going.

Credit and Recognition: Sharing credit and giving recognition are two simple ways to
sustain, but very important ways to build trust and commitment within the partnership.
Every opportunity should be used to acknowledge members contributions and provide
visibility for members and the partnership as a whole.

To begin the partnership, the organisations need to adhere to the above detailed
principles of partnership and also have an agreement on another set of principles that are
required to comply for sustainable operation of the partnership. They are as given below:

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Power: The partners need to ensure that no one overpowers the other or dominates
discussions in the decision-making process. Relatively balanced power involves shared
decision-making and use of earlier agreed actions to address issues.

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*

Openness: Transparency in discussion about power difference among the partners. These
discussions cannot be expected to remove power differences, but instead ensure that they
are recognised, and managed reasonably and productively.

Loyalty: The partnership is based on a common purpose and responsibility toward both
the goal and each other. As such, partners reflect a duty of care and loyalty to each other.

Joint Action: Partnership with shared accountability calls for planning and acting together,
including evaluating the work of the partners by themselves.

Ownership: Partnership work belongs to the collectiveness in action and not to any single
partner. All partners participate in and take credit and responsibility for the partnerships
actions, both achievements and failures.

Information: partnership documents are open to all partners for review and comment, as
well as reference and use. It underlines the need for information sharing among the partners.

Communication: Partners communicate directly, respectfully and openly with each other.
It is an indicator of successful partnership.

Respect: Mutual respect is demonstrated in a way that ensures that the interests of partners
are taken into account in negotiation and decision-making.

Values: As partners develop their plans for action they work to understand each others
views of development or the particular work in which they are engaged. Through this
understanding, they work to identify common approaches and learn from each other.

Vision: Partners should not only share common development approaches, but should seek
to find ways to operate the partnership with shared operational priorities. As such, they can
work to agree on how to address all partnership related issues: complex issues such as
finances, program activities, information sharing, as well as basic issues such as meeting
schedules and logistics.

5. Types of Partnerships

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Partnership among different organisations working for the development can be


categorised into :
1.

Partnership between People or community and private sector

2.

Partnership among the Community Based Organisations or Stakeholders Associations or


Civil Society Organisations

3.

Partnership between Government and Non-Governmental Organisations (NGOs) or Private


Corporate Sector, which is commonly known as Public-Private Partnership.

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Private-People Partnership
Successful organisations could be established when government or non-governmental
actors approached communities in a non-imperative manner, seeking to foster bottom-up
capacities. This is characterised as a catalytic approach. This means that organisational structures,
purposes and procedures are not imposed from outside but rather are developed together
with rural communities, so that their directions and leadership are thoroughly understood and
supported in the partnership. Catalysts are different from change agents or extension personnel
in that they are not promoting a particular change or new technology. Instead, they try to help
communities build up their own capacities6.
There is an increasing need to bring in the capacities of the NGOs and corporate sectors
to strengthen the catalyst approach. The scope and space is increasing for the private sector to
have partnership with local communities or people in rural development. The Corporate Houses
have established institutional framework for taking development work in rural sector on various
subject matters to meet to the needs and priorities of the rural communities. In the new and
dynamic global environment, the role of the private sector is becoming ever more important.
The private sector provides most income-generating activities and job-creation opportunities,
and is increasingly becoming the driving force for economic growth and poverty reduction7.
Several organisations have come up in India with the initiative of corporate houses that work
for the development with the people and communities.
Advantages that flow out such partnership is that (1) a corporate house could pump
large scale financial resources, (2) they can also engage well qualified personnel for managing
development, (3) directly development investment goes to the community as per their needs
and priorities, (4) direct partnership with people and community, and (5) directly and indirectly
employment opportunities as part of the development organisation and also due to the
expanding opportunities.

People-People Partnerships
It is partnership among the Community Based Organisations or Stakeholders
Associations or Civil Society Organisations. It is another dimension in the partnership for
development. With the emergence of the democratic decentralisation and administrative
decentralisation, peoples participation in development process has increased in many forms.

SRD II (N) 6

As part of the democratic decentralisation, rural local self-government has been


strengthened through development of Panchayat Raj(Local Self Governance) Institutions. To
increase the people participation in managing services and resources, the Users of such resources
6

Report of the APO Seminar on Role of Local Communities and Institutions in Integrated Rural Development held in
Islamic Republic of Iran, 15-20 June 2002 (ICD-SE-3-01)

Private Sector Development And Partnership Strategy, www.ifad.org/pub/policy/private/e.pdf accessed in July


2010.

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or services have been organised at local level. They are known as Stakeholders Association and
User Groups of particular resource or service.
As members of all these organisations are from the same area and community, there is
lot of scope for interaction between these organisations, which could be seen as people-people
partnership. Because, the User Groups are formed by the government under its development
programme or initiated by an NGO as part their development intervention, these groups function
with limited coverage of area and partnership.

Public-Private Partnership
In India public-private partnerships are increasing day by day. Such partnerships are
considered effective instruments to reduce poverty and help to speed up poverty alleviation
strategies. Specifically to reduce poverty in rural areas most of the public-private partnerships
are focusing on infrastructure development.
The main purpose of public-private partnerships is to balance the strengths of both
sectors in providing facilities for development. In development largely the public-private
partnerships are engaged in, apart from infrastructure development, water and sanitation, power
generation and distribution, educations, roads, housing, hospitals, pipelines, air traffic control,
and informal technology systems development.

Definition
In general, the term public-private partnership describes a range of possible relationships
among the public and private entities in the context of different services that lead to sustainable
rural development.
Public-private partnership can be defined as :
Cooperative arrangements whereby public sector and private sector collaborate for
comparative rural development to contribute to effective rural and societal development,
efficient, responsible and sustainable economic returns.
Legal agreements between government and private sector for the purpose of providing
public infrastructure, community facilities and related services
Public-private partnership presents frameworks that acknowledges and structure the
role for government in ensuring that social obligations are met and successful sector reforms
and public investments achieved

SRD II (N) 6

Public-Private Partnership is a contractual agreement between a public agency


(governments) and a private sector entity. Through this agreement, the technology, skills
and assets of each sector (public and private) are shared in delivering a service or facility
for the use of the general public. In addition to the sharing of resources, each party shares
the risks and rewards potential in the delivery of the service and/or facility
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While performing specific tasks or action for development both public and the private
sectors have certain advantages. In general, governments contribution to public and private
partnerships may usually take the form of capital and investment (mostly available through tax
revenues), transfer of assets, other commitments and in-kind contributions that facilitates the
partnerships. In addition to mobilising the political support, government facilitates social
responsibility, awareness and local knowledge to the private sector. In turn, the private sector
makes use of its technical expertise in managing the development operations efficiently for
sustainable results. Sometimes, depending on the contract, private partner may also contribute
investment capital.
Each partnering agency is having its own strengths. The major strengths with the public
sector are legal authority; protection of procurement policies; broad prospective and/ or
balancing the competing goals to meet public needs; dedicated personnel and capital resources.
Similarly, the private sector strength is management efficiency; newer technologies; workplace
efficiencies; cash flow management; personnel development and, sometimes, shared resources
(money and/ or assets). Thus, the strengths of one sector complements with another in bringing
the development to the people through partnership.
Effective Public-private partnerships recognise that the public and the private sectors
each have certain advantages, relative to one another, in performing specific tasks. The
governments contribution to public-private partnerships may take the form of capital for
investment (available through tax revenue), a transfer of assets, or other commitments, or inkind contributions that support the partnership. The government also provides social
responsibility, environmental awareness, local knowledge, and an ability to mobilize political
support. The private sectors role in the partnership is to make use of its expertise in commerce,
management, operations, and innovation to run the business efficiently. The private partner
may also contribute investment capital, depending on the form of contract.

Principles of Public-Private Partnerships


Following are the basic principles used in designing the public-private partnerships in
India:

1.

Common Venture

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In order to design a public-private partnership it is important to clearly negotiate and


define the common venture and its expected results. It is important to limit the venture to
those aspects that are of interest to the public. For a company the engagement in a publicprivate partnership can be a part of its overall business strategy. However, in such a case, the
public-private partnership should be an operational effort that can be run independently of
the strategy of the company.

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2.

Defined private interest

It is important to clearly define the private commercial interest of the participating


company in the achieved results.

3.

Defined public interest

It is also important to clearly define the public interest in the results of the public private
partnership, if possible also specifying the level of the public that is mainly interested, i.e., local,
district, national, etc.

4.

Competition neutral

Everybody in the society must have access to the generated information and knowledge.
A public-private partnership must not allow a company to achieve a competitive advantage
that is funded by the public, as this would be inappropriate. So a company engaged with the
public in a public private partnership must agree that the results are also made available to its
competitors. This principle can only be followed for direct results in terms of information and
knowledge. A company that engages in a public-private partnership also acquires skills and
personal contacts that have a competitive value. But this advantage can be seen as the
compensation to the company for investing into a result that will also be available to its
competitors.

Minimum public contribution


A full-cost budget is made for the venture. This only includes direct costs for the venture
itself. Normal costs for running the company cannot be included in the full-cost budget. Full
cost means that all efforts are included, i.e., non-monetary costs are also monetized and
budgeted, such as, for instance, rent of equipment that already belongs to the company, or
costs for personnel of the company when they work on the common venture. The public typically
pays a maximum of 49 percent of the total direct costs of the common venture. This increases
the chances of sustainability in that the capacity and commitment is in the company to continue
to operate with the achieved results. In case a higher public engagement is necessary, one has
to carefully consider the potential capacities of the company. It may be that in such a case the
public-private partnership has to be scaled down to a pilot phase, or the company first needs
capacity building before engaging in a public-private partnership. Usually, milestones are
defined for reaching the results, if possible, with clearly verifiable indicators. Only after reaching
a milestone will the public disburse the funds for the next milestone8.

Advantages of public-private partnerships


There are multiple advantages in promoting public-private partnerships for rural
development. The most important one is value for money. In the process, the project ensures

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Ueli Scheuermeier (2004) public-private partnerships for rural development www.beraterinnennews.org

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the quality on similar lines in which it was ensured under conventional procurement for less
money. Sometimes project with high quality will be delivered with same amount of money.
Here, there are few value linked money drivers :
One is risk transfer. Risk will be transferred to a party which can manage it with less
cost. Further, it ensures that the parties involved will use conservative assumptions in developing
their expectations of benefits and costs.
The next advantage is output based specification.
*

Maximises the use of each sectors strength

Reduces development risk

Reduces public capital investment

Mobilises excess or underutilised assets

Improves efficiencies/quicker completion with cost effective delivery

Better environmental compliance

Improves service to the community

Improves cost effectiveness

Shares resources and effective utilisation of state assets to the benefit of all users of public
services

Alleviation of capacity constraints and bottlenecks in the economy through higher


productivity of labour and capital resources in the delivery of projects

Accountability for the provision and delivery of quality public services through a
performance incentive management/regulatory regime

Innovation and diversity in the provision of public services

Shares/allocates risks

Mutual rewards

Value for money for the taxpayer through optimal risk transfer and risk management

SRD II (N) 6

In addition to the above stated advantages, there are other important advantages. They
are:

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Guaranteeing the work
In public-private partnership, normally government keeps control over the quality of
public infrastructure in a number of ways: (1) The government typically owns the infrastructure,
while the private-sector has a lease or a right to use the infrastructure, which expires at the end
of the contract agreement (sometimes referred to as a concession or franchise); (2) The
government establishes the performance standards and penalizes the private-sector partner
in the event standards are not met; and (3) The government establishes the user charges and
terms on which the public can access the infrastructure.
When government sector (public sector) delivers the services without using publicprivate partnerships it would typically employ and take responsibility for private-sector
consultants who would design and engineer all or part of the road and then bid construction
to a private-sector company. Taxpayers would bear the responsibility of any budget overruns
or delays. Issue a bond to private-sector investors to finance construction; taxpayers would be
responsible for repayment of interest and principal. Take responsibility for operating and
maintaining the facility, elements of which might be contracted out to a private company. Again,
taxpayers would bear responsibility for any quality defects or unexpected problems. By entering
into a Public-Private Partnership, all of these activities are integrated into one long-term contract
with a private-sector partner to the advantage of the taxpayer.

Project acceleration
Projects can be delivered years ahead as there are often stipulations that construction
is completed on time and within budget, thus shielding taxpayers from cost overruns and delays.
Cost-effective design and construction
The private partner brings the efficiencies and innovations of the private sector to the
job, because funding is available up front and major infrastructure projects do not have to be
phased in, thus greatly reducing overall cost and time. Additionally, the design meets the
performance standards at the lowest possible construction cost, and this can result in significant
cost savings compared to traditional methods.
Risk and responsibility
The private partner takes the responsibility and risk for interest rates and repayments,
lifting that burden from taxpayers. The private partner is also responsible for all maintenance
and operations in accordance with standards set by the government.
Users pay

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Users, rather than taxpayers, pay for what they use. Thus, those who benefit most from
the project pay for it with tolls, thereby freeing up tax money for other projects and needs.

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Public-private partnerships can be represented in different phases 9. In the identification
phase, the objective is to select a scheme for development, taking into account the socioeconomic benefits which the scheme is accepted to deliver. The approval process is the key
step between project development and implementation. Once the project has been approved,
planning phase starts in which risk will be retained by the public sector. In this phase, the host
public sector should take accountability, which is important in implementation phase. In the
post-transaction phase, the public sector is responsible for ensuring that stakeholders in the
private sector meet statutory standards (for example: safety, design and construction standards).
As already mentioned, there will be risk factor in the process of public-private
partnerships. The allocation of risk is seen as defining the quality of the public-private
partnerships. In risk transfer the general rule is that it should be allocated to the party (either
private or public) which is best able to manage it with least cost. The major risks are: political,
planning, designing, construction, maintenance, operational, usage, financial and legal.

Structuring public-private partnership


In general, public-private partnerships can follow a variety of structures and contracts.
However, it incorporates the following key characteristics:
*

a contractual agreement defining the roles and responsibilities of the parties,

sensible risk-sharing among the public and the private sector partners, and

financial rewards to the private party commensurate with the achievement of pre-specified
outputs.

Public-private partnership is one tool available to decision makers in reforming


infrastructure or service delivery. It is most effective when it is accompanied by other reform
activities to underpin and reinforce the public-private partnership and to support sustainable
improvement. A successful public-private partnership is designed with careful attention to the
context or the enabling environment within which the partnership will be implemented and
where the operating environment can be reformed to be more conducive to the goals of publicprivate partnership this should be accomplished. Where elements of the operating context
cannot be changed, the public-private partnership design must be tailored to accommodate
existing conditions.

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Thus, in designing a public-private partnership process and selecting a form of publicprivate partnership, it is important to consider the reform objectives; policy environment; the
legal, regulatory, and institutional frameworks; financing requirements and resources of the
sector; and the political constraints and stakeholder concerns. Public-private partnership will
be an effective tool to address some, but probably not all, sector issues. To be successful, public9

Van Herpen (2002) Public private partnerships, the advantages and disadvantages examined Dutch Ministry of
Transport, www.etcproceedings.org/paper/download/645

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private partnership must be built upon a sector diagnostic that provides a realistic assessment
of the current sector constraints. Specifically, the sector diagnostic will cover:
*

technical issues;

legal, regulatory, and policy frameworks;

institutional and capacity status; and

commercial, financial, and economic issues.

Contracting typology under public-private partnership


There are six basic contracting types in public-private partnerships. These are:
a.

Service Contracts,

b.

Management contracts,

c.

Affermage or lease contracts,

d.

Build-operate-transfer (BOT) and similar arrangements,

e.

Concessions, and

f.

Joint ventures.

Service Contract
Public authority (government) hires a private company or entity to carry out specific
tasks/services for a period on one year. The public authority remains the primary provider of
the infrastructure service and contracts out only portions of its operation to the private partner.
The private partner will perform the service at the agreed cost and meet performance standards
set by the public partner. In general, public partners use competitive bidding procedure to
award service contracts. In general, service contracts can have a quick and substantial impact
on system operation and efficiency, and provide a vehicle for technology transfer and
development of managerial capacity.
Management Contracts

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This is another method where services to be contracted out to include some or all of
the management and operation of the public services, such as hospital, port authority and so
on. Though the obligation for service provision remains in the public sector, daily management,
control and authority will be assigned to the private partner. In this, the private partner provides
working capital but no financing for investment. The major advantage of this model is that

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many operational gains that result from private sector management can be made without
transferring the assets to the private sector.
Affermage or Lease Contracts
In this model, the private partner is responsible for the service in its entirety and
undertakes obligations relating to quality and service standards. The duration under this type
of contract will normally be for 10 years. Under this model, service provision responsibility will
be transferred from public to private sector and financial risk for operation and maintenance
responsibility remains with the private sector. The key advantage of this model is that it provides
incentives for the operator to achieve higher levels of efficiency in the products.

Concessions
This model mainly makes the private sector responsible for the full delivery of services
in a specified area. In other words, the private sector is responsible for all capital investments.
Even though the private sector operator is responsible for providing the assets, such assets will
be owned by public during the concession period. The key element in this model is that public
sector is responsible for establishing performance standards and ensures that the concessionaire
meets them. Besides, the role of public sector shifts from being service provider to regulating
the price and quality of service. One of the key advantages of the concession arrangement is
that it provides incentives to the operator to achieve improved levels of efficiency and
effectiveness since gains in efficiency translate into increased profits and returns to the
concessionaire.
Build-Operate-Transfer and similar arrangements
These are a kind of specialised concession in which a private sector or consortium
finances and develops a new infrastructure project or a major component according to
performance standards set by the public sector. In this model, the private partner provides the
capital required to build the new facility and owns the assets for a period set by contract
sufficient to allow the developer time to recover investment costs through user charges. Mostly
this model is widely used to attract private financing to the construction or renovation of
infrastructure.

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Joint Venture
This is the alternative model to full privatization in which normally infrastructure is coowned and operated by the public sector and private sector. In the process, both the public
and private sector partners can either form a new company or assume joint ownership of an
existing company through a sale of shares to one or several private investors. The private sector
company may also be listed in the stock exchange. The most important requirement of this
model is good corporate governance. In other words, the private sector/company must have
ability to maintain independence from the public partner (government). To be specific, this

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model is known as real partnerships of the public and private sectors that match the advantages
of the private sector with social concerns and local knowledge of the public sector.
Hybrid Arrangements
In this model, the contract incorporates different characteristics of a range of contract
types. It brings together the attributes most suitable to a particular projects requirements and
the operating conditions. This model will provide a tailored solution in terms of scope, risk
sharing, and/or scope that is most directly suitable to the project at hand.

Public-private partnership generic sequence


Road map and a sequence of public-private partnership activities can be seen as
following, which describes the components of the sector diagnostic10.

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10

Klaus Felsinger (2006) Hand book on public-private partnership Asian Development Bank

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Different forms of public-public and private-private partnerships
The concept of public-public partnership was developed in the context of private-private
partnerships. In this category no private sector is involved. In general, public-public partnerships
can be categorised according to different types of partners, such as partnership between two
public authorities; partnership between any public authority and communities and development
partnerships. In the development sector public-public partnerships are used to achieve the
following basic objectives:
*

Public-public partnerships restructure the public sector and facilitate the improvement in
the services. In this process capacity building is the major activity which will lead to greater
efficiency, improved access to services or more equitable treatment.

Public-public partnerships can be an effective way of restructuring the public sector and
improving public services as a defence against privatisation. It does not imply that such
partnership stop the privatisation but minimises such movement.

Public-public partnerships can help to build stronger community support and accountability
for services. Such partnerships can also be used to develop a significant increase in the level
of public participation.

This particular concept is one of the most commonly found in America and Europe. In
general, this collaboration may occur between public authorities of the same type and level or
it may occur between different types or levels of public authorities. However, this narrow use of
the concept of public-public partnership has been widened to include partnerships between
public authorities (government) and any part or member of the general public. For example, a
recent definition of public-public partnerships in South Africa includes governmentcommunity
par tnerships, governmentNGO partnerships, as well as governmentgovernment
partnerships11. In addition, there is another concept called development partnerships that
usually takes place between a public authority from a higher income country with a public
authority from a low income country. This is a cross-border partnership between authorities
from different countries12.

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In this concept all government departments and corporations are included in public
category. Similarly, community refers to NGOs, community, trade unions and so on. As referred
above, development partnerships refer to public authorities from high and low income countries
and public authorities from different countries/neighbouring countries.

11

Kitchen, H. (2003). Public public partnerships. Newsletter 14. McIntosh Xaba and Associates : City. December
2003. http://www.ksp.org.za/holonl15.htm

12

Devid Hall et al. (2005). Public-Public Partnerships in health and essential services. Discussion paper 23. University
of Greenwich : Public Services International Research Unit.

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6. Institutional Frameworks for Public-Private Partnerships in India
A wide range of institutional structures and capacity approaches have been adopted
for conceptualising and procuring public-private partnerships across States and Central
agencies, different variants of which have had some degree of success. At the State level, the
three main approaches have been: combining dedicated institutions with cross-cutting
legislation; establishing and using cross-sectoral public-private partnership advisory units to
help line departments in the absence of overarching legislation; and relying on line departments
and sectoral agencies to build capacities.
In this process, for instance, Gujarat, AP and Punjab have developed specialized
institutions and legislation. Each of these States has constituted an agency (respectively the
Gujarat Infrastructure Development Board, the AP Infrastructure Authority and the Punjab
Infrastructure Development Board) and passed Acts to promote private sector participation in
infrastructure projects across sectors. For example, the Gujarat Infrastructure Development Act,
1999, gives force of law to the provision of entering into a concession agreement with a private
sector developer, provides transparent procedures for selection of the developer, and provides
for levying user charges for the facilities provided by the developer.
A second category of States, including Karnataka, Rajasthan, Uttarakhand and West
Bengal, have developed cross-sectoral facilitation entities, but have not passed comprehensive
legislation. In Karnataka, the Infrastructure Development Corporation of Karnataka (IDeCK) is a
joint venture between the state government and IDFC modelled on Partnerships UK, providing
advisory services, such as enabling frameworks, project development and structuring, and
management of a Project Investment Fund. The Rajasthan Project Development Corporation
(PDCOR) is similar in structure, a joint venture between the State government and IL&FS to
facilitate private investment in infrastructure, including policy advisory services to the state
government, and institutional support to structure and implement Public-private partnerships.
The ICICI West Bengal Infrastructure Development Corporation Limited (IWIN) is a joint venture
between ICICI Bank Group and Government of West Bengal formed with the objective of
accelerating the development of infrastructure.
Finally, a third category of States, including MP, Maharashtra and Tamil Nadu, have relied
on sectoral and line agencies to develop and implement public-private partnerships. In Madhya
Pradesh (MP), for example, initially the MP Public Works Department (MPPWD) and the specially
created MP Road Development Corporation (MPRDC) acted as the agency for development of
road projects on a BOT basis. In the process of developing projects, MPRDC has developed policy,
guidance materials and skills. In Maharashtra, the State Road Development Corporation (MSRDC)
and Mumbai Metropolitan Region Development Authority (MMRDA) have developed policies
for infrastructure development through private sector participation, including a Policy on
implementation of Road & Bridge Projects through private sector participation13.

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13

World Bank. (2006). India building capacities for public-private partnerships www.worldbank.org

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7. Gaps in India compared to elsewhere
While some States in India have made important progress towards developing the
frameworks needed for broad and robust public-private partnership programmes, others have
developed policies and approaches in a single sector only, and most other States are yet to
seriously commence public-private partnership programmes. As a result, there is considerable
diversity in both the strength of policy and legal frameworks in place, and the level of
transactions, capacities and experiences.
Even taking this diversity into account, there are some common areas where frameworks
in India need to be developed. As noted earlier, the policy rationale for public-private
partnerships is often limited to the use of public-private partnerships as a source of investment
capital when the public sector lacks funds. As a result, there is not much championing of publicprivate partnerships on the grounds that they will lead to more efficient service delivery and
better value for consumers and taxpayers. There is limited systematic compilation, analysis and
transfer within the public sector of knowledge and experiences between public-private
partnership projects, sectors and different governments, to the extent that there is a lack of
confidence in civil servants to undertake public-private partnerships. Greater awareness of good
examples and established procedures can help make it more acceptable to follow, with the
best antidote to inaction being precedence.
Capacities for evaluation and oversight in particular need to be built up: there is little
evidence so far that there has been much progress in developing capacities to decide which
projects are best done through public-private partnerships, and ex-post evaluation of the
performance of public-private partnerships versus expectations has been limited so far. Finally,
the processes for identifying and procuring public-private partnerships are often not clearly
laid out.
That there are gaps should not be surprising, in part because most State governments
in India are at an early stage in the development of their public-private partnership programmes.
Nonetheless, it is important that the right frameworks and capacities are further developed in
the States and agencies where public-private partnership programmes are going to be pursued.

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8. Strengthening Public-Private Partnerships in India


While progress has been made, both by having a substantial number of public-private
partnerships now in operation and by putting in place legislative and institutional frameworks
for public-private partnerships in some states, scaling-up the use of public-private partnerships
will require addressing the gaps identified above. Many public-private partnerships will be for
services, which are State, and in some cases, municipal subjects, and capacities have to be
developed at this level, where service responsibilities lie. However, there are roles the centre
could play in developing capacities at the sub-national level, in addition to developing capacities
at the central level.

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Both experience to date in India and internationally show that there is no unique formula
for developing a sound public-private partnership framework. However, successful programmes
are characterised by clear policy and legal frameworks for public-private partnerships,
competent and enabled institutions that can appropriately identify, procure and monitor publicprivate partnerships, and efficient oversight and dispute resolution procedures. We look at the
following main steps that will be critical to scaling up the public-private partnership programme
in India and assess the actions that could be taken by the centre in the following areas:
1.

Strengthening and monitoring of their fiscal costs;

2.

Policy and legislative frameworks;

3.

Information dissemination;

4.

The development of guidance material;

5.

Setting up a public-private partnership unit to serve as a pool of expertise;

6.

Project development funds for the preparation of public-private partnerships; and

7.

Funding for public-private partnership payments made by State governments.

The Centres role in developing capacities for sub-national public-private partnerships


needs careful consideration taking into account the size of the country, Centre-State fiscal and
other relations and the variety of experiences so far, with some States having made considerable
strides and others having made very little progress. Its role also depends on the extent to which
the Centre wishes to proactively catalyse the increased use of public-private partnerships by
States and municipalities. Information dissemination and guidance efforts can be expected to
lead to results.
However, a catalytic role by the centre is likely to be needed to expand the usage of
public-private partnerships, particularly in States and sectors where they have been less used
so far. This would consist of, in addition to information dissemination and guidance, resources
to develop public-private partnership projects and frameworks, and to fund government
commitments under public-private partnerships. This would help address important constraints
to further development of public-private partnerships in the country namely, weak capacities
to identify realistic public-private partnerships and bring them to the market; a lack of willingness
to pay for project development; and a lack of creditworthiness on the part of States to provide
their financial contribution to public-private partnerships. However, there are considerably more
risks in this catalytic role than in more limited information dissemination and guidance roles.

9. Keywords

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Millennium Development Goals, Catalysts, Community Based Organisations,


Stakeholders Associations
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10. Summing up
This Unit discussed in detail about what is partnership, what are the different types of
partnerships and the role played by different partnerships in development programmes. It also
discussed the various issues involved in the formation of partnerships and their pros and cons.
While discussing about the role of partnerships in development elsewhere, including in
infrastructure and industry, an attempt is made to provide the reader with the current scenario
in India.

11. Know your Progress


1.

What is partnership?

2.

Describe the different forms of partnership.

3.

What are the different principles of partnership?

4.

Discuss the people-private and private-private partnerships with suitable examples.

5.

What are the definition and basic principles of public-private partnership?

6.

What are the basic advantages under public-private partnerships?

7.

How many forms of contracting exist under public-private partnerships? Explain them in
detail?

8.

Describe public-private partnership scenario in India?

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12. Further Reading/References


1.

Global Development Alliance Secretariat (USAID). 2003. Tools for Alliance Builders Washington
D.C.: United States Agency for International Development.

2.

Klaus Felsinger. 2002, Handbook on public-private partnerships, Asian Development Bank.

3.

Osborne, Steven P. 2000. Managing Public-Private Partnerships for Public Services: An


International Perspective. London: Routledge.

4.

Plummer, Janelle. 2002. Focusing Partnerships: A Sourcebook for Capacity Building in PublicPrivate Partnerships. London: Earthscan.

5.

United Kingdom Department of Finance and Personnel. PPP Projects and Procurement Issues.
www .dfpni.gov.uk/economic_appraisal_guidance/projects.htm

6.

World Bank (2002). India building capacities for public-private partnerships.


www.worldbank.org

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13. Model Answers


2.

The forms of Partnership include Private-People Partnership, People-People


Partnerships, Public-Private Partnership and Public-People Partnership.

3.

The principles of partnership are Compelling Vision, Problem Definition by Partners, Power
equity, Mutual Accountability and Communication Linkages

6.

The basic advantage of Public-Private Partnership is that it would help balance the strengths
of both sectors in providing facilities for development, also to tap the potentials of private
corporate houses, to meet the growing demand for development funding,

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UNIT - 3 : STAKEHOLDERS INTEREST : RIGHT TO INFORMATION


ACT AND CONSUMER PROTECTION ACT
Structure
Introduction

2.

Objective

3.

Right to Information

4.

Consumer Protection Act, 1986

5.

Keywords

6.

Summing up

7.

Know your Progress

8.

Further Reading/References

9.

Model Answers

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1.

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1. Introduction
The most neglected rights in democracies throughout the world are the Right to
Information and Consumer Protection. Although these are the most cherished human rights,
most countries throughout the world, including India, have largely disregarded them. The Right
to Information is considered to be a customary international law, which is exemplified from its
enshrinement in various international covenants and treaties, most notably the Universal
Declaration of Human Rights, the International Covenant on Civil and Political Rights and the
European Commission on Human Rights as well as numerous national constitutions.
Since few decades, the freedom of information has been recognised as an internationally
protected human right, and societies across the world have been moving away from opaque
and secretive administrative systems to open and transparent systems. Indeed, Sweden stand
first to set of laws for transparency in public affairs more than 225 years ago. That happened in
1776. Alongside there is an exciting global trend towards recognition of the Right to Information
by States, intergovernmental organisations, civil society and the people. There is a growing body
of authoritative statements supporting the Right to Information, made in the context of official
human rights mechanisms, including the United Nations, the Commonwealth, the Organisation
of American States and the Council of Europe. All this amounts to a clear international
recognition of the Right to Information. Numerous laws giving effect to this right have, in the
last few years, been enacted by nations in all regions of the world1.

2. Objective
The main objective of this Unit is to create awareness and enhance the knowledge on
the RTI and Consumer Protection Act (CPA).

3. Right to Information(RTI)
Introduction
The Right to Information has been recognised as a fundamental human right, intimately
linked to respect for the inherent dignity of all human beings. Freedom of information, including
the right to access information held by public bodies, has long been recognized not only as
crucial to democracy, accountability and effective participation, but also as a fundamental
human right, protected under international and constitutional law.
After the U.N. General Assembly recognized freedom of information as a fundamental
human right in 1946, many nations have adopted laws assuring right to access information

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http://www.nyayabhoomi.org/treatise/history/history1.htm, accessed on 16th August 2010

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held by public authorities. So far, for about more than 75 countries have enacted freedom of
information laws and 64 of which were enacted during the last two decades 2.

Chronological Background of RTI in India3


The Right to Information campaign in India began with the Mazdoor Kisan Shakti
Sangathan (MKSS) movement to bring in transparency in village accounts via the demand for
minimum wages in rural India. Ghost entries in muster rolls were a sign of rampant corruption
in the system, which prompted MKSS to demand official information recorded in government
files. The movement soon spread across India. From very modest beginning in the villages of
Rajasthan, the success of MKSS has been a source of inspiration for activists in India and
throughout the world. It led to the genesis of a broader discourse on the Right to Information
in India.
In 1993, a draft RTI law was proposed by the Consumer Education and Research Council,
Ahmedabad (CERC). In 1996, the Press Council of India headed by Justice P.B. Sawant presented
a draft model law on the Right to Information to the Government of India. The draft model law
was later updated and renamed the PCI-NIRD Freedom of Information Bill, 1997. Unfortunately,
none of the draft laws were seriously considered by the Government.
Meanwhile, MKSSs advocacy gave rise to the National Campaign on Peoples Right to
Information (NCPRI), which was formed to advocate for the Right to Information at the national
level. Constituted in 1996 in New Delhi, the NCPRI aims to provide active support to grassroots
struggles for the Right to Information and to lobby government to enact and implement
effective access to information legislation.
In 1997, efforts to legislate for the Right to Information, at both the State and National
level, quickened. A working group under the chairmanship of Mr. H.D. Shourie (Shourie
Committee) was set up by the Central Government and given the mandate to prepare draft
legislation on freedom of information. The Shourie Committees Report and draft law were
published in 1997. Notably, the draft law was criticised for not adopting a high enough standard
of disclosure. The Shourie Committee draft law passed through two successive governments,
but was never introduced in Parliament. In the interim, in 1999 Mr. Ram Jethmalani, then Union
Minister for Urban Development, issued an administrative order enabling citizens to inspect
and receive photocopies of files in his Ministry. Disappointingly, the Cabinet Secretary did not
permit this order to come into effect.

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Eventually, the Shourie Committee draft law was reworked into the Freedom of
Information Bill, 2000, an even less satisfactory Bill than the Shourie Committees. The 2000 Bill
was sent to the Parliamentary Standing Committee on Home Affairs, which consulted with civil
2

Srinivas Madhav, RTI: Footprints , CGG, Hyderabad

http://www.nyayabhoomi.org/treatise/history/history1.htm, accessed on 23rd August 2010

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society groups before submitting its Report in July 2001. The Committee recommended that
the Government address the flaws in the draft Bill pointed out by civil society. Unfortunately,
the Government did not implement that recommendation, to the detriment of the final content
of the Bill.
The National Freedom of Information Bill, 2000 was introduced in Parliament in 2002. It
was passed in December 2002 and received Presidential asset on January 2003, as the Freedom
of Information Act, 2002. Unfortunately, a date for the Bill coming into force was never notified,
so that it could never actually become operational.
In May 2004, UPA Government came to power at the Centre. The national campaign for
Right to Information received a major boost when the UPA Governments Common Minimum
Programme promised that: The Right to Information Act will be made more progressive,
participatory and meaningful. The National Advisory Council (NAC) was set up to oversee
implementation of the Governments Common Minimum Programme. Since its inception, the
NAC has taken a close interest in RTI. At the very first meeting of the NAC on 17 July, 2004, NAC
members submitted a Statement from the National Campaign for the Peoples Right to
Information to the NAC calling for action on RTI. To aid discussions, Commonwealth Human
Rights Initiative (CHRI), an international NGO, submitted an Analysis of the Freedom of
Information (FOI) Act and Recommendations to the NAC and all MPs prior to the first Meeting.
Following the first NAC meeting, Aruna Roy met with key government stakeholders who
recommended that civil society submit a paper recommending amendments to the FOI ACT.
Draft National Campaign for the Peoples Right to Information Recommendations for Amending
the Central FOI Act, 2002 were developed and submitted to the NAC for consideration at their
second meeting on 31 July, 2004. The NAC considered the draft NCPRI Recommendations and
released draft NAC Recommendations Amending the FOI Act, 2002. NAC Members Aruna Roy
and Jean Dreze provided an Update on the Discussions of the NAC at these first two Meetings.
In the meantime, a public interest litigation case being pursued by Advocate Prashant
Bhushan on behalf of the NCPRI and Centre for Public Interest Litigation since 2002 tried to
compel the Government to notify an effective FOI Act, 2002 immediately. The case was heard
by the Supreme Court on 20 July 2004. The Supreme Courts Order set a deadline of 15
September, 2004 for the Central Government to advise when the Act will be notified and if not,
when interim Administrative Guidelines would be issued. In the interim, on August12, 2004, the
Department of Personnel and Training, Ministry of Personnel, Public Grievances and Pensions
finally released Draft Rules under the Freedom of Information Act 2002. CHRI issued a Press
Release on the Draft Rules on August14, 2004.

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Meanwhile, at the NACs third meeting on 14 August, 2005, CHRI made a Submission
regarding the draft NAC Recommendations for consideration at the meeting. The NAC agreed
on Final Recommendations regarding Amending the FOI Act, 2002. The final version endorsed
by the NAC was sent by its Chairperson, Mrs. Sonia Gandhi, to the Prime Ministers Office. A

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Government Press Release dated 18 September 2004 stated that: The government will also
introduce in the Winter Session of Parliament a bill to seek amendments to the Right to
Information Act, based on suggestions put forth by the NAC.
The Right to Information Bill, 2004 (RTI Bill, 2004) was tabled on 23 December during
the winter session of the Lok Sabha(Lower House of Parliament). The RTI Bill, 2004 was based
largely on recommendations submitted to the Government by the NAC (which were based on
the NCPRIs original draft Bill). NCPRI produced a comparative analysis of the RTI Bill, 2004 against
the FOI Act, 2002 and the original NAC Recommendations. CHRIs summary of the Bill was also
produced.
The RTI Bill, 2004 was referred by Parliament to the Department Related Standing
Committee on Personnel, Public Grievances, Law and Justice for consideration. CHRI submitted
its recommendations to the Parliamentary Standing Committee on the RTI Bill, 2004 prior to
giving evidence before the Committee on 14 and 16 February, 2005. A range of civil society
activists also gave evidence before the Committee. CHRI made a Supplementary Submission
on the RTI Bill on 21 February.
The Report of the Committee (including a proposed amended version of the RTI Bill)
was tabled in the Lok Sabha on 21 March, 2005. CHRIs tabulated and running text analysis of
the report highlights the recommendations for change to the RTI Bill, 2004 made by the
Committee. CHRI made a Submission to Cabinet commenting on the Committees Report.
On 10 May, 2005, the RTI Amendment Bill, 2005 (which actioned many of the
recommendations of the Parliamentary Standing Committee) was tabled in the Lok Sabha. The
Bill was passed very quickly - it was approved by the Lok Sabha on 11 May, 2005 and by the
Rajya Sabha(Upper House of Parliament) on 12 May. On 15 June, 2005, President APJ Abdul
Kalam gave his assent to the National Right to Information Act, 2005. With Presidential assent,
the Central Government and State Governments had 120 days to implement the provisions of
the Bill in its entirety. The Act formally came into force on 12 October, 2005.

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Right to Information (RTI) Act


Right to Information is a part of fundamental rights under Article 19(1) of the
Constitution of India which guarantees the fundamental rights to free speech and expression.
The prerequisite for enjoying this right is knowledge and information. The absence of authentic
information on matters of public interest will only encourage wild rumours and speculations
and avoidable allegations against individuals and institutions. Therefore, the Right to Information
becomes a constitutional right, being an aspect of the right to free speech and expression which
includes the right to receive and collect information. This will also help the citizens perform
their fundamental duties as set out in Article 51A of the Constitution. A fully informed citizen
will certainly be better equipped for the better performance of duties.

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What is information?
The RTI Act defines information as any material in any form, including Records,
Documents, Memos, E-mails, Opinions, Advices, Press releases, Circulars, Orders, Logbooks,
Contracts, Reports, Papers, Samples, Models, Data material held in any electronic form and
Information relating to any private body which can be accessed by a public authority under
any other law for the time being in force.

What is a record?
The RTI Act specifies Records as :
*

any document, manuscript and file;

any microfilm, microfiche and facsimile copy of a document;

any reproduction of image or images embodied in such microfilm (whether enlarged or


not); and

any other material produced by a computer or any other device.

Rights under RTI Act 2005


Right to Information Act 2005 empowers every citizen to:
*

Ask any questions from the Government or seek any information

Take copies of any government documents

Inspect any government documents

Inspect any Government works

Take samples of materials of any Government work

Who is covered under RTI?


The Central RTI Act extends to the whole of India, except the State of Jammu and Kashmir.
All bodies, which are constituted under the Constitution or under any law or under any
Government notification or all bodies, including NGOs, which are owned, controlled or
substantially financed by the Government are covered.

Significance of RTI Act

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The Constitution of India, through its Preamble, ensures the citizens of India certain
rights. Article 19(1) guarantee us the right to freedom of speech and expression and as

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recognized by the Supreme Court this also implies a full right to information. The Right to
Information Act, 2005 has established the necessary practical regime of right to information.
Right to information can empower citizens to take charge by participating in decisionmaking and by challenging corrupt and arbitrary actions at all levels. With access to government
records, citizens can evaluate and determine whether the government they have elected is
delivering the results that are expected. RTI is thus a tool that can change the role of the citizens
from being mere spectators to that of being active participants in the process of governance.

Benefits of RTI Act


One can seek information about applications or complaints regarding ration cards,
electricity connections, water connections and so on, pending with the public authorities and
force them to redress your grievances quickly without any need of paying bribes. Further, this
Act promotes transparency and accountability in the Working of every public authority.
Preamble states that the Act:
*

contains corruption

holds Governments and their instrumentalities accountable to the governed

facilitates informed citizenry and transparency of information which are vital to functioning
of democracy

Salient Features of RTI Act4

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The following are the salient features of the RTI Act:

Universal access to information held by the public authorities all citizens have access to
information, pertaining to any period, in any form, in official language

Right to information includes inspection of records, works and taking certified samples of
material

Information broadly defined-includes: records, e-mails, samples and models

Applies to all public authorities, NGOs, private bodies subject to provisions

Voluntary disclosure of maximum (17 categories of ) information on nationwide network

Public Information Officers (PIO) to provide information

Right to Information Act, 2005: A Citizens Guide. www.unpan1.un.org/intradoc/groups/public/documents/cgg/


unpan028857.pdf, accessed on 23rd August 2010

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*

PIO has the duty to assist requesters and transfer the request to proper public authority, if
necessary

No prescribed form

Reasonable fees. No fees for persons below poverty line

No need to give reasons for requesting information but PIO should provide reasons for
rejection of the request

Information concerns the life and liberty to be provided within 48 hours

Information to be provided expeditiously, within 30 days of receipt of request

Deemed to be refused if no response is given

Only absolute exemption from disclosure of information

All other exemptions are subject to public interest test

Information which cannot be denied to the Parliament or a State Legislature shall not be
denied to a citizen

Allows partial disclosure

Internal First Appeals against PIOs decisions on fees/ form of access/ rejection/partial
disclosures

Independent Information Commissions at Central and State levels

Citizens can directly make complaints and appeals to Information Commissions

Presumption in favour of disclosure of information onus to prove that a denial of request


was justified shall be on the PIO

Overriding effect on other secrecy laws

Penalties on delinquent PIOs

A Guide which includes the details of PIOs of all public authorities

Educational programmes to disadvantaged communities

Annual reporting by the Information Commissions

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Institutional Framework for Implementation of RTI
One or more existing officers in every Government Department have been designated
as Public Information Officers (PIO). These PIOs act like nodal officers. The person seeking
information can file the applications with them. They are responsible for collecting information
sought by the applicant from various wings of that Department and provide the same to the
applicant. In addition, several officers have been appointed as Assistant Public Information
Officers (APIOs). Their job is only to accept applications from the public and forward it to the
concerned right PIO.
In the case of all Central Government Departments, 629 post offices have been
designated as APIOs. This means that person seeking information can go to any of these post
offices and submit fee and application at the RTI counter in these post offices. They will issue a
receipt and acknowledgement and it is the responsibility of that post office to deliver it to the
right PIO. The list of these post offices is given at http://www.indiapost.gov.in/rtimanual16a.html.
Also a list of PIOs/APIOs and Appellate Authorities for all Central and State departments/
Ministries is available online at www.rti.gov.in.

Fee
There is an application fee. For Central Government Departments, it is Rs 10. However,
different states have prescribed different fee. For getting information, you have to pay Rs 2 per
page of information provided for Central Government Departments. It is different for different
States. Similarly, there is a fee for inspection of documents. There is no fee for first hour of
inspection, but after that, one has to pay Rs. 5 for every subsequent hour or fraction thereof.
This is according to Central Rules. For each State, one needs look into respective State rules.
One can deposit fee either in cash or through a DD or Bankers Cheque or Postal Order drawn in
favour of that public authority. In some States, court fee stamps can be purchased and affixed
on application.

Access to Information
Any person can seek the desired information. There is no need of mentioning any reason
for seeking the information. One has to give the clear contact details (i.e., Name, Address, and
Phone No.). Section 6(2) clearly says that no information other than contact details of the
applicant shall be asked.

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Time duration
If an application is filed with the concerned PIO, the applicant must receive information
within 30 days. If the application is filed with APIO then information has to be made available
within 35 days. In case the matter to which the information pertains affects the life and liberty
of an individual, information has to be made available in 48 hours.

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4. Consumer Protection Act, 1986(CPA)
Introduction
Though consumer is the purpose and most powerful motivating force of production,
yet at the same time consumer is equally vulnerable segment of the whole marketing system.
Attempts have been made to guard the interest of the consumer in a sporadic way till 1986,
when Government of India enacted a comprehensive legislation-Consumer Protection Act, to
safe guard the interest of the consumer than ever before.
The Act enshrines the rights of the consumer such as right to safety, right to be informed,
right to be heard, and right to choose, right to seek redressal and right to consumer education.

Consumer Protection Act (CPA)


The CPA imposes strict liability on a manufacturer, in case of supply of defective goods,
and a service provider, in case of deficiency in rendering of its services. The term defect and
deficiency, as held in a catena of cases, are to be couched in the widest horizon of there being
any kind of fault, imperfection or shortcoming. Furthermore, the standard, which is required to
be maintained, in services or goods is not to be restricted to the statutory mandate but shall
extend to that claimed by the trader, expressly or impliedly, in any manner whatsoever.
The Act is applicable in all states in India except in Jammu and Kashmir. The act makes
provisions to include both tangible goods and intangible services (henceforth referred to as
product) purchased from a trader or service provider (henceforth referred to as company). The
act can apply to any consumer who uses the product for non-commercial activities, the only
exception being use of it to earn his livelihood. In other words, the act excludes commercial
customers fully, but includes individual domestic customers, groups of domestic customers,
societies and not-for-profit organisations5.
The Act was passed in Lok Sabha on 9th December 1986 and Rajya Sabha on 10th
December 1986 and assented by the President of India on 24th December, 1986 and was
published in the Gazette of India on 26th December 1986. This Act was enacted in the 37th year
of the Republic of India and was amended from time to time in the following years, i.e., 1991,
1993 and 2002.

Salient features of CPA6

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(I)

It covers all the sectors such as private, public, and cooperative, or any person. The provisions
of the Act are compensatory as well as preventive and punitive in nature and the Act applies
to all goods covered by sale of goods Act and services unless specifically exempted by the
Central Government;

http://www.consumerdaddy.com/a-14-consumer-protection-law-in-india.htm, accessed on 16th August 2010

http://www.sethassociates.com/consumer-protection-act-in-india.html, accessed on 16th August 2010

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(II)

It enshrines the following rights of consumers:

(a)

Right to be protected against the marketing of goods and services which are hazardous
to life and property; (b) right to be informed about the quality, quantity, potency, purity,
standard and price of goods or services so as to protect the consumers against unfair
trade practices; (c) right to be assured, wherever possible, access to a variety of goods and
services at competitive prices; (d) right to be heard and to be assured that consumers
interests will receive due consideration at the appropriate fora; (e) right to seek redressal
against unfair trade practices or unscrupulous exploitation of consumers; and (f) right to
consumer education;

(III)

The Act also envisages establishment of Consumer Protection Councils at the Central, State
and district levels, whose main objectives are to promote and protect the rights of consumers;

(V)

To provide a simple, speedy and inexpensive redressal of consumer grievances, the Act
envisages three-tier quasi-judicial machinery at the national, State and district levels. These
are: National Consumer Disputes Redressal Commission known as National Commission,
State Consumer Disputes Redressal Commissions known as State Commissions and District
Consumer Disputes Redressal Forum known as District Forum; and

(VI)

The provisions of this Act are in addition to and not in derogation of the provisions of any
other law for the time being in force.

Definition of Defect and Consumer7


Under the CPA, Consumer Forums at the District, State and National level have been
specifically constituted to adjudicate claims of consumers for any defect in goods. A defect
has been defined in Section 2(1) (f ) of the Act as any fault, imperfection or shortcoming in the
quality, quantity, potency, purity or standard which is required to be maintained by or under
any law for the time being in force or under any contract, express or implied, or as is claimed by
the trader (which includes the manufacturer) in any manner whatsoever in relation to any
goods.

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It is important to mention herein that by virtue of Section 2 (1) (d) persons/entities who
had purchased goods for commercial purpose (other than those persons who have purchased
goods for using them to earn their livelihood by means of self employment) are excluded from
the scope of CPA; they cannot institute proceedings under the CPA even if there is any defect
in the goods purchased by them for using the goods for commercial purposes.

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Purview of a Complaint8
According to the CPA, Complaint means any of the following allegations made in writing
by a complainant :
i.

Any unfair trade practice or a restrictive trade practice has been adopted by a trader,

ii.

The goods hired or bought suffer from one or more defects

iii.

The goods hired or availed of are deficient in any respect

iv.

A trader has charged price in excess of price fixed by law or displayed on the goods or any
package containing goods

v.

Goods which will be hazardous to life and safety when used are being offered for sale to the
public in contravention of the provisions of any law requiring traders to display information
in regard to the contents, manner and effect or use of such goods.

Consumer Courts
A three-tier-system:
a)

State Consumer Dispute Redressal Commission: claims above Rs. 20 lakh

b)

Consumer Dispute Redressal Commission or State Commission: Claims from Rs 5 to 20 lakh.

c)

Consumer Dispute Redressal Forum or District Forum: Claims up to Rs 5 Lakh

Complaint
A complaint, hand written or typed, can be filed by a consumer, a registered consumer
organisation, Central or State Government and one or more consumers, where there are
numerous consumers having the same interest. No stamp or court fee is needed. The nature of
complaint must be clearly mentioned as well as the relief sought by the consumer. It must be in
quadruplicate in District Forum or State Commission. Else, additional copies are required to be
filed.

Consumer Protection Councils


Councils have been setup in all States and at the Centre to promote and protect the
rights and interest of consumers. These Councils are advisory in nature and can play important
role in recommending consumer oriented policies to the State and Central Government.

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5.

Keywords
Consumer Protection, Human Rights, Right to Information

6. Summing up
Right to Information Act
Right to Information offers an invaluable tool, which every person in India can use to
find out information that can make his or her lives better. This Users Guide has been designed
to assist and guide the citizens of India to use the Right to Information Act, 2005 (referred
hereafter as the RTI Act) and to exercise this right more effectively.
Year 2005 was a momentous year for Right to Information in India because it saw the
enactment of a National Right to Information law. The RTI Act passed by the Indian Parliament
on 12 May 2005 and received Presidential assent on 15 June 2005 came into force on 12 October
2005.
Prior to the passage of the RTI Act, only 8 States and one Union Territory had Right to
Information laws. However, the new RTI Act covers not only all Central Government public
authorities, but also covers all State and local level public authorities (except Jammu & Kashmir
which is not covered by Central legislation due to its special status). This means that citizens in
every State of India will now be able to access information from the Central and State
Governments under the RTI Act, whether or not a separate State Right to Information law is in
place.

Consumer Protection Act


The Consumer Protection Act is a social welfare legislation which was enacted as a result
of widespread consumer protection movement. The main object of the enactment of this Act is
to provide for better protection of the interests of the consumer and to make provisions for
establishment of Consumer Councils and other authorities for settlement of consumer disputes
and matters connected therewith.

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In order to promote and protect the rights and interests of consumers, quasi-judicial
machinery is sought to be set up at District, State and Central levels. These quasi-judicial bodies
have to observe the principles of natural justice and have been empowered to give relief of
specific nature and also to impose penalties for noncompliance of the orders given by such
bodies. The main object of these bodies is to provide speedy and simple redressal to consumer
disputes. It is one of the benevolent pieces of legislation intended to protect the consumers at
large from exploitation.

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7. Know your Progress
1.

What is the importance of information in development?

2.

What are the citizens rights in India?

3.

What is RTI?

4.

Narrate the significance and salient features of RTI.

5.

Who are responsible for implementation of RTI?

6.

How to seek information? Explain briefly the process and procedure.

7.

What is Consumer Protection Act?

8.

Briefly narrate the scope and benefits of RTI.

8. Further Reading/References
1.

Kumar, Niraj; Treatise on RTI Act 2005, Bharat Law House, New Delhi.

2.

Kumar, Niraj; Handbook on RTI Act, 2005, Bharat Law House, New Delhi.

3.

Guide on RTI Act, 2005, Min. of Personnel and Public Grievance & Pensions,
http://rti.gov.in/RTICorner/Guideonrti.pdf

4.

Harsh Mander and Abha Joshi, The Movement for Right to Information in India: Peoples
Power for the Control of Corruption, www.humanrightsinitiative.org/.../india/.../
The%20Movement%20for%20RTI%20in%20India.pdf

Govt. of India,

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9. Model Answers
2.

The Rights of the Indian citizens include Right to Work, Information, and Education.

4.

Main features of RTI are access to information, an Officer to provide information, Reasonable
Fee, no prescribed form to ask for information.

5.

Public Information Officer (PIO) is responsible for implementation of RTI, PIO assists
requesters and transfer the request to proper public authority, if necessary.

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UNIT 4 : FARMER ORGANISATIONS


Structure
1.

Introduction

2.

Objective

3.

Need for Farmer Organisations

4.

Types of Farmer Organisations

5.

Steps in establishing Farmer Organisations

6.

Forms of Farmer Organisations

7.

Farmer Organisations and Development Agencies

8.

Agrarian Movements in India and Role of Peasant/Farmer Organisations

9.

Sustainability of Farmer Organisations


Limitations and Difficulties of Farmer Organisations

11.

Keywords

12.

Summing up

13.

Know your Progress

14.

Further Reading/References

15.

Model Answers

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10.

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1. Introduction
In the present era of community driven development the role of stakeholders has gained
greater importance. In an agrarian economy like that of India, farmers play a major role in
agricultural production. In India, more than 65 percent of people depend on agriculture to earn
their livelihood. In order to augment agriculture and to help the farmers, many policies were
evolved over years and they get reflected in the successive Five Year Plans. However, the small
and marginal farmers and the landless agriculture labour have been facing problems due to
significant changes in production system. Market now controls and dictates a farmers
production. A farmer is always under stress and has to struggle for land, inputs, resources and
credit. In a sense, farmers and agriculture always continue to be in the grip of crisis. This is
clearly reflected in the struggles waged by the peasants/farmers right from the Colonial rule to
date through their organisations to fight for their rights.
In this Unit, an attempt is made to elaborate different types of farmer organisations,
and their need and utility. It is important to understand that farmers are primary stakeholder in
rural development. While discussing farmer organisations a brief understanding of farmers
movement in India is also needed. There is also a need to discuss the linkages of farmer
organisations with the line departments in order to gain an understanding of the benefits of
development accrued through farmer organisations.

2. Objective
This Unit will provide a brief idea on the significance, structure and function of farmer
organisations.

3. Need for Farmer Organisations


With increased emphasis on demand-driven development, organisation of farmers into
groups is an important tool that enables them to act as a pressure group to demand their due
share in the economic and political power. Everywhere in the globe, small and marginal farmers
are collaborating with each other in some or the other way by forming into groups, sharing
information, and working together. Under the existing circumstances, farmers groups can make
a positive difference to the lives of the farmers and agricultural labour, as they work towards
improving their livelihood options, as well as sustainable management of natural resources.

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The groups with common interest can secure access to services, such as training, credit
or equipment. Lack of access to any of these could be a vital issue that an individual farmer
faces and it gets resolved when he is in a group. This is particularly the case where farmers
organise themselves as a response to credit and input needs, marketing concerns, etc., as there

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are clear economic benefits of working in groups. These include the ability of groups to buy
seed and fertilisers in bulk, or access more distant markets, etc. Working together can increase
members bargaining power, which helps to share and lower risks and costs. In areas where
farmers are scattered geographically, and communication is difficult, the importance of such
organisations is greater.
An organisation creates an opportunity for participation that contributes to group
members facing the issue at hand as well as finds solutions to them. This, in turn, builds group
cohesion, solidarity, and promotes mutual support. It provides an important way to farmers to
become recognised, economically, socially and politically. Organising is an important way for
farmers to have a voice and increase their influence. This is vital when working towards
improving their own social, economic and environmental conditions that can be achieved
through lobbying and advocacy activities.
Many tasks related to managing sustainable agricultural practices are best done in
groups. This is clear from the various types of informal institutions, such as voluntary work groups
and long-practiced traditions of reciprocity which are common and found in countries as diverse
as India, Ghana, the Philippines and Brazil. These farmer groups are based on community ties,
trust among members, obligations, and are rooted in tradition. This practice is also seen widely
among the tribal farmers in India, like Lanjia Saura of Orissa (Mishra, 2007), who jointly share
their agricultural knowledge and other resource inputs in agriculture.
Farmers organisations can provide farmers with many services that are critical to their
success in accessing markets, and farmer organisations have been providing some of the
following services to the farmers:
Marketing services (input supply, output marketing and processing market information)

Facilitation of collective production activities

Financial services (savings, loans and other forms of credit)

Technology services (education, extension, research)

Education services (business skills, health, and general)

Welfare services, (health, safety nets)

Policy advocacy

Managing common property resources (water, pasture, fisheries, forests)

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4. Types of Farmer Organisations
The farmer organisations usually can be divided into two types: 1) community-based
and resource-orientated organisations; and 2) commodity-based and market-orientated
organisations (Shankariah and Shingi, 1997).

Community-Based, Resource-Orientated Farmer Organisations


This is generally a village-level association or cooperative dealing with inputs needed
by the members, the resource owners, to enhance the productivity of their businesses based
on land, water, or animals. These organisations are generally small, and have well-defined
geographical areas. However, the client group is highly diversified in terms of crops and
commodities.
The primary-level agricultural cooperatives in the developing world come under this
category. Majority of them have been financially vulnerable and ineffective. These groups of
organisations generate income from the sale of inputs and outputs. The income can then be
put back into the organisation by spending it on extension, business planning, and
administration.

Commodity-Based, Market-Orientated Farmer Organisations


These organisations specialize in a single commodity and opt for value-added products
which have expanded markets. They are designated as output-dominated organisations. Not
specific to any single community, they can obtain members from among the regional growers
of that commodity who are interested in investing some share capital to acquire the most recent
processing technology and professional manpower. These organisations are generally big and
operate in a competitive environment. Research, input supply, extension, credit, collection of
produce, processing, and marketing are all integrated to maximize the returns on the
investments of the members who invested in the collective enterprise. Several successful cases
are found in India, such as Anand Milk and other dairy farmer organisations.
The profits generated are used to provide supplementary and supportive services at
reduced cost to encourage members to use them. To do this requires a high calibre of
representative and enlightened leadership from among the grower members. It is a challenging
and demanding task to conceive, design, build, and nurture this type of farmer organisation.

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Whether it is community-based and resource-orientated organisation or commoditybased and market-orientated organisation, the participation of farmers, the primary
stakeholders, is not constant. It varies based on the following issues:
*

The degree of the farmers dependence on the outputs of the organised activity.

The degree of certainty of the availability of the outputs.

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*

The extent to which the outputs will be available only as a result of collective action.

The extent to which the rewards associated with the collective action distributed equitably.

The extent of availability of rewards within a reasonable time frame.

The extent to which the rewards are commensurate with the costs associated with continued
participation (Shingi & Bluhm, 1987, cited in Shankariah and Shingi, 1997).

5. Steps in Establishing a Farmers Organisation


Shankariah and Shingi (1997) discussed the role of extension in helping formation of
former organisation and suggested different steps in doing so. Forming of farmer organisation
is not an easy task. It requires certain preconditions and if one wants to form a farmer
organisation there is a need to follow different steps involved in establishing them. They are as
discussed below:

Step -1: Understanding the Village Community and its Needs


A person interested in the formation of organisation should enter into the community
with an open mind and try to understand the dynamics of that community structure. He or she
should also develop an understanding of the entire community, including poor and marginal
farmers, women and the elites.
He/ she should adopt the techniques like key informant interview, participant
observation and PRA techniques like transit walk, resource mapping, etc., which will help in
understanding peoples attitude, knowledge, and skills. He or she should try to collect both
qualitative and quantitative information on the levels of income and productivity, costs of
cultivation, post-harvest losses, output utilisation, and the likelihood of making striking
improvements to each of these factors. He or she should try to elicit the agricultural and the
other needs of villagers.

Step- 2 : Finding out Potential Leaders in the Community


One needs to identify leaders in the village. Preferably, they should come from families
with better social status from farming households. It is better to undertake a thorough study of
those leaders. If there are any farmer organisations already functioning in the village get hold
of its leaders. In some cultures, it is wise to search for and contact middle-aged leaders of the
area.

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Step- 3 : Discussing with the Identified Leaders and Seeking Cooperation


from Other Agencies
There is a need to talk to these leaders about the agricultural situation and get ideas
and information on farmer organisations in the village and seek cooperation from other

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government and non-government agencies to establish farmer organisations that can take care
of the interest of different stakeholders involved in agriculture and allied activities.
It is essential to ascertain whether there is any farmer organisation in the area and if
there is none whether there is any need for such an organisation? If the community has a farmer
organisation, one needs to understand its structure and history of performance. It is important
to understand how the farmer organisation can play a constructive role in the village or
community development. It is also essential to impress upon the leaders on the need for farmer
organisations in the entire process of broad-based agricultural development. It is important to
provide facts and figures to convince potential leaders of the possibilities and approaches for
increasing the income of a sizeable number of farmers and for contributing to the economic
development of the region.

Step -4: Helping Local Leaders to Arrange Community Meetings


There is a need to facilitate the local leaders to organise community meetings. Sometimes
more than one meeting may be needed to discuss the need for and the role of farmer
organisations in agricultural development. farmer organisation leaders from neighbouring
villages can be invited to speak at these meetings. Farmer-to-farmer information exchange helps
them. Sometimes smaller meetings can be held for low-resource (small and marginal) farmers
and minority groups. Prospective members need to be convinced that everyone benefits in
proportion to his or her contribution, and not just the big farmers, as is widely perceived.

Step - 5 : Nominating Core Group Leaders to Develop or Establish the


Farmers Organisation
From the community meetings, core group leaders can be elected or nominated to
design the farmer organisation with further community consultation. The person in charge of
formation of farmer organisation should facilitate the community in the process of election or
selection.

Step - 6 : Developing an Organisational Framework for the Farmers Organisation


After the selection of core group leader, the person in -charge should help the core
group leader in developing an organisational structure for their farmer organisation. In the
past, the blueprint approach was taken without understanding the function that the farmer
organisations structure plays in its performance. Many group discussions should be organized
to highlight the need for careful planning.

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The structure should serve the organisations functions and goals. Understanding various
types of farmer organisations is useful. Should they be commodity-based organisations or
community based organisation? Should they be multipurpose? Should there be one farmer
organisation for the entire village or several to cater to the needs of special-interest groups
(low-resource farmers, women, craftsmen, small businesses, and the like)? Should they have

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subgroups and an advisory committee? The importance should be given to all the vulnerable
communities while forming the group.

Step - 7 : Train the Office-Bearers of Farmers Organisation


It is essential to educate and train the office bearers of farmer organisation to strengthen
the farmer organisation. They should be aware of its functions and they need to be given training
on leadership.

Ste p- 8 : Establishing Networks with other Line Departments


Before moving ahead they should contact other line departments and try to receive
their support. In consultation with officials from other line departments they should develop
their plan.

Step -9 : Implementing Selected Projects


In this step, the person in charge of farmer organisation can help the farmer organisation
leaders implement the projects they have chosen. They should prepare the outline of the project.
Timeframe of the project should be charted out. Resource for the implementation of project
should be secured.

Step - 10 : Evaluating and Midterm Monitoring the Farmer Organisations Progress


Usually evaluation is done annually to meet formal requirements. But person in charge
can encourage farmer organisations to reflect on their activities more frequently so that they
learn and improve their management skills. They need to watch for people who want to take
over the farmer organisations for their self-interest. It is important to be watchful and also be
alert to take action against any negative influences. These monitoring or reflection processes
help strengthen farmer organisations and avoid self-defeating problems.

6. Forms of Farmer Organisations


There are various forms of farmer organisations. They may be found in different forms
such as Cooperative Farming, Water Users Association, etc.

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Cooperative Farming
It was observed by different scholars that various factors like increasing pressure of
population on land, inequitable distribution of land, fragmentation of land, low productivity of
the soil, traditional methods of cultivation, illiteracy of the farmers, meagre financial resources
of the cultivators, etc., stood as stumbling blocks in the implementation of plans for a progressive
agricultural growth. In this context, it may be noted that the 64th Session of the Indian National
Congress held at Nagpur in 1958 pledged its overwhelming support to the adoption of cooperative farming.

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Cooperative farming is where farmers come together and work jointly for the betterment
of all. In cooperative farming they come together, pool their resources in buying inputs, using
resources like land, water and market the produce and divide the earnings. When the cultivator
becomes a member of the co-operative society, he can meet his credit requirement from the
financial assistance extended by it. Besides, he is enabled to purchase and use modern machinery,
to effect efficient division of labour, to provide irrigation, to undertake measures for permanent
development of land and finally to sell his produce advantageously, all of which normally could
be beyond the capacity of an individual farmer to achieve. In the era of globalization and climate
change, where agriculture has stood at cross road and food security has raised a question mark
on its own sustainability the cooperative farming has emerged as a great initiation in providing
better life to the farmers. It has given an opportunity for efficient use of water and adoption of
ecologically sound policies, small farm management as well as monsoon management in an
era of climate change.
Intense discussions on co-operative farming versus contract farming were held in India
to discuss the pros and cons of both types of enterprise. The introduction of new economic
policy has stimulated many multinational corporations (MNCs) to enter into Indian farming
sector. The method they often use to establish themselves is to enter into a contract with farmers
who have landholdings of their own for the supply of agricultural produce on a regular basis at
a fixed rate. The MNCs may help the contracted farmers with one or more key inputs and even
with finance in advance to facilitate regular production and supply. The farmer, however, is
relieved of the great burden of arranging for the inputs, marketing of the products and of
securing a stable and regular income. Co-operative farming is conceived and promoted as a
farmer controlled set-up, capable of providing key inputs and services for the production and
marketing of the products on behalf of the poor and powerless farmers. The debate suggested
that, under Indian conditions, it is better to opt for co-operative farming at the level of the
farmers while contracts for processed products may be established between multinational
companies and co-operative farming societies at primary level.
There are four main types of co-operative farming societies, viz., (a) co-operative better
farming societies, (b) co-operative tenant farming societies, (c) joint co-operative farming
societies and (d) collective co-operative farming societies1 (Madan, 2007).

(a) Cooperative better farming society


These societies are aimed at introducing improved methods of farming. The members
follow a specific plan of cultivation and take up activities jointly through the society, such as
ploughing, purchase of seeds, watch and ward, use of machinery, harvesting, pooling, cleaning,
grading, and selling the produce. While the members are independent, they join together to

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http://www.maharashtra.gov.in/english/gazetteer/BULDHANA/agri_coop%20farm.html

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undertake certain activities jointly. They pay for the services availed or received and at the end
of the year receive patronage dividend.

(b) Cooperative Tenant Farming Society


These societies own land in freehold or leasehold, and they lease smaller holding to an
individual tenant cultivator of the society. While the society plans the cultivation, its members
are free to execute them according to their convenience. Supply of credit, seed, manure, and
costly agricultural implements and arranging for the marketing of the produce are undertaken
by the society and the members are free to make use of these facilities. The society collects
fixed rent for the leased holding and also an additional amount towards reserve fund. A farmer
is free to sell his produce according his own will.

(c) Cooperative collective farming society


As in the case of Cooperative Tenant Farming Societies, these societies also hold land in
freehold or leasehold as well as the other means of production. Members under these societies
undertake joint cultivation by pooling their labour resources for which they receive a prescribed
wage. Joint cultivation facilitates mechanization of agricultural production, which is the most
important gain. At the end of the year profits are worked out in proportion to the wages earned
by each member after deducting wages, costs of management and allotment to reserves.

(d) Cooperative joint farming society


Under this type of society small owners pool their land as their holdings are not large
enough to permit of economic farming. Members work on the pooled land in accordance with
the directions of an elected committee and the manager appointed by it. They work jointly and
each member receives his wages. After the production all the members incur the expenses
according to the amount of land they own. The produce is also shared according to the same
principle. The normal functions of the society are planning jointly crops, purchase seeds and
other equipment of cultivation, and disposing production.

Water Users Association

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Farmer organisations are being formed to manage irrigation water in several nations,
including in India. In India, several States in the recent past have come up with major policy
and legal initiatives that have transferred some responsibilities of Irrigation Management from
government agencies to the Water Users Associations (WUAs) which are nothing but farmer
organisations. While some of these WUAs have been formed under government resolutions,
most States today have done so through enabling laws. In States like A.P, Rajasthan, Orissa,
Madhya Pradesh, Tamil Nadu Maharashtra and Chhattisgarh the law enabling farmers
participation in irrigation management has come through the enactment of specific laws.

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The main objectives of the WUAs Act formulated by different States include: i) realising
the maximum irrigation potential, ii) ensuring equitable and reliable supplies, iii) improving
the efficiency of the existing irrigation network, and iv) managing water resources better through
stakeholder participation and withdraw the department from organisation and maintenance.
However, lack of harmony between technical, financial, historical aspects of community water
management and socio-cultural and institutional aspects of water management have stood as
major constraints in achieving its goals.

7. Farmer Organisations and Development Agencies


Emphasising on support from outside, Jon Hellin et.al (2007) observed that it is very
rare for farmer organisations to self-organise on a formal, as opposed to an informal, basis.
Support is often needed in the establishment and continued per formance of farmer
organisations. Highlighting the example of farmer organisation from El Salvador and Honduras
of Mexico, they claimed that farmer organisations secure a very small percentage of the final
consumer price and low volumes of product plus low margins. Here the problem was with low
subsidies. It is pertinent to understand that the subsidies are a means to ensure sustainable
production by farmers. While the political climate over the last two decades has been hostile to
subsidies, there is increasing recognition of the key roles that both the private and public sectors
can play in contributing to agricultural development of these regions.
Highlighting the reasons for failure of farmer organisations Jon Hellin et.al (2007) claimed
that those organisations are encouraged to overreach themselves by development agencies
who wish to improve farmers access to markets but fail to recognise fully the constraints to
achieving this through collective action. It is required to match farmer skills and managerial
experience to different forms of farmer organisations. In some cases, it is advisable to link farmers
to specialised service providers rather than adding additional functions to overburdened farmer
organisations.
Development agencies can play a very important role in facilitating farmer organisation
development, especially in the early stages, but greater attention has to be directed to the
questions of farmer organisation for what purpose? and once we are organised, who can we
partner with? In terms of market access, various researches suggested that the benefits of formal
farmer organisation are more evident in the vegetable sector characterised by high transaction
costs associated with market access. In the case of low-value commodity crops such as maize, it
may not be in farmers interests to organise themselves for market sales but farmer organisations
may benefit from improved access to agricultural inputs and technological services. Furthermore,
these benefits may be secured through informal or even short-lived organisations rather than
more demanding formal ones.

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Farmer organisations have been identified as a key factor in enhancing farmers access
to markets. In response, policy makers and development practitioners have focused on
supporting small scale producers to associate, collaborate and coordinate in order to achieve

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economies of scale in their transactions with input suppliers and buyers. The enthusiasm for
farmer organisations has, at times, obscured the fact that establishing viable organisations is
not a simple process. It is often a challenge to establish the rules on which farmer organisations
are based and to monitor and enforce compliance with these rules. In some cases, the
establishment of farmer organisations incurs transaction costs, which, if too high, may mean
that farmers are better off not organizing (Stockbridge et al. 2003)2. Furthermore, successful
association often requires management and entrepreneurial skills; soft assets that small
producers may lack, whilst contracting a professional management team is costly (Pingali et al.
2005) 3.
Farmers voice cannot be recognised without farmer organisations. Unless and until they
come forward others will take advantage of it. It is seen in almost all parts of world that various
political parties have come forward to raise the issues of farmers problems. However, the net
result was not anywhere comparable to what farmers achieved on their own effort and struggles.
However, there is importance of third parties to organise farmers to establish a formal
organisation.
To engage in any sensible dialogue with the rest of society, farmers need their
representative organisations, the farmers organisations, structured from grassroots to the
international level, as their legitimate voice. This is why farmers movement gives a lot of
importance to farmer organisations, organisations by farmers and for farmers are important
pillars of current society.

8. Agrarian Movements in India and Role of Peasant/Farmer


Organisations

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Peasant struggles in India have a long history. Their struggles can be broadly grouped
under two types: 1) sporadic movements, and 2) organised movements with specific leadership
and development of peasant/farmer organisation(s). Agrarian movements during the Mughal
rule were more sporadic and their occurrence has increased during the Colonial rule. This
increase in peasant struggles is attributed to the introduction of new land revenue policy, forest
policy, etc., by the colonial administration. The peasant struggles were sporadic during the initial
period of colonial rule and these were against the usurious Zamindars(landowners), Jagirdars
and other intermediaries, including moneylenders. These movements revolved around tenancy
rights and security, and taxes. With the emergence of nationalist movement, peasants rightful
grievances were taken into account by the nationalist leaders like Gandhi, Swami Sahajanand
Saraswati, Raja Mahendra Pratap, Vallabhai Patel and many others. Peasant struggles were led
by many of these and other leaders. The famous examples of peasant struggles led by the

Cited in Jon Hellin, Mark Lundy & Madelon Meijer, 2007, Farmer Organization, Collective Action and Market Access
in Meso-America, CAPRi Working Paper No. 67, pp:6

Cited in Jon Hellin, Mark Lundy & Madelon Meijer, 2007, Farmer Organization, Collective Action and Market Access
in Meso-America, CA, PRi, Working Paper No. 67, pp:3

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nationalist leaders are Champaran Movement in Bihar against the indigo planters; in Khaira,
Gujarat, against the collection of land revenue due to failure of crops; peasant struggles under
the leadership of Raja Mahendra Pratap of Ghadar party: Chauri Chaura: Avadh: Mopla in Malabar:
Shekhawati farmers movement, Marwar farmers movement, and Gharsana farmers movement
in Rajasthan, etc4.
These struggles led to the realisation of forming separate peasant/farmer organisations
to take care of the interests of the peasants/farmers. Swami Sahajananda Saraswati formed
Bihar Provincial Kisan Sabha (BPKS) in 1929 to fight for the occupancy rights of the peasants
and mobilise them against the attacks of the Zamindars. The peasant unrest and movement
spread to the other areas of the country due to the oppressive policies of the British and
exploitation by the Zamindars. This has led to the formation of the All-India Kisan Sabha (AIKS)
in 1936 under the leadership of Swami Sahajananda Saraswati. AIKS was initially dominated by
the rural rich due to the Congress Socialists insistence on making it a representative organisation
of all the agrarian classes. Swami Sahajananda wanted to build the AIKS as an organisation to
champion the cause of the rural poor and this led to the alienation of the rich and middle
peasants. AIKS passed into the hands of the communist leadership during 1940s and there were
many historic struggles led by the AIKS under the leadership of Communist Party of India, like
the famous Tebhaga and Telangana peasants struggles. Post-independent India saw the
emergence of various all-India peasant organisations led by different political ideologies to
struggle for the rights of the marginal and small farmers and the landless agricultural labourers.
These struggles have led to many a positive change in the government policies and programme
to ameliorate the conditions of the farmers/ peasants.

9. Sustainability of Farmer Organisations


There are lots of success stories of farmer organisations leading to active and effective
farmer participation as, for example, in the case of coffee producers in South America (Hellin
and Higman 2003). One of the better known examples in India is the milk industry: more than
70 percent of Indias milk is produced by households who own only one or two milk animals,
and these producers form part of a nationwide network of dairy cooperatives (FAO 2004: 24).

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Stringfellow et al (1997) identify three key factors that determine whether or not
successful farmer cooperation for marketing is likely to take place: a) a match between the
existing skills/experience of members and what is required to undertake joint activities; b)
internal cohesion and a membership driven agenda; and c) successful, commercially oriented,
integration of the organisation into the wider economy5.

Cited in http://en.wikipedia.org/wiki/Farmers_movements_in_India

Cited in Jon Hellin, Mark Lundy & Madelon Meijer, 2007, Farmer Organization, Collective Action and Market Access
in Meso-America, CAPRi, Working Paper No. 67, pp:6

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There is an important difference between farmers or communities that organise
themselves to work together, and they are being organised in groups by external actors who
see this as a vital step and entry point for community development. However, it is observed in
most of the cases that the groups which have emerged on their own sustain for a long period
than the groups formed by external agencies which are more prone to difficulties at the start,
and there is a risk that they will not continue if or when the initiating institution pulls out.
Legal status is also usually needed for an organisation to be recognised by public
authorities, or to access public services. It can also be useful when finding partners and
institutionalising them into more formal structures developments which can help an
organisation to progress and move forward. Supportive local policies and more conducive
institutional environment are of critical importance. Power relationships at the local and district
level are often complex, and strengthening farmers voices, and making sure they are listened
to, are crucial elements for sustainable agriculture.
It is observed that many groups organise themselves as a response to a felt need. Once
this need is resolved, members may feel that working as a group is no longer necessary, or that
they need to change their objectives to suit to the new situation. As such, some groups are not
meant to last forever and it is valid for them to achieve their objectives and move on. What is
important is that a farmer group should have a clear vision of where it is going and what it
wants to achieve. It should act as a pressure group and also act as a major stakeholder in
sustainable agriculture.
Accountability of farmer organisations is a crucial parameter for deciding substance,
quality of work, bringing equity in distribution and gaining overall confidence of members.
The foremost aspect of a farmer organisation is that the members should feel that the
organisation is their own. It is also important that the quality of leadership of the organisation
plays an important role in the growth of democratic decision making which is crucial for
accountability and transparency. It is also necessary for the farmer organisations to interface
with local the self-government and other line departments.

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Coordinated functioning of institution is vital for sustaining farmer organisations. Simply


forming organisation will not serve the problem as long as devolution of power to them is
made. However, as long as institutions are in place and functional in terms of mandated duties
one can hope for their better performance and sustainability.
For rating the sustainability or success of farmer organisations, the perception of the
stakeholders about the organisation / institution is required. The stakeholders perceptions are
crucial due to three distinct dimensions. First, the stakeholder as a farmer is concerned about
the availability of resources in time and need. Second, as a member of the organisation he/she
has the responsibility for sustaining and welfare of the organisation. Third, as a member of sociopolitical groups, stakeholder perceives his/her participation in the activity either as a social
group activity or as a political activity.

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10. Limitations and Difficulties of Farmer Organisations
If an organisation has to develop and flourish in the long term, it has to overcome the
difficulties of its management. Often these are problems of day-to-day management, such as
farmers not having enough time to participate as fully as they would like, or having difficulty in
finding fees or other contributions required. Farmers weigh these investments against benefits,
but often these and other pressing practical concerns can become a difficulty for farmers groups.
According to the circumstances in which specific organisations are formed, each group will
need different types of support, resources and information. Access or lack of it to these can
affect the performance of the groups. In larger groups or networks, difficulty in reaching
decisions and resulting internal conflict is more common. If objectives are not achieved, or
results do not come up to expectations, members may lose interest. Groups also have to deal
with external pressure or influence, and always have to operate within the local political and
economic environment. Challenges faced by groups include ensuring that everyone can be
involved, and avoiding certain interests or voices becoming dominant. This is especially the
case with gender and cultural or religious concerns.
Although working together is beneficial in many situations, it must be recognised that
organising for the sake of organising, or organising because it is requested by outside projects
will not necessarily bring the expected results. Successful groups make some planning, thought
and careful consideration of what form they should take in order to reach their goals. Members
should also look at why it is beneficial to be in a group, and consider all their options (Hellin et
al., p. 26).

11. Keywords
Livelihood options, Marketing services, Policy advocacy, Common Property Resources,
Farmer Organisations, Cooperative Farming, Water Users Association, Agrarian Movements

12. Summing up
This Unit has given a clear picture of farmer organisations. It has narrated how farmer
organisations as primary stakeholders can play a major role in agricultural development. It has
described the need of farmer organisations in agriculture development. While discussing its
importance it has discussed the sustainability of these organisations and also its limitations. It
has also given emphasis on collaboration of farmer organisations with various development
agencies and line departments. It also brought out how farmers movements led to formation
of farmer organisations.

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13. Know your Progress


1.

What makes the farmers to come together?

2.

What opportunity the Farmers Organisation creates?

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3.

What kind of services Farmers Organisations provide?

4.

Mention the issues that influence farmers participation.

5.

What are the different steps involved in forming farmer organisation?

6.

Write a note on Community-Based, Resource-Orientated Farmer Organisations.

7.

Discuss Commodity-Based, Market-Orientated Farmer Organisations.

8.

What is co-operative farming?

9.

What is self-organised farmer organisation?

10.

Discuss the role of development agencies in forming farmer organisation.

11.

Discuss the role of farmers movements in promoting farmer organisations.

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14. Further Reading/References


1.

FAO. (2004). The State of Food Insecurity in the World. Annual report by Economic and Social
Department. Rome: FAO.

2.

Hellin, J. and S. Higman. (2003). Feeding the market: South American farmers, trade and
globalization. London, UK: ITDG Publishing and Latin American Bureau.

3.

Jon Hellin, Mark Lundy and Madelon Meijer. (2007). Farmer organisation & market Access,
LEISA Magazine, 23.1, March 2007, Pp: 26-27.

4.

Laxminarayan, H and Kissen Kanungo. (1967). Glimpses of Cooperative Farming in India.


Bombay: Asia Pub. House.

5.

Madan, G R, 2007. Cooperative Movement in India, Mittal Publication, New Delhi

6.

Shingi, P. M., and L. H. Bluhm. (1987). Participation in irrigation projects: Changing patterns in
northwestern India. In H. K. Schwarzweller (Ed.), Research in Rural Sociology and Development.
Volume 3, p. 65-84. Greenwich: Jai Press.

7.

Shingi, P. M., and L. H. Bluhm. (1987). Participation in irrigation projects: Changing patterns in
northwestern India. In H. K. Schwarzweller (Ed.), Research in Rural Sociology and Development.
Volume 3, p. 65-84. Greenwich: Jai Press.

8.

Singh, R.N. (1963). Cooperative Farming in India. Jaipur: Popular Book Depot.

9.

Shankariah Chamala and P. M. Shingi. (1997). Chapter 21. Establishing and strengthening
farmer organizations. In Burton E. Swanson, Robert P. Bentz and Andrew J. Sofranko (Eds.)

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Improving agricultural extension: A reference manual. Rome: FAO. http://www.fao.org/
docrep/w5830e/w5830e0n.htm

SRD II (N) 6

15. Model Answers


1.

The farmers come together, as the groups with common interest can secure access to
Services, such as training, credit or equipment.

3.

The farmers organisation can provide service in matters related to marketing, finance,
technical inputs, welfare and managing Common Property Resources.

5.

The different steps involved in forming farmers organisation are: Understanding the Village
Community and its Needs, Finding out Potential Leaders, Discussing with the Identified
Leaders, Seeking Cooperation, Arrange Community Meetings, Nominating Core Group
Leaders to Develop or Establish Farmers Organisation

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SRD II (N) 6

BLOCK - 2 : COOPERATIVES AND OTHER FORMAL


AND INFORMAL ORGANISATIONS

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BLOCK- 2: COOPERATIVES AND OTHER FORMAL


AND INFORMAL ORGANISATIONS

Introduction
Rural development and agriculture is intertwined with the existence of cooperatives
and other formal and informal organisations. Cooperatives and other informal organisations
like the SHGs play an important role in providing succour to different stakeholders in rural
areas. This Block provides a brief description about the background and current situation of
the cooperative movement in the global and Indian context. It also discusses about the
agricultural and consumer cooperatives and the structural and functional issues involved in
cooperation. These aspects are discussed in the following four Units under this Block:
Unit -1: Cooperative Movement: History and Present Status: An understanding of origin
and evolution of cooperative movement and its present status elsewhere and in India is
delineated in this Unit. It provides the reader with a glance of salient features, principles, values
and objectives of cooperation and its relevance in the present day context of rural development.
Unit - 2 : Agricultural Cooperatives : This Unit vividly discusses different forms of
agricultural cooperatives, significance of agricultural cooperatives, their role in supply of
different agricultural inputs, problems facing agricultural cooperatives, and their current status
in India.
Unit - 3 : Consumer Cooperatives: The need, role and working of consumer cooperatives
is the focus of this Unit. It also discusses the problems of development of consumer cooperatives
and the measures required to augment them in India. This provides the reader with a good
understanding of the consumer cooperative movement in India.

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Unit - 4 : Structural and Functional Issues in Cooperation : This Unit deals with
classification of cooperative organisations and the structural and functional aspects of different
types of cooperatives. It points out the differences between collective and cooperative
organisations.

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UNIT - 1 : COOPERATIVE MOVEMENT : HISTORY AND PRESENT STATUS


Structure
1.

Introduction

2.

Objectives

3.

Meaning and Definition of Cooperation

4.

Evolution and Growth

5.

Salient Features of a Cooperative Organisation

6.

Nature and Scope

7.

Principles of Cooperation

8.

Values of Cooperation

9.

Objectives of Cooperation
Historical Profile of Cooperative Movement in India

11.

Progress of Cooperatives at a Glance

12.

Keywords

13.

Summing up

14.

Know your Progress

15.

Further Reading/References

16.

Model Answers

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10.

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1. Introduction
Cooperatives have developed for over 200 years and they exist all over the world
providing essential services which would otherwise be unattainable. In many Third World
countries, Cooperatives, such as credit unions and agricultural organisations, have been very
successful in helping people to provide for themselves where private and other corporate
capitals do not see high profitability. In 90 countries of the world, over 700 million individuals
are members of cooperative institutions. Globally, Cooperatives have been able to elevate its
position as a powerful economic model. In some countries they are a sizeable force within the
national economy.
The word cooperation has been derived from a Latin word cooperare where co means
with and operare means to work. In other words, cooperation means to work together for some
common purpose as a means of promoting economic and social welfare. The origin of
cooperation is perhaps as old as the early civilisations themselves.
The institution of cooperation was born out of circumstances necessitated by different
forces in different countries, but with one common underlining goal, viz., collective well-being.
It may be termed as that form of economic organisation in which persons wilfully and voluntarily
pool their resources on a basis of equality for the achievement of their economic interests.
A group of persons facing same type of problems may be forced, due to circumstances,
to join hands together and to cooperate with each other just to tide over their common
problems. But such an isolated act will not fall under purview of cooperation as such since it
involves something more than this. Thus, cooperation signifies not only an associated or
collective action but also the setting up of an organisation to attain the common goals.
Thus, cooperation is to be understood as special form of economic organisation in which
people work together for the attainment of their common objectives to their best advantage.

2. Objectives

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The objectives of this Unit are to:


i)

familiarise the students with the concept of cooperation,

ii)

help understand the history of Indian Cooperative Movement, and

iii)

have an idea regarding the present status of the cooperative movement.

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3. Meaning and Definition of Cooperation
A unique feature of cooperation is that although it is evolutionary in character and as a
concept, in practice, it becomes revolutionary in bringing about changes in social and economic
life. It should be realised that cooperation is a dynamic concept and not a conservative one.
The concept of cooperation, thus, envisages a group of persons having one or more
common economic needs, who voluntarily agree to pool their resources both human and
material and use them for mutual benefit, through an organisation managed by them on
democratic lines.
Cooperation has been looked upon as a socio-economic movement of significance. It
has proved very effective, as an instrument, for removing disparities in the distribution of wealth.
Though, it is difficult to claim that cooperation can help in the removal of poverty from its
roots, but it can certainly prove to be a powerful instrument in the reduction or minimisation
of poverty.
It plays a very important role in the development of any society or nation. It goes a long
way in up-lifting the standards and well-being of the masses. It puts all social tensions and
disturbances to an end with the help of the spirit of love, affection and brotherhood; it improves
the standard of living of the people by providing them proper education and training and by
inculcating among them a spirit for cooperation.
Cooperation is the only social process which is included in the definition of society. The
Dictionary of Sociology defines society as, a group of human beings cooperating in the pursuit
of several of their major interests, invariably including self-maintenance and self-perpetuation.
The value of cooperation lies primarily in the contribution which it can make in increasing
productivity and raising the standard of living, but it also contributes to the training of emergent
people in democracy, business administration and social responsibility.

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Cooperation is a means of achieving the common good of all. It is never considered as


an end in itself. It is no longer regarded as a welfare activity but the free people have adopted
it as a business organisation and a commercial proposition.
Cooperation has proved to be an executive instrument in removing the disparities in
the distribution of income and wealth. Village cooperatives, land cooperatives, credit
cooperatives and service cooperatives are doing yeoman service for the betterment of the living
conditions of the millions of small farmers. Cooperation has both the vision and strength to
uplift the poorer sections of the Indian community. Cooperation is not merely a movement but
is becoming a way of life. Cooperation in India has assumed lot of social importance, as it has
close access to a majority of the Indian population. Cooperatives can also help to eradicate the
exploitation of the labouring class by the capitalist class in a more democratic way.

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Cooperation can be defined in its simplest and most general form as an activity of two
or more individuals working together for their own good. In other words, through cooperation
people help themselves by helping one another.
The term cooperation has been defined by different scholars in different manners. Some
of the definitions are mentioned here:
According to H. Calvert, cooperation is a form of organisation, wherein persons
voluntarily associated together as human beings on the basis of equality for the promotion of
the economic interests of themselves.
Dr. C. R. Fay argued that, cooperation is an association for the purpose of joint trading
among the weak and conducted always in an unselfish spirit on such terms that all who are
prepared to assume the duties of membership may share its reward in proportion to the degree
in which they make use of their association.
Cooperative Planning Committee (1946) mentions that, cooperation is a form of
organisation in which persons voluntarily associate together on a basis of equality for the
promotion of their economic interests. Those who come together have a common economic
aim which they cannot achieve by individual isolated action because of the weakness of the
economic position of a large majority of them. This element of individual weakness is overcome
by the pooling of their resources by making self-help effective through mutual aid, and by
strengthening the bonds of oral solidarity among them.
Prof. Paul Lambert views cooperative as an enterprise formed and directed by an
association of users, applying within itself the rules of democracy and directly intended to serve
both its own members and the community as a whole.
Prof. Lamberts definition has been widely recognised by the co-operators all over the
world. The main emphasis is that cooperation aims at not only serving the members interest
but also of the community.
At present, the universally accepted definition of cooperation or cooperative is an
autonomous association of persons united voluntarily to meet their common economic, social
and cultural needs and aspirations through a jointly owned and democratically controlled
enterprise.

4. Evolution and Growth

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The origin of cooperation, as a movement, is about two centuries old. It was the chaotic
situation in the political and economic spheres of the European life which gave rise to
cooperatives as a movement. It was the threat of domination and exploitation by large business
houses that forced the people of Rochdale to come together in the Rochdale Society of Equitable
Pioneers to secure their household requirements at wholesale prices and thereby escaping from

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the exploitation of the traders. Thus, the origin of modern cooperative movement is credited to
the town of Rochdale, a city of 25,000 people in 1844 and another 40,000 people living in smaller
towns and villages nearby. Rochdale city was centre of the cotton and weaving of woollen
goods, especially flannel. The first ever attempt to start a cooperative failed but the people
who participated in it did not permit this failure to discourage them. In this way consumers
cooperative was initiated in England. Other champions of the British cooperative movement
were Robert Owen (1977-1858) and Dr. William King (1786-1865).
The first country in the world to apply the principles of cooperation in the field to credit
is Germany. The poor farmers of Germany under the guidance of Raiffeisen combined into
cooperative societies to obtain cheap credit for themselves. Another pioneer in the field of
providing relief to the poverty, famine stricken and indebted working class was M. Hermann
Schulze (1808-1833). In 1849, he founded his first ever society of shoemakers with the object of
making bulk purchase of raw materials and supplying it to members. In 1850, he founded his
first credit society in his native town with just 10 members, all of whom were artisans. However,
within two years it was remodelled as self-supporting institutions with capital and shares.
Raiffeisen started a cooperative society in 1848 to distribute potatoes and bread to the
poor, and later on in 1862 he started a cooperative society of which farmers themselves were
the members. Though both the cooperatives tried their best to render help to the people, still
there were fundamental differences in their ideologies. Raiffeisen believed that credit societies
were meant to help the members to improve their financial condition and thus, wanted the
members to help one another by pooling their meagre resources. Schulze, on the other hand,
believed that cooperative societies should be run on economic lines and, therefore, he tried to
make them economically viable so as to withstand all sorts of competition.

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Thus, the evils of the capitalistic system made social thinkers like Robert Owen (17771858) of England and Chario Fourier (1772-1837) of France to think of an alternative and better
system of economy. They thought and visualized an ideal form of society based on the principles
like association, voluntary nature of cooperation, social motive and democratic control. These
two people could, therefore, be considered to be the fathers of cooperation. Scarcely a nation
in the world is without something that is termed as cooperative organization. Socialist or
capitalist, developed or developing, young or old, they all claim such organization and most
nurture them. In recent decades, such nurturing has been specially pronounced in the newly
emerged third world developing countries.
The great depression in 1930 and the Second World War that broke out in the wake of it,
added impetus to the progress of the cooperative movement. Thus, cooperation grew in
adversity. The post Second World War period saw a rapid growth of the movement throughout
the world. Though the original theoretical principles propounded by pioneers like Robert Owen,
Raiffeisen, etc., have undergone a sea-change, they still constitute the backdrop of cooperative
ideas and practices.

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5. Salient Features of a Cooperative Organisation
In the light of various definitions given by different scholars on the subject, we can
arrive at certain essential salient features of any cooperative form of organisation. These are:
*

It is primarily an association of persons and the main thrust is on man and not on capital,
which is the life blood of corporate form of organisation.

It is a voluntary organisation and the members join it at their own will. They are never coerced
to join a cooperative society. Exerting any sort of influence or pressure on persons in
becoming members is against the very concept of cooperation.

It is always run as any other business enterprise, in the sense that the members not only
stand to share the gains but they also share the risks and undertake to bear the losses and
run the organisation at their own costs. It is not to be considered as a charitable association.

The main emphasis is not on the maximization of profits but to provide best service to the
members of the organisation at the most economical costs and to the best of members
advantages.

They are run by the members themselves. Each member enjoys only one vote irrespective
of the number of shares held by him/her. Thus, the system of democratic management is
very much evident in cooperative bodies.

No distinction is made between the members and all are treated alike. They are placed on
the basis of equality and no discrimination is made between them on the basis of race,
religion, caste, financial or social status. It exists on the basis of the well-known fact that
cooperation can exist only amongst the equals.

The profits of cooperation are distributed in proportion to the business done by its members
with the organization and not on the basis of their contribution towards the share capital of
the society.

The motto of cooperation is each for all and all for each, i.e., each member looks after the
interests and welfare of the whole body of its members. Thus, the essence of cooperation is
self-help.

6. Nature and Scope

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The nature of cooperation should be viewed from the angle that it is voluntary in action
and any cooperative organisation has to be brought up on the democratic principles. It is the
desire to join hands together and to associate with each in solving the common economic
problems that has led to the emergence of new form of business ownership on cooperative
lines. Thus, it is the economic compulsion that has encouraged cooperative efforts in practically
every field.
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The consumer cooperation in England was initiated to escape exploitation from the
rich business class. Subsequently, poor farmers of Germany joined hands and started the
cooperative credit movement to obtain cheap credit for themselves. With the spread of
industrialisation and all round development in the field of agriculture, a wide gulf grew up
between the farmer-producers and the ultimate consumers. The farmers found themselves at
the mercy of a long chain of middlemen, who exploited and forced them to pay high prices.
The major chunk of profits was pocketed by the middlemen. Thus, forced by the circumstances,
the farmers formed societies, i.e., agricultural cooperative societies and the consumers also
formed societies to make bulk purchases.
Cooperative activities have, over a period of time, entered in different branches of
economic activities. Today, these are found in production, consumption, service, credit, marketing
and other spheres of any economy.
The scope of cooperation is wide. The movement that started with consumer cooperation
has taken giant strides. Today, due to the need for specialization and the question of economic
viability of the cooperative organization, these have taken the form of service and multi-purpose
cooperative societies.
It is evident, therefore, that cooperation can be and has been successfully tried in areas
like consumption, production, distribution and exchange which are the four basic areas as
regards the scope of economic function.

7. Principles of Cooperation
All social and economic forms have their own Principles and definition of each concepts.
Cooperation has a set of Principles originally founded by the first successful promoters of
cooperation namely, the Rochdale Pioneers.
The International Cooperative Alliance (ICA) Commission (1966) on Cooperative
Principles faced the problem of defining the term principle. The working definition adopted
by the commission was: those practices which are essential, that is, absolutely indispensable
to the achievement of the cooperative movements purpose.

History of Principles of Cooperation - Rochdale Principles

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The Rochdale Pioneers, England, were the first to work out their aims and purposes, and
committed them into practice. The Rochdale Pioneers registered their first Cooperative Society
of Equitable Pioneers on 24th October 1844. The inspiration came to them from the preaching
and practices of Robert Owen and Dr. William King. The pioneers began to adopt the following
ideas, rules and practices, which are popularly known as Rochdale Principles:

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(i)

Democratic control

(ii)

Open membership

(iii)

Limited interest on capital

(iv)

Patronage dividend

(v)

Cash trading

(vi)

Sale of pure and unadulterated goods

(vii)

Education of members and

(viii)

Political and religious neutrality.

Later on, the spread of Cooperative Movement in Various Countries and the emergence
of different types of cooperatives warranted a change in the above principles from the point of
view of application. Hence, ICA Vienna Congress held in 1930 appointed a special committee in
order to state Rochdale principles in their final form.

ICA Principles Commission 1937

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Special committee presented to the 14th Congress of the ICA held at London, England in
1934 a report on the enquiry into the historical facts relating to the original statutes of Rochdale
Pioneers and their application by consumer cooperatives at that time. Some proposals of this
committee were opposed by some of the delegates. The London Congress remitted the report
to the special committee which took up the enquiry again. The new enquiry covered cooperative
wholesale societies, workers productive societies, agricultural productive societies, credit
societies and cooperative banks. The results of the ICA Special Committees Report entitled The
Current application of the Rochdale Principles of Cooperation was approved by 15 th Congress
held at Paris, France, in 1937. The first Commission (1937) recommended that the following
seven principles may be considered:
1)

Open membership,

2)

Democratic control

3)

Distribution of surplus to the members in proportion to their transactions

4)

Limited interest on capital

5)

Political and religious neutrality

6)

Cash trading

7)

Promotion of education

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The eighth principle, viz., the supply of pure and unadulterated goods, was omitted as
this would be taken for granted in these days in view of adoption of protective laws in various
Countries. The 1937 Committee suggested that the first four principles as essential principles
and the remaining three principles as non-essential.

ICA Principles Commission 1966


The social, political, economic, technical and structural changes in the economic systems,
the emphasis on managerial skills, progress in the cooperative movement, etc., again warranted
a need for a review of the Cooperative Principles in the 22nd ICA Congress held at Bournemouth,
England in 1963. In 1964, a Commission on Cooperative Principles was appointed under the
chairmanship of Prof. D.G. Karve.
The report of the Commission was approved at the 23rd ICA Congress held at Vienna,
Austria in 1966. The following are the six cooperative principles reformulated by this Second
Commission:
1)

Voluntary and open membership

2)

Democratic administration

3)

Limited interest on paid-up share capital

4)

Distribution of surplus to the members in proportion to their transaction

5)

Cooperative education

6)

Cooperation among cooperatives

The Sixth Principle, viz., Cooperation among Cooperatives, otherwise known as principle
of growth, is a new addition. This Second Commission on Cooperative Principles reaffirmed the
first four principles in a fuller form, However it observed, All those six principles possess equal
authority and must be equally observed. They form a system and are indispensable. They should
be observed in their entirety.

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ICA Principles Commission 1995


The 29th ICA Congress held at Stockholm, Sweden, in 1988, sensed a crisis around the
world, as the cooperative movement tried to maintain its distinctiveness from the investororiented sector and as it struggled in many countries to escape the dominating influence of
the governments. For example, between 1970 and 1995 the market economy had expanded its
impact dramatically around the world. Traditional trade barriers had changed scientifically and
many of those changes, such as the creation of free trade areas, the decline in government
support for agriculture, and the deregulation of the financial industries, threatened the economic
frameworks within which many cooperatives had functioned for decades. To prosper, in many

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instances merely to survive, cooperatives had to examine how they would react to these changed
circumstances.
Consequently, the ICA initiated a series of studies whose results were brought to the
30th Congress held at Tokyo, Japan, in 1992. The Tokyo Congress mandated the ICA to further
study various aspects relating to the Principles of Cooperative and to make recommendations
to the next Congress. At the 31st Congress (coinciding with the ICA Centennial 1895-1995) held
at Manchester, England, in 1995, was presented with the draft Statement of Cooperative Identity
and a background note in support of the Statement which were the product of a long interaction
among coordinators, a six-member primary reference group and an informal advisory panel of
fifty persons scattered around the world. The 31st Congress and the ICA General Assembly at
Manchester approved the Statement.
The Statement of the Cooperative Identity contains three distinct parts: definition of a
cooperative, basic value of cooperation and principles of cooperation. The principles are:
Voluntary and open membership, Democratic member control, Member economic participation,
Autonomy and independence, Education, Training and information, Cooperation among
cooperatives and Concern for community.

Voluntary and Open Membership


Cooperatives are voluntary organisations open to all persons who are able to use their
services and willing to accept the responsibilities of membership, without gender, social, racial,
political, or religious discrimination.

Democratic Member Control


Cooperatives are democratic organisations controlled by their members, who actively
participate in setting their policies and making decisions. Men and women serving as elected
representatives are accountable to the members. All members have equal voting rights (one
member, one vote).

Member Economic Participation

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Members contribute equitably to the capital of their cooperative. At least, part of that
capital is usually the common property of the cooperative. Members usually receive limited
compensation, if any, on capital subscribed as a condition of membership. Members allocate
surpluses for any of the following purposes: developing their cooperative, possibly by setting
up reserves, part of which at least would be indivisible; benefiting members in proportion to
their transactions with the cooperative; and supporting other activities approved by the
members.

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Autonomy and Independence
Cooperatives are autonomous, self-help organisations controlled by their members. If
they enter into agreements with other organisations, including governments, or raise capital
from external sources, they do so on terms that ensure democratic control by their members
and maintain their cooperative autonomy.

Education, Training and Information


Cooperatives provide education and training for their members, elected representatives,
managers, and employees so that they can contribute effectively to the development of their
cooperatives. They inform the general public, particularly young people and opinion leaders,
about the nature and benefits of cooperation.

Cooperation among Cooperatives


Cooperatives serve their members most effectively and strengthen the cooperative
movement by working together through local, state, national, and international structures.

Concern for Community


Cooperatives work for the sustainable development of their communities through
policies approved by their members.
The cooperative principles cumulatively are the life blood of the movement. Derived
from the values that have infused the movement from its beginnings, they shape the structures
and determine the attitudes that provide the movements distinctive perspectives. They are
the guidelines through which co-operators strive to develop their cooperative organisations.
They are inherently practical principles, fashioned as much by generations of experience as by
philosophical thought. They are, consequently, elastic, applicable with different degrees of detail
to different kinds of cooperatives in different kinds of situations. Above all, they require cooperators to make decisions: for example, as to the nature of the democracy of their institutions,
the roles of different stakeholders, and the allocation of surpluses that are created. They are the
essential qualities that make co-operators effective, cooperatives distinct, and the cooperative
movement valuable. Importantly, the principles that form the heart of cooperatives are not
independent of each other. Cooperatives should not be judged exclusively on the basis of any
one principle. They are subtly linked, when one is ignored, all get diminished. Rather, they should
be evaluated on how well they adhere to the principles as an entirety.

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8. Values of Cooperation
The General Assembly of the ICA, in its Centennial Congress held at Manchester in
September 1995 adopted a Statement on Cooperative Identity. This statement now replaced
the Principles of Cooperation approved by ICA Congress held at Vienna in 1966. The statement

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has three parts. The first part of the statement provides definition of Cooperation. The second
part identifies the values of Cooperation. The third part dwells upon the Principles of
Cooperation. The statement makes a clear distinction between cooperative values which are
absolute and must be adhered to by all cooperatives and cooperative principles which are in
the nature of operating rules, and, therefore, must be so framed by each sector of the movement
so as to demonstrate what the general principles mean for its operation, particularly in the
light of the contemporary circumstances.
The values as given in the statement on cooperative identity reads as follow:
Cooperatives are based on the values of self-help, self-responsibility, democracy, equality, equity
and solidarity. In the tradition of their founders cooperative members believe in the ethical
values of honesty, openness, social responsibility and caring for others. These values are briefly
explained hereunder:

Self-help
Self-help promotes mutual help. Self-help and mutual help constitute the foundation
of cooperative enterprise at micro-level. This value respects individuals capacity to solve their
own and communitys problems individually and collectively. This value makes an individual
member to realize his/ her inherent potential and strength.
Self-help is based on the belief that all people can and should strive to control their
own destiny. It emphasises that, first, each individual is responsible for his/ her own destiny
and, second, each individual must control his/ her own destiny. However, as an individual one is
limited in what one can try to do, what one can achieve, but through joint action and mutual
responsibility one can achieve more. Cooperative also provides opportunities to individuals to
develop themselves tone up their skills, improve their understanding and continue their
process of education.

Self-Responsibility
It represents that members take the responsibility to develop and run their enterprise.
Members decide the objectives and pattern of their business. Hence, the success or failure of
the cooperative rests with them. Members take the responsibility to promote cooperation
among their communities also. They need to demonstrate that a cooperative enterprise is a
countervailing force in the market to balance the supply and demand. They are ultimately
responsible for distinguishing their enterprise from other organisations.

Democracy

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It represents the democratic control and diffusion of power in the cooperative enterprise.
Democracy, says Paul Lambert, is the cardinal principle. It distinguishes cooperative business
most sharply from capitalist business, and it can be applied uniformly to any type of cooperative
business. It ensures one man one vote irrespective of members stake in the capital.

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Members are users of cooperative business. Therefore, naturally, the affairs of
cooperatives should be controlled by members. This would mean that the affairs should be
administered by persons elected or appointed in a manner agreed to by the members. Power
has been placed in the hands of member-users, who, in turn, actively participate in framing of
policies and taking decision. In short, equality among member-users is possible, only when
democracy is ensured.

Equality
A cooperative is based on equality equality of members, who are its basic units. This
basis in human personality is one of the main features distinguishing a cooperative from firm
controlled primarily in the interest of capital. Members have right of participation, a right to be
informed, heard and involved in making decisions. Members should be associated in a way that
as equal as possible without any discrimination on the basis of gender, religion, caste, creed,
race, amount of capital invested, political affiliation, etc. The concern for achieving and
maintaining equality by adopting the principle of one man one vote will be a continuing
challenge for all cooperatives.

Equity
This is another never ending challenge before the cooperatives. This refers to how the
members are treated in cooperative business. They are treated on par with their participation
with the business of cooperative enterprise. In other words, any surplus arising out of revenue
and expenditure of the transactions of the cooperative is treated in two ways. First, priority is
given for the capital formation to meet the future challenges. Second, the remaining will be
shared among the member-users on par with their transaction with the business of the
cooperative enterprise. This is, in fact, an automatic mechanism for the equitable distribution
of wealth.

Solidarity
It means that the cooperatives stand together for the collective interest. They stand for
economic distribution of goods and services by integrating local, state, national and
international cooperatives under a common umbrella. They believe that though the cooperatives
in different sectors and regions have different interest, they have certain commonalities for the
betterment of member communities, in particular, and human race, in general. In fact, solidarity
is the very cause and consequence of self-help and mutual help. This value demonstrates the
strength of cooperative movement to the individual members, the mass as well as other social
organisations.

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Ethical Values
Apart from the above, the cooperative members believe in the ethical values of
cooperation, such as honesty, openness, social responsibility, and caring for others. Founders of

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the cooperative movement not only believed in these basic values but also advocated that
they are above the influence of time, place and people.
Values are not external. They are dynamic. They are likely to change in accordance with
the changing environment. Cooperatives to be real and true need to inculcate certain basic
values. These values will distinguish them from other forms of organisations. Further, the basic
values of cooperation should be reflected in day-to-day functioning of cooperatives which
naturally requires imbibing these values in the minds of members of cooperatives through
education and training.

9. Objectives of Cooperation
According to ICA Commission, cooperation aims at something beyond the promotion
of the interests of the individual members who compose a cooperative. Its object is rather to
promote the progress and welfare of the humanity. It is this that makes a cooperative society
something different from an ordinary economic enterprise.
Cooperation is the concern of the weak. Persons individually weak can join together to
be cooperatively strong. They join together to do something which they cannot very well do as
individuals.
The aims or objectives of cooperation are:
1.

Provision of goods and services at cost to its members

2.

Elimination of unnecessary profit of middlemen in trade and commerce

3.

Prevention of the exploitation of the weaker members of the society

4.

Protection of the rights of the people in their dual capacity, i.e., both as producers and
consumers so that none is exploited by each other

5.

Promotion of mutual understanding and education among the members and, in the long
run, among people, i.e., society, in general.

The objectives of cooperation have been beautifully summed up by V.L. Mehta as, to
bring about, in a peaceful manner, social change of a far reaching nature to usher in a social
order, where exploitation is stopped and equality brought, irrespective of caste, colour and
creed; and to harmonise the dignity of the individual with the well being of the community.

10. Historical Profile of Cooperative Movement in India

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During the British rule, Nicholson, a British Officer in India, suggested to introduce
Raiffeisen Model of German Agricultural Credit Cooperatives in India. As a follow-up of that
recommendation, the first Cooperative Society Act of 1904 was enacted to enable formation of

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agricultural credit cooperatives in villages in India under Government sponsorship. With the
enactment of 1904 Act, cooperatives were to get a direct legal identity as every agricultural
cooperative was to be registered under that Act only. The 1904 Cooperative Societies Act was
repealed by 1912 Cooperative Societies Act which provided formation of cooperative societies
other than credit. Under 1919 Administrative Reforms Act, cooperatives was made a provincial
subject making each province responsible for cooperative development. In 1942, the British
Government enacted the Multi-Unit Cooperative Societies Act, 1942, with an objective to cover
societies whose operations are extended to more than one State. The impulses of the Indian
freedom movement gave birth to many initiatives and institutions in the post-independence
era. Armed with an experience of about 70 years in the working of Multi Unit Cooperative
Societies and the Multi-Unit Cooperative Societies Act, 1942 and 1984, the Central Government
enacted a comprehensive Act known as Multi State Cooperative Societies Act, 2002, repealing
the Act of 1942 and 1984.

11. Progress of Cooperatives at a Glance


Indian Cooperative Movement was basically organised against the exploitation of
unscrupulous moneylenders and to liberate the farming community from the web of poverty
and indebtedness. The Government took lot of measures to improve the conditions of the
farming sector and as such promoted Cooperative Credit Societies in the light of Raiffeisen
model credit societies on the basis of recommendation of Sir Fredrick Nicholson in 1889.
Today, cooperative movement in India is one of the largest movements in the world.
Initially, it was started with a limited spectrum of activities or dispensation of rural credit and it
has now entered in all fields of economic activity with social content. This movement has covered
100 per cent villages and 75 per cent rural households and is functioning over 545 thousand
cooperatives of various levels with membership coverage of 236 million and working capital of
Rs. 34,00,555 million, inclusive of credit and non-credit. It has been playing a significant role in
disbursing agricultural credit, distribution of agricultural inputs, providing market support,
processing, etc.

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The statistics indicate that modern cooperative movement has made tremendous
progress in every walk of its activities and occupies a major place in the share of the national
economy (Profile of Indian Co-operative Movement-2002). Thus, the importance of Cooperative
movement cannot be belittled. In this context, we are being reminded by the findings of the All
India Rural Credit Survey Committee 1954 that Cooperation has failed but it must succeed
and the comments of Royal Commission on Agriculture if the Co-operatives fail, this will be a
failure for best hope of India. It is, therefore, planners of post-independence era gave thrust to
the cooperative movement, and the then Prime Minister Jawaharlal Nehru wanted India to be
convulsed with co-operatives.

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12. Keywords
Collective action, common goals, mutual benefit, productivity, economic compulsion,
social responsibility

13. Summing up
To sum up, this unit brought out in brief the concept and meaning of cooperation. The
salient features, nature and scope of cooperation are explained in a lucid manner. The principles
of cooperation are presented in its historical perspective, i.e., beginning with Rochdale Pioneers
Principles and ending with ICA principles of cooperation as advocated in the Manchester
Congress. This unit also presented in brief the history and status of cooperative movement in
India.

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14. Know your Progress


1.

What is cooperation?

2.

Explain the concept of cooperation.

3.

Define cooperation

4.

What is nature of modern cooperation?

5.

Explain the scope of cooperation

6.

Bring out the Rochdale Principles of cooperation.

7.

What are the primary principles of cooperation?

8.

What were the reasons for changing the principles of cooperation at different points of
time?

9.

What were the circumstances under which changes in the principles of cooperation were
made in 1995?

10.

State the Principles of Cooperation, 1995.

11.

What are the values of cooperation?

12.

Describe the values of cooperation.

13.

What are the general objects of cooperation? Describe them.

14.

Trace the history of cooperative movement in India.

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15. Further Reading/References
Books
1.

Kulandaiswamy, V & O.R. Krishnaswamy (2000). Cooperation Concept and Theory.


Coimbatore: Arudra Academy.

2.

Mathur, B.S (2000). Cooperation in India. Agra: Sahitya Bhavan Publishers & Distributors Pvt
Ltd.

3.

Ravichandran, K & S. Nakkiran (2009). Cooperation Theory and Practice. Delhi: Abjeeth
Publications.

Journals
1.

The Co-operator published by NCUI, New Delhi.

2.

Cooperative Perspectives, published by VAMNICOM, Pune.

Articles
1.

Das, Banishree, Nirod Kumar Palai , and Kumar Das, Problems And Prospects Of the
Cooperative Movement In India under the Globalization Regime, paper presented in the
XIV International Economic History Congress, Helsinki 2006, Session 72

2.

Samantaray, P.C. (2004). Hundred Years of Co-operative Movement: Emerging Issues and
Challenges, Orissa Review, December 2004.

16. Model Answers


The cooperatives are organised for addressing common economic problems. They are
organised in all sectors that include production, marketing, service, manufacturing, financial
services, consumer and also large scale multi-purpose cooperatives.

7.

The principles of cooperation are democratic control, open membership, limited interest
on capital, patronage dividend, cash trading, sale of pure and unadulterated goods, education
of members and political and religious neutrality

11.

The values of cooperation are self-help, self-responsibility, democracy, equality, equity,


solidarity, and ethical values

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5.

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UNIT - 2 : AGRICULTURAL COOPERATIVES

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Structure
1.

Introduction

2.

Objective

3.

Characteristics of Agricultural Goods

4.

Different Forms of Agricultural Cooperatives

5.

Merits of Agricultural Cooperatives

6.

Agricultural Inputs and Role of Cooperatives

7.

Nature and Problems of Supply of Inputs by Cooperatives

8.

Price Policy for Inputs and Supplies

9.

Agricultural Insurance

10.

Status of Agricultural Cooperatives in India

11.

Keywords

12.

Summing up

13.

Know your Progress

14.

Further Reading/References

15.

Model Answers

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1. Introduction
The term agricultural cooperation includes all those activities which are organised on
cooperative lines for helping the farmer in the professional capacity as a producer. This form of
cooperation is of immense importance to developing countries where agriculture is the main
occupation of the people. In these countries agriculture suffers from a number of inherent
weaknesses, for example:
i.

the individual farmer cannot fight against the forces of market and is unable to obtain the
economies of large-scale production by his own efforts. Majority of farms are small and are
often scattered. In Africa and Asia, the average size of a family-farming plot is approximately
1 to 3 hectares. Many of these farms are hardly economically viable units. Because of the
small size, the individual farmer is not at all in a position to influence the market on his own;

ii.

the yield from investment in agriculture is on an average much below than that in industry
or trade, because of

1)

high inherent risk involved in production due to climatic factors and other contingencies;

2)

the high percentage of fixed costs and the long production cycle, making the agriculture
less flexible for coping up with sudden changes in demand;

3)

a highly imperfect market, perishable nature of many agricultural products and the lack of
sufficient and suitable storage and processing facilities owing to which the farmer is
compelled to sell his produce immediately; and

4)

difficulties in getting various financial needs.

In developing countries, these difficulties are increased by the predominance of the


agricultural sector in the economy, by the frequent lack of diversification, i.e., the dependence
on a smaller number of crops and by the envisaged rapid changes in agriculture from subsistence
farming to the cultivation of cash crops to supply to the growing urban population and to earn
foreign exchange through export in order to finance development. Further, the role of
agricultural cooperatives becomes significant due to the distinctive characteristics of agricultural
goods.

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2. Objective
The objective of this Unit is to familiarise you with the concept of agricultural
cooperation and make you to understand different aspects of agricultural cooperation.

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3. Characteristics of Agricultural Goods

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The characteristics of agricultural goods are:


1)

Small-scale production : Agricultural goods are produced in small, medium, and large sized
farms. But compared to industrial production the size is very small. The quantum of
production produced by farmers is usually low in developing countries compared to the
developed countries.

2)

Scattered production : Agricultural lands are spread out throughout a country and the farms
are spread out to farther places. But in the case of industries, in a small size area a factory
can be organised and large production can be arranged.

3)

Seasonal production : Unlike factory production, agricultural production is seasonal and


crops can be grown only according to certain seasons. So, agricultural production is decided
by seasons.

4)

Dependence on nature : Nature plays the crucial role in agricultural production. Agriculture
has to depend on rainfall, temperature, soil conditions, etc. Whenever rainfall is low or high,
agricultural production suffers. Erratic changes in climatic conditions also adversely affect
agricultural production.

5)

More bulky and less value : Agricultural commodities are very bulky and to the quantity and
weight of the commodity the value is very less. Due to this factor, difficulties arise in
transporting agricultural commodities form one part of the country to another. Transport
costs add to the cost of agricultural produces.

6)

Perishable in nature : Majority of the agricultural commodities are perishable in nature. Even
food grains like wheat, maize, etc., can be kept only for few months. On the other hand
products like vegetables, milk, flower, etc., are perishable in nature and cannot be kept for a
long time. Hence, they have to be sold within short period.

7)

Supply factor : Agricultural commodities are produced seasonally and supply reaches the
market during particular seasons. Hence, they have to be stored and kept safely for the rest
of the period. Modern stores are needed to store agricultural commodities from pest attack,
rat attack, etc.

8)

Demand factor: Demand for agricultural commodities cannot be increased suddenly like
industrial products. But processed agricultural commodities may get good demand and
surplus agricultural commodities can be exported.

9)

Larger dependence on agriculture : In less developed countries and developing countries,


majority of the population depends on agriculture whereas, in advanced and industrialised
countries less percentage of population depends on agriculture.

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4. Different Forms of Agricultural Cooperatives
Agricultural cooperatives are rendering number of services to the farmers like provision
of agricultural credit, marketing services, processing services, irrigation facilities, and allied
occupations like dairying and poultry. The following are some of the important agricultural
and agriculture-related cooperatives organised by cooperatives in developed countries and
developing countries:
Agricultural credit cooperatives : These agricultural credit cooperatives are organised from
village level to the national level with various structures or tiers. They provide short-term,
medium-term and long-term credit to the farmers. They provide banking facilities and attract
deposits from the farmers. In many developing countries agricultural credit cooperatives
are acting as multi-purpose cooperatives. By this process, in addition to agricultural credit,
they undertake marketing, processing activities and distribute consumer articles to them.

ii)

Marketing cooperatives : Marketing cooperatives supply inputs to the farmers and purchasing
agricultural produces and sell them for a higher price to the farmers. Marketing cooperatives
have removed the middlemen and brought lot of benefits to the farmers.

iii)

Processing cooperatives : Processing cooperatives are organised to convert raw agricultural


produces into a consumable form. Sugar cooperatives convert sugarcane juice into sugar;
cotton-processing cooperatives gin the cotton and separate cotton and cottonseed. Like
this, many of the agricultural produce are converted into value-added products.

iv)

Irrigation cooperatives : Irrigation cooperatives are organised by farmers who do not have
assured irrigation facilities. They extract water from various sources like canal, river, and
ground water and distribute water to the farmers. Small farmers are highly benefited by
such cooperatives.

v)

Dairy cooperatives : Dairy cooperatives provide assured income to the farmers. Many dairy
cooperatives have organized processing units and through them they manufacture dairy
products like cheese, butter, milk powder, etc.

vi)

Fisheries cooperatives : Though fishery is a separate occupation, fisheries cooperatives are


brought under the fold of agriculture-related cooperatives. There are two types of fishing,
inland fishing and marine fishing.

vii)

Agro-engineering cooperatives : Many small farmers cannot afford to purchase costly


agricultural machineries like tractor, sprayer, duster, and harvester. Such machines are
purchased by agro-engineering cooperatives and hire them to the farmers. Through such
efforts, agricultural activities are quickly undertaken.

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5. Merits of Agricultural Cooperatives
The services rendered by the agricultural cooperatives add merit to these cooperatives.
They are:
1.

Agricultural cooperatives provide services and supplies to the farmers. Services like
marketing, processing, and godown facilities are important for the farmers. Supplies include
input supplies, agricultural credit, consumer articles, etc.

2.

Agricultural cooperatives relieved the farmers from the exploitation of moneylenders,


middlemen and other intermediaries.

3.

Agricultural cooperatives supply all inputs at a reasonable price and sometimes below the
market price to the farmers and they save lot of money.

4.

Marketing cooperatives sell the produce of the farmers for a higher price and the middlemen
role is minimised and distress sale of agricultural commodities are eliminated.

5.

Processing cooperatives convert the raw agricultural produces into a consumable form and
provide value addition to the products. This process helps the farmers to fetch higher price
for their produces.

6.

Agricultural cooperatives benefit the consumers by means of distributing the agricultural


products at a reasonable price in the market

6. Agricultural Inputs and Role of Cooperatives


Generally, agricultural can be classified as primitive agriculture and modern agriculture.
Under primitive agriculture, farmers follow traditional methods of agriculture and they heavily
depend on nature. Deep ploughing, rotation of crops, application of manure, crop protection
measures, scientific marketing systems, etc., will not be followed under primitive agriculture.

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Under modern agriculture, farmers use improved seeds, manure and chemical fertilizers,
follow crop protection measures, and go for deep ploughing, rotation of crops, intensive
cultivation by way of taking more than one crop in a year on the same land. Assured irrigation
facilities are developed under modern agricultural system. To face the natural calamities, the
farmers are given crop and cattle insurance under modern agriculture. Here below, we can see
the important inputs needed for agriculture. Farmers are in need of the following inputs for
their agriculture:
1)

Improved seeds

2)

Fertilisers (manure and chemical)

3)

Pesticides

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4)

Fuel

5)

Agricultural credit

6)

Service inputs marketing, processing, equipment, insurance, hiring of machineries, etc.

1.
Improved Seeds : Improved seeds are one of the preconditions of modern agriculture
and total agricultural production. Improved seeds developed in agricultural research centres
have greater production potential and farmers must use them to increase their per hectare
production. But there are certain issues relating to the availability of improved seeds.
1)

Cost of the improved seeds : Compared to the traditional seeds collected in the farms by the
farmers, the improved seeds are costlier. But the production will be higher than the traditional
farm seeds.

2)

Timely availability : The farmers must get the improved seeds well before the sowing season.
So the cooperatives or other institutional agencies must take steps to provide the improved
seeds even before the sowing season.

3)

Multiplication of such seeds for future : In certain cases, improved seeds may have to be
imported from foreign countries. To multiply such seeds for the broader use of many farmers,
it may take lot of time. This is one of the difficulties of improved seeds.

4)

Finance required for the purchase : As the improved seeds are costlier, the cooperatives or
commercial banks must come forward to provide loans for the purchase of improved seeds.
Otherwise, the farmers may find it difficult to apply such seeds to the farms.

2.
Fertilisers : Farmers can use both manures and chemical fertilisers. Manure is obtained
from cattle and it has become scarce due to the decreasing cattle population and the increased
demand for fertilisers. So, the alternative for the farmers is to go for chemical fertilisers, which
are manufactured in the factories. The tasks included in fertiliser are as follows:
Forecasting the demand by season, location, and type of fertiliser It is very difficult to
forecast the exact demand for fertilisers. The use of fertiliser depends on the type of crop
and the season in which they are going to cultivate such crops. Farmers may also be in need
of various types of fertilisers like Di Ammonium Phosphate(DAP), Urea, mixtures, etc. It is
slightly difficult to assess the quantity of each fertiliser needed by the farmers.

2)

Transport and distribution channels Chemical fertilisers are manufactured either in a


particular country or imported by certain countries like Ethiopia. From the production centre
or the harbour terminal fertilisers are to be transported quickly and safely. Again, from the
producer or importer, the fertilisers have to be distributed through the wholesalers, retailers,
or cooperatives. An effective and efficient distribution channel alone can do good to the
farmers. Cooperatives are the most suitable agencies to distribute fertilisers to the farmers
quickly and at a reasonable price.

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3)

Credit needed to procure fertilisers Fertiliser, as an input is costlier. The farmers are in need
of finance, which can be provided by cooperatives or commercial banks. Without such credit
arrangements, small farmers and poor farmers cannot get fertiliser.

4)

Advisory and demonstration services at the farm levels Farmers are in need of advisory
services through extension workers about the type of fertiliser to be applied and what time
to be applied. It is the duty of the agricultural extension department to undertake such
activities.

5)

Cost of fertilisers When fertiliser is imported by private merchants, naturally the cost will
be high. If fertiliser if imported by cooperatives and distributed through cooperatives, farmers
get lot of benefits. For example, in Ethiopia, cooperative unions distribute the fertilisers below
Birr 50 per quintal than the market price.

6)

Effects relating to fertility of the soil, environmental degradation, etc., continuous use of
chemical fertilisers would be harmful to the soil. So, the farmers must complement natural
manure with chemical fertilisers to keep the fertility of the soil intact and to avoid harmful
effects of chemical fertilisers.

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3.
Pesticides/Herbicides : Intensive agriculture led to the application of improved seeds
and chemical fertilisers, which resulted in the multiplication of pest attack on crops. Farmers
are in need of the application of chemical pesticides, fungicides, etc. Certain issues relating to
the application of pesticides are as follows:
1)

The higher cost of pesticides : Like improved seeds and fertilizers, the cost of pesticides is
high. So, the farmers must be provided with credit facilities.

2)

Implements needed for its application : To apply pesticides, instruments like sprayers and
dusters are needed. These are costlier and an ordinary farmer cannot purchase it for use. So,
facilities must be made by agencies like cooperatives to hire such instruments.

3)

Harmful effects of chemical pesticides on the crop : Before applying the chemical pesticides,
the farmers must consult the agricultural extension workers. Steps must be taken to avoid
the harmful effects of chemical pesticides. Natural herbicides like neem powder can be
substituted with chemical pesticides.

4)

Environmental degradation : Care should be taken that soil conditions are not spoiled by
chemical pesticides. Chemical should not also pollute water and the environment. Too much
chemicals may also be not good for vegetables and fruits, which are consumed by human
beings.

5)

Immunity for the pest : Continuous application of chemical pesticides may make the pest
immune to such things, which may demand more doses of chemicals. Here, farmers have to
be careful.

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4.

Fuel: Now-a-day, farmers are in need of fuel, like petrol and diesel, to operate pump sets,
tractor, harvester, etc. Electricity can supplement fuel in certain activities. Improved methods
of agriculture demand assured irrigation facilities to the farmers. In remote areas, and in
areas where canal or river irrigation is possible, farmers have to get the ground water through
motor pump sets, for which fuel or electricity is needed.

5.

Agricultural Credit : Agricultural credit is the basic input, which is called as prime mover for
agricultural development. Through adequate credit farmers can purchase the needed inputs
like seeds, fertiliser, pesticides, etc. A farmer is in need of three types of credit

6.

1)

Short-term credit such credit is needed for a period of 3 months 15 months for the
purchase of inputs, to meet farm expenses like the payment of wages, payment of
electricity fees, taxes, etc.

2)

Medium-term credit such credit is needed for a period of 15 months 5 years. Such
credit is needed for the purchase of agricultural implements, purchase of cattle and milch
animals, for the erection of pump sets, etc.

3)

Long-term credit Long-term credit is needed for a period of 5 years 15 to 20 years. It


is needed to make permanent improvements on land like levelling of land, constructing
bunds, fending the farmland, construction of farm shades, to dig wells and construct ponds
for irrigation. It is also needed to purchase heavy agricultural implements like tractor,
harvester, thresher, etc. Long-term credit is also needed to purchase new lands for
extending farmlands.

Service Inputs: Farmers are in need of service inputs like marketing services, processing
services, transport services, hiring of agricultural machineries, insurance, etc. Marketing is
an important service needed for farmers. There are two types of marketing undertaken by
marketing agencies, namely input marketing and output marketing. Input marketing denotes
the supply of improved seeds, chemical fertilisers and pesticides to the farmers. Output
marketing implies the selling of agricultural produce to the market.

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Cooperatives are considered to be the better agencies in providing marketing services


to the farmers. Transport, grading, weighing, and storing are some of the services related to
marketing services. Closely related to the marketing service is the processing service to be
undertaken for the farmers. Through processing activity a raw agricultural commodity is
converted into next form. For example, conversion of wheat flour from raw wheat is a processing
activity. Through processing activity value addition is given to the farmers, which fetches a
higher price to their produce compared to the selling of raw agricultural produces.
Hiring of agricultural machineries is one more service inputs needed for the farmers. As
agricultural machineries are costlier, all farmers cannot purchase costly machineries. So,
institutions like cooperatives can purchase such costly machineries and hire them to the farmers.
Important agricultural machineries are tractor, sprayer, duster, harvester, etc. Insurance is another
important service to be given to farmers. To protect the farmers crop from natural calamities,

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crop insurance has been introduced. To protect the livestock, cattle insurance has been
introduced. Such insurance services are undertaken by cooperatives, commercial banks, and
insurance companies.

7. Nature and Problems of Supply of Inputs by Cooperatives


With the development of modern scientific agricultural methods the dependence of
the cultivator has largely increased during recent decades on outside supplies. With a view to
maintaining a constant flow of supply of essential agricultural services the farmers require
efficient machinery. The private trader cannot possibly serve the purpose. The farmers, therefore,
have to look to a cooperative society for supplying the required agricultural services. Such a
society can help in keeping the prices of essential agricultural supplies at a reasonable level
and also in supplying goods and services of proper type, standard and quality, which are required
by the farmer for his agricultural operations.
Agricultural supplies can be organised through cooperatives. They collect orders from
members and distribute them from door to door. One great advantage of such an organisation
is that the administrative cost is reduced to the minimum. The agricultural cooperative society
may have a number of functions. It may engage in the supply of basic farm requisites. E.g. artificial
fertilisers, quality seed, chemicals, tools, fuel, lubricating oil, etc. The society has to maintain a
stock of assorted supplies. The quantity of the commodity to be ordered will be determined on
the basis of the estimated total demand for a particular period.
The size of the order will, therefore, depend on:
1)

the period for which the demand has been calculated;

2)

the available storage space; and

3)

the available capital.

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Then the society will have to make a useful study of the various sources of the supply of
required articles. The offers received from various firms will have to be compared in respect of
the price, terms of delivery, the terms of payment, the delivery schedule, the reputation and
reliability of the firm concerned. It may be possible that the society may itself undertake the
production of the necessary supplies, but in all cases it cannot be possible. The society may
have to face a number of problems in respect of storage space. It is necessary that the society
should have a good extension service. The society will have to take care of the fact that it will
sell to its members the articles that they require. The type of extension service can be carried
out:
1)

by the society itself; or

2)

by specialists employed for the purpose or obtain direct from the secondary organisations;
and

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3)

by outside organisations like the farmers unions, the Government Departments, etc. Various
methods used for such extension activities are: individual advice, organisation of training
courses. On-the -spot demonstrations, lectures, film shows, etc.

Supplies can either be delivered at the farms or collected by the members. Which of
two to choose will depend largely on whether the society has the necessary transport facilities
and is in a position to bear the cost of transport without increasing the price of the commodity,
or the farmer is willing to pay the extra delivery cost. Besides, the accessibility of the individual
farm, the average distance between the members farm and the societys premises and the means
of transport available, the average bulk and weight of each consignment, and the presence of
competitors will also have to be taken into account.

8. Price Policy for Inputs and Supplies


The price policy adopted by a society is of great significance and depends, by and large,
on the mode of operation. A society acting as an agent for its members, does not necessarily
frame its own price policy. A society, which buys articles for supplying to the members at its
own risk and responsibility, is completely free to frame its own price policy.
The price policy will depend on:
1)

Whether the society should charge uniform prices from all member; and

2)

Whether the society should charge different prices from different members according to
the size of the order, time or distance, etc.

There can also be another basis for the calculation of the price and that is whether all
the articles should be sold on the same percentage of commission or the percentage of
commission should be different for different groups of commodities. The differential prices
may be determined:
1)

By distributing the total cost amongst single commodity group.

2)

This will be an objective approach and according to the commodity groups, which allow
high margins, are charged with the main bulk of expenditure without taking into account
the true cost structure and the same will be to cover the total cost of operation. This will be
a subjective approach.

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9. Agricultural Insurance
Farming involves more risks than any other business since it is greatly dependent on
climatic conditions. Moreover, crops can be seriously damaged by pests and diseases. Although
by the application of modern farming techniques these risks can be kept at a reasonable level,
the farmer is never able to do away with them completely. Consequently, in developing countries
the farmers very existence is in danger.
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Agriculture has two types of insurance, namely crop insurance and cattle insurance.
Agricultural insurance schemes have been formed through cooperative effort in various
countries for the protection of the farmers from these risks. Cooperative agricultural insurance
society protects the farmer against losses and damage and acts as an additional source for the
supply of capital for the cooperative movement. The success of such a society depends largely
on the fact as to how far it is able to spread the risk over the widest possible area and the
maximum number of members. Such societies have been organized at regional and national
levels and, sometimes, they have a strong secondary system. In certain cases, cooperative
marketing societies are also engaged in providing insurance services to their members. These
societies cover:
1)

general risks, which the farmer faces, e.g., fire, accident, burglary, etc.; and

2)

specific risks inherent in agricultural operations.

Cooperative insurance societies have also been covering the risk of other primary and
secondary cooperative organisations. The risk can be covered by such societies either fully or
partly. Full risk is covered when the crop or the animal involved is covered against all possible
natural risks, while the risk is partially covered in the case of single or specific risks. A particular
risk to be covered is chosen on the basis of:
1)

the relative economic importance of the crop or livestock covered;

2)

the nature of the risk involved, and

3)

whether the risk is assessable.


Agricultural insurance cooperatives also perform some other functions like :

1)

insurance counselling;

2)

assessment of insurable interest;

3)

under-writing of the insurance bills;

4)

inspection of the insured property;

5)

collection of premium; and

6)

processing of the claims.

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The compensation offered for any loss or damage is generally less than the actual cost
involved. The basis for such compensation in the case of crop insurance is either the long-term
average yield per acre or the specific yields of a represen-tative farm. The rate of compensation
is usually progressive. Similar pattern is followed in livestock insurance. The premiums are

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calculated in such a way that the administrative cost and normal losses during the contract
period are easily covered. In agricultural insurance abnormal risk has its own significance,
because crop failures and epidemics are generally widespread. As the premiums are calculated
on the basis of normal risks, the society has to make some provisions for covering abnormal
risks. These provisions may be:
1)

A strong reserve fund and

2)

Reinsurance of a part or of the entire abnormal risks with other insurance organisations.

In practice, a combination of both these provisions is found. In developing countries,


the problem of agricultural insurance is a ticklish one. There may be more than one reason for
this.
1.

It is not easy to calculate the risk accurately owing to the lack of statistical data;

2.

Trained and qualified persons are not available for insurance work;

3.

The risk involved is generally higher than in other countries owing to the ignorance of the
farmer, outmoded farming techniques, inadequate veterinary services, low quality of livestock
and dependence on climatic conditions; and

4.

Farmers can hardly afford to pay for insurance.

It is because of these difficulties that agricultural insurance schemes have not gained
much headway in these countries.

10. Status of Agricultural Cooperatives in India


Agricultural cooperatives have established strongest cooperative network in the country,
wherein the Primary Agricultural Cooperative Societies (PACS) formed the kernel of the
cooperative movement.
The Principle of Cooperation among cooperatives has been promoting the agricultural
cooperative business through the formation of federal structures at every level and the
implementation of the schemes like linking of credit with marketing.

2)

Agricultural cooperatives in the country have realised that white revolution and green
revolution enhanced the income of the rural population.

3)

Through the scheme State Partnership, both Central and State governments have been
contributing to the share capital of these cooperatives and are strengthening their working
capital base.

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1)

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4)

District Central Cooperative Banks (DCCBs) are acting as financing bank for all these
cooperatives at District level and the State Cooperative Banks facilitates the smooth flow of
needed financial assistance to these cooperatives at the State level.

5)

The National Bank for Agriculture and Rural Development (NABARD) provides special
assistance for the effective functioning of these cooperatives.

6)

The Indian Farmers Fertilizer Cooperative Ltd (IFFCO) and the Krishak Bharathi Cooperative
Ltd (KRIBHCO) have been satisfying the fertilizer demand of the farming in the country.

7)

Anand Pattern dairy cooperatives promoted by the National Cooperative Dairy Federation
of India Ltd., have become the model in the world

Like these, the list of laurels of the agricultural cooperatives in India is exhaustive.
However, there are still many miles to go.

11. Keywords
Scattered production, seasonal production, service inputs, price control

12. Summing up
Needless to say that the agricultural cooperatives are the organisations formulated by
the small farmers aiming at securing the maximum profit by making use of collective and
organised power to the possible extent. For this purpose, an agricultural cooperative provides
member farmers with necessary services, such as farm guidance, supply of agricultural inputs,
processing and marketing of agricultural produces and finances, etc. These services should be
organised not independently but linked with one another. Especially with a view to realizing
the best returns, planned marketing may be the most important one. In order to bring about
planned marketing, planned production or planned farm management should be an essential
condition. Now it has become indispensable to link production with cooperative marketing,
processing and consumer business. Agricultural cooperatives play significant role in this
direction throughout the world.

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13. Know your Progress


1.

What do you understand by agricultural cooperation?

2.

What are the different forms of agricultural cooperatives?

3.

Explain the characteristics of agricultural goods.

4.

Describe the advantages of agricultural cooperatives.

5.

What are roles played by the cooperatives for the promotion of agriculture?

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6.

Write briefly on the structure of agricultural credit cooperatives.

7.

What do you understand by service input?

8.

State the different service inputs provided by the agricultural cooperatives.

9.

What is agricultural insurance? State its significance.

10.

Describe the status of agricultural cooperatives in India.

14. Further Reading/References


Books
1.

K. Ravichandran & S. Nakkiran. (2009). Cooperation Theory and Practice. Delhi: Abjeeth
Publications.

2.

B.S. Mathur. (2000). Cooperation in India. Agra: Sahitya Bhavan Publishers & Distributors P
Ltd.

Journals
1.

The Cooperator, published by NCUI, New Delhi.

2.

Cooperative Perspectives, published by VAMNICOM, Pune.

3.

NCDC Bulletin, published by NCDC, New Delhi.

15. Model Answers


They are agricultural credit cooperatives, marketing cooperatives, processing cooperatives,
irrigation cooperatives, dairy cooperatives, fisheries cooperatives, agro-engineering
cooperatives.

4.

Agricultural cooperatives can provide services and supply of inputs to the farmers, price
stabilisation, processing facilities for value addition.

8.

The different service inputs provided by the agricultural cooperatives include marketing
services, processing services, transport services, hiring of agricultural machineries, insurance,
etc.

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2.

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UNIT - 3 : CONSUMER COOPERATIVES

SRD II (N) 6

Structure
1.

Introduction

2.

Objective

3.

Need for / Advantages of Consumer Cooperatives

4.

Working of Consumer Cooperatives

5.

Why the Consumer Cooperatives must apply Management Techniques?

6.

Causes of Poor Performance in Developing Countries

7.

Problems of Consumer Cooperatives

8.

Suggestions for Improving Business Techniques and Operations

9.

Consumers Cooperatives in India

10.

Causes for Slow Growth of Consumers Cooperatives in India

11.

Keywords

12.

Summing up

13.

Know your Progress

14.

Further Reading/References

15.

Model Answers

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1. Introduction
The history of consumers cooperatives starts with the works of Rochdale Pioneers. It
was Rochdale Pioneers who showed the seed for modern Cooperation in the world. In 1844, a
batch of 28 weavers formed a society in Toad lane in Rochdale of England and it was named as
Rochdale Society of Equitable Pioneers. The consumers cooperative movement gradually started
to grow throughout the world and played significant role in holding the price line of essential
commodities. The movement has achieved spectacular success in the countries like England,
Sweden, Denmark, and Finland.
The main object of a consumer store is to serve its members and customers with goods
required by them for household consumption. It is expected to provide goods at reasonable
price and to protect the interest of the members. These stores are also expected to stabilize the
price line and check the exploitation of the consumers by the private business.
The main achievements of consumer cooperatives are:
1.

Reduction in costs of retailing with advantages accruing to consumers, thus making possible
more savings and higher standard of living and contributing to economic stability.

2.

Provision of better quality goods.

3.

Promotion of thrift and consequent increase in economic security of members.

4.

Education in intelligent buying, family budgeting and general economics.

5.

Check on monopoly by cooperative competition and profiteering.

Consumer cooperatives are one of the important cooperatives found in almost all
countries. Consumer cooperatives work for the welfare of the consumers by means of providing
pure goods at reasonable prices and relieve the consumers from the exploitation of middlemen.

2. Objectives
To familiarise you with the concept and meaning of consumer cooperatives,

ii)

To help you understand the constitution, functions and problems of consumer cooperatives,
in general, and Indian consumer movement, in particular.

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3. Need for / Advantages of Consumer Cooperatives
1.

Consumer cooperatives help the consumers from exploitation by merchants. The hold of
the private traders in consumer business is very strong. There are very many intermediaries
between the producer and the consumer. They take away a portion of the price paid by the
consumer and exploit the consumers. This is avoided by consumer cooperatives.

2.

They provide pure and unadulterated goods. Since the days of Rochdale Pioneers, consumer
cooperatives have made it a point to provide only pure and unadulterated goods. Quality
consciousness is always with the consumer cooperatives.

3.

Consumer cooperatives distribute the articles for a lower price than market price because
consumer cooperative go for bulk purchase of commodities through their wholesale stores.
The wholesale stores purchase the commodities at the production centre or manufacturing
centres and distribute them at a low margin to the primary cooperatives. In turn, the primary
cooperatives sell the goods for a lower price.

4.

They help to bring down the market price. Market price is influenced mainly by the private
traders. Wherever the number of consumer cooperatives is high, they are able to bring down
the market price also.

5.

Consumers are able to get all items in one place. The organisation of departmental stores or
supermarkets by the consumer cooperatives made it convenient for the consumers to get
all the goods under one place.

6.

Bulk purchase and purchase at production centres provide the economies of scale. Consumer
cooperatives go for huge volume of purchase and the benefit is transferred to the consumers.

7.

During the times of scarcity, they help the free flow of goods at a reasonable price.
Cooperatives are not profit oriented organizations and in many countries to distribute the
essential consumer goods, governments have authorized them as the sole agency. Consumer
cooperatives avoid the scarcity by means of keeping enough stock to the consumers.

4. Working of Consumer Cooperatives


There are various types of consumer cooperatives. Specialised consumer cooperatives
are meant for factory workers, employees, and students. Consumer cooperatives are also
classified as rural and urban consumer cooperatives. The membership of consumer cooperatives
is open to all types of people but the consumer cooperatives for workers, employees and
students; the membership is confined to that category of people. Ordinary consumer
cooperatives and cooperative super markets serve the non-members also.

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Consumer cooperatives operate through federal set up. At the lower level, primary
consumer cooperatives and cooperative super markets are there. At the district and regional

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level cooperative wholesale stores (UK Model) operate. Consumer federations function at the
regional level or national level. The function of the wholesale stores and the federations is to
purchase consumer goods in bulk quantities and supply them to the primary stores. In several
countries apex consumer societies are engaged in manufacturing of consumer goods. For e.g.,
in Sweden, the KF (National Federation of Consumer Cooperatives) is engaged in manufacturing
of consumer articles.

5. Why the Consumer Cooperatives must apply Management Techniques?


1.

Consumer cooperatives have come to occupy a significant place in our distributive system.
In all our national schemes priority has been given to the consumer cooperatives.

2.

The importance of consumer cooperatives will long last only when they increase their
competitive power. To compete with the private traders, the stores must enhance their quality
of service by applying scientific principles of management.

3.

The volumes of transactions handled by stores have been going on increasing year after
year. The quantity must justify quality also. Better management will ensure quality of foods
and service.

4.

Consumer cooperatives have been branded as the stabilizers of price level. They can check
the erratic upward trend of price level. This has been amply proved by many of the consumers
cooperatives and Super Bazaars in various parts of our country.

5.

To modernise their service techniques and to promote the loyalty of the consumers, the
stores have to introduce scientific techniques of management.

6. Causes of Poor Performance in Developing Countries

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The consumer cooperative movement has not been able to make much headway. It has
so far not succeeded in acting as price- setter in the market and has not made any significant
contribution to holding the price line. The consumer stores are suffering from a number of
structural, operational, and administrative weaknesses. Most of these weaknesses have arisen
as a result of their accelerated unplanned growth. Some of the important factors, which retarded
the sound growth, and working of the consumer cooperatives in developing countries are as
under.
1.

Indifference of the state/national government : The biggest single factor accounting for the
poor performance was the apathetic and indifferent attitude of the government for a long
time. Supplies to the stores were not regular and preference was given to private agencies,
members of the cooperatives suffered on that account.

2.

Narrow basis of operation : One flagrant defect of these stores is the narrow basis of their
operations. Most of them deal in limited number of commodities and, hence, the customers
are not in a position to get most of their requirements from the store.

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3.

Small and uneconomic sizes : Most of the primary stores have been very small and non-viable
units. They have poor membership, inadequate working capital and their average sales have
been so low that they could hardly meet their ordinary expenditure. On account of their
uneconomic size most of them were not making profits or were incurring losses.

4.

Inadequacy of funds : Lack of adequate finance has been another important handicap in the
working of the stores. Most of the primary stores failed to collect large amounts of share
capital and banking institutions did not oblige them with funds, as they had no faith in the
efficient working of these stores.

5.

Lack of efficient management : Most of the stores are manned by persons who have had
hardly any experience of business. On account of the inefficient management the cooperative
stores could not compete with private retail traders who are generally so well versed in the
art of managing their small unit.

6.

Lack of loyalty on the part of members : The success of a cooperative store depends upon the
unflinching and continuous loyalty of its members. However, the members of the store have
not shown this loyalty. Most of the members patronise the store so long as their prices are
lower than those of the market. Even at the same price they have not shown any preference
to the stores.

7.

High cost of management : The high cost of management has been another factor for the
failure of the store movement. The private trader is free from a number of overhead expenses,
which are so common in most of the consumer stores. A private trader thus enjoys many
relative advantages over the consumer stores.

8.

Lack of link with other Cooperative : The consumers cooperatives have not established any
link with producers and marketing cooperatives. The consumers store also does not make
purchases from the marketing and other cooperatives.

9.

Dishonesty of the employees and management : Some of the stores have come to the grief
because of the dishonesty of their employees. No action was taken against the employees
who had misappropriated the store money. Inefficiency; red-tapism, nepotism, and
corruption have crept into the vitals of some of the stores.

10.

Defective price and purchase policy : Some of the stores had not followed a sound price and
purchase Policy. In planning and formulating these policies power is exercised by the
chairman or secretary or the executive officer alone or in consultation with one another.
The lack of proper purchase policy has been responsible for heavy losses in many of the
stores.
In short, following factors can be held responsible for causing losses to the consumer

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stores:

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a)

Adverse price fluctuations in agricultural commodities;

b)

High overhead costs;

c)

Low margin of profits;

d)

Running small and uneconomic units;

e)

Dealing mainly in controlled commodities;

f)

Injudicious purchases;

g)

Mismanagement and misappropriation; and

h)

Locking up of funds in slow moving and un-saleable articles.

7. Problems of Consumer Cooperatives


Disloyalty of members is a great problem for the consumer cooperatives. Members go to
consumer cooperatives when there is scarcity and the price is low or for purchase of
controlled commodities. Other times, they go to the private shops.

2.

Rising of working capital is another problem for consumer cooperatives. Many of the
cooperative banking institutions are meant for agricultural cooperatives and there is no
separate cooperative financing agency for consumer cooperatives.

3.

They have to work under stiff competition from private traders. Private traders join together
and sometimes try to weaken the consumer cooperatives.

4.

In several countries, the absence of federal consumer cooperatives has weakened the
position of consumer cooperatives. Federal cooperatives are needed for bulk purchases, to
provide training, to guide the primary stores and to raise resources.

5.

In developing countries government interference affects the working of the consumer


cooperatives. Consumer cooperatives are compelled to distribute scarce consumer goods
for a lower price.

6.

Personnel efficiency is also questionable in consumer cooperatives. The employees of


consumer cooperative must be given continuous training in customer attraction and
improving their working.

7.

Lack of integration between consumer cooperatives, producers cooperatives and marketing


cooperatives is a cause of concern.

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1.

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8. Suggestions for Improving Business Techniques and Operations


1.

Primary store should aim at providing variety of goods and serving larger interest of
members. This should depend upon local conditions and the needs of consumers.

2.

Consumer stores should make bulk purchases through appropriate cooperative agencies
or efforts like Joint Purchase Committees in Tamil Nadu, India.

3.

Important consumer stores should undertake processing activities like oil-extraction, flour
making, etc.

4.

Government should give positive preference to consumer stores in the matter of granting
import licenses and supply of goods to Government Departments or projects.

5.

Credit sales should be undertaken only by institutional stores where there is an agreement
between the store and the employer that the credit amount due to a member would be
deducted from his salary.

6.

Consumer stores should pay patronage dividend on the basis of the purchases.

7.

Stores should lay special emphasis on suitable purchase and price policy.

8.

Consumer stores should introduce home delivery services to stimulate sales.

9.

The stores should pay special attention to the quality of goods.

10.

The stores should make bulk purchases and establish direct contacts with reputed
manufacturers for securing wholesale agencies.

11.

The board of directors should consist of persons who have some business experience and
who can inspire confidence in the public. All the staff of the store should be properly trained.

12.

Salesmen should be induced to promote sales by offering them commission on sales,


exceeding a certain minimum limit.

13.

A proper system of supervision and checking should be introduced.

14.

Managers should be given full freedom to carry out the policies laid down by the board of
directors.

15.

Stress should be laid on the importance of prompt and correct maintenance of accounts
and audit.

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9. Consumers Cooperatives in India
In India a consumers cooperative store is a voluntary organisation of consumers,
organised to obtain their requirements of consumer goods and services on terms of greatest
advantage to them. This type of cooperative undertakes retailing, wholesaling and, sometimes,
the production and processing of consumer goods. The immediate objective of consumers
cooperative stores is to satisfy the requirements of essential commodities of their members
better and more economically than is done by existing institutions or private trade. In other
words, the consumers can obtain what they want and the quality they want. In India consumers
cooperative made progress only during the war period.
Importance of Consumer Cooperatives
1.

To sell goods at correct weight and at reasonable price

2.

To distribute the rationed articles

3.

To reduce the price spread by linking the consumer with the producer by linking of Credit
Marketing

4.

To maintain economics of scale in retail distribution by purchasing the goods in bulk.

5.

To put check to the arbitrary price rise for essential commodities in the market by holding
Active Price Policy

6.

To safeguard the interest of consumer against the exploitation nature of middlemen.

Organisational Pattern
There has been no uniformity in the organisation of consumers stores in the country.
The organisational structure is generally a two-tiered one. Some States have adopted the unitary
system while others have the federal pattern. In some States the mixed pattern is also found.
The deferent type of stores ensures autonomy and decentralisation and inculcates cooperative
spirit amongst the members. The unitary stores enjoy all the economics of large scale. The
functions of each tier are discussed here.

Primary Consumer Cooperative stores

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Membership and share capital


Any person who is competent to contract and is residing within the area of operations
of the society is eligible for admission as members. The Government has approved the following
institutions for the purpose of eligibility for admission as members of consumers societies
(including wholesale stores):

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1.

Religious institutions;

2.

Educational institutions;

3.

Medical institutions;

4.

Social organisations;

5.

Canteens;

6.

Joint stock companies, partnership firms; and

7.

Local bodies

Normally, the value of share is fixed at Rs.10. The maximum borrowing power of primary
stores and wholesale stores is normally fixed at eight times of the paid up share capital plus the
reserve fund. It is, however, competent for the society to borrow in excess of this limit with the
previous sanction of the Registrar and subject to such conditions as the Registrar may impose.

Functions of wholesale stores

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The Committee on Consumers Cooperatives summed-up the following as the functions


of the wholesale stores.
1.

Procure and store consumers goods for supply to primary stores.

2.

Maintain close coordination with marketing, processing and industrial cooperatives of the
area for making direct purchase from them.

3.

Undertake processing and manufacture of consumers articles as and when possible.

4.

Supervise and advise members of primary stores on management, business techniques,


etc.

5.

Open branches, if necessary, to feed members stores.

6.

Organise independent stores in new areas where consumers stores have not come up.

7.

Take up import of consumer goods, on behalf of constituent stores and function as an agent
of Government for the distribution of short supply or controlled commodities through
member stores or otherwise.

8.

Recommended loan applications of primary stores to District Central Cooperative Banks,


etc.

9.

Undertake generally all such functions as may help development of consumers movement
within its area of operation.

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State Federations
The Government of India started a scheme for organising separate federations of
wholesale consumer cooperative societies in each state with a view to coordinating and
facilitating the working of wholesale stores and also to assist promotion, organisation and
development of consumer cooperatives in the State. These federations are expected to perform
the following functions:
1.

To make bulk purchases of consumer goods from within the State and from other States
mainly for sale and supply to affiliated societies and arrange for a proper storage, packing,
grading, and transport of such commodities.

2.

To establish and run manufacturing and processing units for the production of consumer
goods in collaboration with other cooperatives or directly by itself.

3.

To render technical guidance and assistance to affiliated stores in grading, packing,


standardization, bulk purchasing, storing, displaying, pricing and other business techniques
and methods to improve and develop their operational efficiency.

4.

To advise and assist affiliated wholesale stores in standardising, accounting and stock control
methods and practices.

5.

To supervise the work of affiliated wholesale stores.

6.

To hold seminars, conferences, and meetings and undertake publicity, propaganda and
education campaigns and similar other functions as may help the development of consumer
cooperative movement within its area of operation.

7.

To build common cadres of employees of affiliated cooperative wholesale stores.

8.

To arrange for the training of the employees of consumers cooperatives in coordination


and with the assistance of other concerned agencies.

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National Cooperative Consumers Federation of India (NCCF)


National Cooperative Consumers Federation of India Limited (NCCF) is the apex body
of consumer cooperatives movement in India. NCCF started functioning from January 1966.
The main objective of NCCF is to provide supply support to its member societies and other
cooperatives for distribution of consumer goods at reasonable rates, besides rendering technical
guidance and assistance to consumer cooperative societies in the field of packaging,
standardisation, bulk buying, costing, pricing, account-keeping and other modern business
techniques and management methods to improve and increase their operational and
managerial efficiency. NCCF assists consumer cooperatives in the distribution of various items
of essential consumer goods throughout the country and thus exerting a healthy influence on
market prices of essential commodities of mass consumption. These cooperatives extend
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significant support to the Public Distribution System prevalent in India for distribution of
selected essential consumer goods.
It has also established showroom-cum-sales counters at different places in the country,
mainly to project its activities and to meet the local requirements of consumers of various items
of daily use.
The Consultancy and Promotional Cell of NCCF has been providing technical guidance
and assistance to the consumer cooperatives throughout the country for improving their
efficiency in the field of Management Accounting System, Wholesale Stores, etc. The Cell also
organises training programmes for the functionaries of the NCCF and other consumer
cooperative organisations from time to time.

Departmental Stores/ Super Bazaars


The beginning of Super Bazaars was made in India through the establishment of the
biggest departmental store in Delhi on 15th July 1966. The opening of these stores proved to be
indeed a landmark in the consumer cooperative movement in India.
Most of these departmental stores deal in wide range of consumer articles, which include
groceries, cosmetics, toiletries, household goods, textiles, readymade garments, drugs and
medicines, etc. A large number of them are also selling fruits and vegetables, eggs, fish and
meat. A few are selling articles such as furniture, footwear, electronic equipment, etc., and are
also running cafeterias. Some of them are providing services such as dry-cleaning, tailoring,
dental clinic, and cooking gas. Banking facilities have been provided in the premises of some
departmental stores in collaboration with the scheduled banks/ cooperative banks. Some of
these stores have given a lead in modern retailing techniques by providing attractive lay-out
and shop designs, artistic display of goods, fixing prices, self-service, pre-packing of goods, price
marketing, etc. A significant feature of their operation is the negligible proportion of controlled
articles handled by them and their complete dependence on non-controlled articles for their
business.

Active Price Policy

SRD II (N) 6

With the object of counteracting the growing tendency towards monopoly price, the
consumer cooperative movement in some countries like Sweden has adopted what is called
the Active Price Policy. In brief, the Active Price Policy is a policy which, instead of giving the
purchaser the whole of the direct economic advantage in the shape of dividend on purchases,
aims at reducing the rate of dividend in order to permit the sale of goods as cheaply as possible.
Thus, under Active Price Policy, the purchaser gets a part of the economic advantage at the
time he makes his purchase rather than making him wait to receive it in a lump sum at the end
of the accounting year. In other words, the Active Price Policy envisages that the cooperative
stores should sell their goods to the public at low prices, which are slightly lower than the

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prevailing market price. This policy has enabled the Swedish Cooperative Movement to achieve
great success.
In India, the consumer cooperatives have been following the traditional policy of selling
at market price. Lately, however, they have started following the Active Price Policy.

10. Causes for Slow Growth of Consumers Cooperatives in India


The Committee on Consumers Cooperatives (1960-61) reported various reasons for the
slow progress of consumers stores in the country. Even after taking various measures the reasons
found by Committee still continues. They are:
1.

Weaker organizational structure

2.

Small and uneconomic size

3.

Dependence to a large extent on the sale of controlled commodities

4.

Inadequacy of funds and heavy working costs;

5.

Lack of business knowledge or experience on the part of members of managing committees;

6.

Lack of loyalty on the part of members;

7.

Dependence on honorary services and lack of interest in management;

8.

Lack of properly trained and experienced staff and inadequate supervision of personnel;
and

9.

Keen competition from private trade and very low margin of profit.

11. Keywords
Exploitation, Market, Bulk purchase, Super Bazaars

12. Summing up

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The first ever successful cooperative endeavour is consumer cooperation. It is present


all over the world. But, they present a history of both success and failure. In the foregoing pages,
we have seen different structural and functional aspects of consumer cooperatives. Despite its
relevance and significance, these cooperatives have been showing poor progress and slow
growth mainly due to inefficient management and lack of members continued participation.

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13. Know your Progress
1.

What do you understand by consumer cooperatives?

2.

Who are Rochdale Pioneers?

3.

What is the main objective of consumer cooperatives?

4.

Describe the need for consumer cooperatives.

5.

What are the various types of consumer cooperatives?

6.

Enumerate the causes for poor performance of consumer cooperatives.

7.

Describe the problems confronting the consumer cooperatives.

8.

Enumerate the organisational pattern of consumer cooperatives in India.

9.

Write a note on National Cooperative Consumers Federation of India.

10.

What do you understand by Active Price Policy?

11.

Explain the causes for slow growth of consumer cooperatives in India.

14. Further Reading / References


Books
1.

K. Ravichandran & S. Nakkiran (2009). Cooperation Theory and Practice. Delhi: Abhijit
Publications.

2.

B.S. Mathur (2000). Cooperation in India. Agra: Sahitya Bhavan Publishers & Distributors P
Ltd.

Journals
1.

The Co-operator, published by NCUI, New Delhi.

2.

Cooperative Perspectives, published by VAMNICOM, Pune.

1.

Consumer Cooperatives, published by NCCF, New Delhi.

15. Model Answers

SRD II (N) 6

3.

Main objective of consumer cooperatives is to work for the welfare of the consumers by
providing pure goods at reasonable price and check exploitation by middlemen.

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Types of consumer cooperatives include cooperatives organized for factory workers,
employees and students. It can be in rural as well as urban areas.

6.

Problems faced by the consumer cooperatives are indifferent attitude of the government,
most of them deal in limited number of commodities and, hence, the customers are not in a
position to get most of their requirements from the store and poor membership, inadequate
working capital and their average sales have been so low that they could hardly meet their
ordinary expenditure.

10.

Active Price Policy is a policy which, instead of giving the purchaser the whole of the direct
economic advantage in the shape of dividend on purchases, aims at reducing the rate of
dividend in order to permit the sale of goods as cheap as possible.

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5.

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UNIT - 4 : STRUCTURAL AND FUNCTIONAL ISSUES IN COOPERATION


Structure
1.

Introduction

2.

Objective

3.

Classification of Cooperative Organisations


i)

Voluntary Vs Compulsory Cooperation

ii)

Limited Vs Unlimited Liability

iii) Federal Vs Unitary Structure


iv) Univalent Vs Polyvalent Cooperatives
v)

Conventional Vs Integrated Model

vi) Collective Vs Cooperative Organisations

SRD II (N) 6

vii) Formal Vs Informal Cooperatives


4.

Keywords

5.

Summing up

6.

Know your Progress

7.

Further Reading/References

8.

Model Answers

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1. Introduction
The choice of organisational structure is a basic issue at the micro level. The success or
failure of cooperative enterprises among others depends on the structural and functional
characteristics of the cooperative organisations. There are a number of pertinent factors which
determine the characteristics of a cooperative organisation which include: a) type of service
required, b) location and size of area of operation, c) size of the potential members, d) existing
customers, practices and traditions, e) available management talent or capacity, and f ) relevant
cooperative laws and regulations.

2. Objective
To familiarise the reader with various structural and functional issues in cooperation.

3. Classification of Cooperative Organisations


Different criteria have been used to classify the structural and functional aspects of a
cooperative organisation. Some of the prominent typologies of cooperatives and their
implications are discussed below:

i)

Voluntary Vs. Compulsory Cooperation

Introduction
Voluntarism is the spirit of cooperation. According to Calvert, the absolutely necessary
principles are that people should associate voluntarily on terms of equality in order to secure
the satisfaction of some common need. Cooperation is an organisation which places great stress
on human development and motivation. Cooperative organisation should therefore be
established on the basis of complete freedom to join or leave. This aspect was particularly
emphasized by Rochdale Pioneers. Motivation will be lacking in compulsory cooperation without
volition or concrete compensation. Voluntary membership not only strengthens individual
responsibility, but it differentiates cooperation from State action.
According to Dulfer, voluntary cooperation is strengthened by the following two factors:
motive of solidarity, i.e., the felt obligation of individual to the group, and

b)

Motive of rationality, which means that the decision to join the cooperative may clearly
seem to be the optimum alternative of the individual economic aim.

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a)

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The cooperative ideal of voluntarism results in the evolutionary, bottom-up approach
to cooperative development. The cooperative organisation emerges out of the existence of a
real need for cooperative action and the realisation of such need by the group of potential
members, which finds expression in the form of cooperative organisation. This is an ideal method
of creating genuine cooperative organisations.
Merits
The voluntary cooperation has the following merits:
1.

It creates value system inherent to the cooperatives.

2.

It promotes a sense of solidarity and harmonious relationship among members.

3.

It develops a lot of resilience in the cooperative to face competition.

Demerits
There are some operational demerits of voluntary cooperation. They are:
1.

It is slow process and requires continuous discussion and dialogue to convince every one
concerned.

2.

It needs constant motivation and moulding of attitudes by means of effective leadership


and publicity.

Against the ideal model of voluntary cooperation, the more expedient alternative,
namely compulsory cooperation, has been advocated by certain co-operators, particularly in
developing countries.
In the words of Calvert, There is much the same excuse for fostering compulsory
cooperation in backward tracts as there is for introducing compulsory education. The end
becomes so desirable that the means appear to become less important. Compulsory cooperation
wisely conducted is compulsory education in business methods.
This model has largely been followed in socialistic countries where the over-riding
authority of State has a say in every aspect of economic and social life of the people and
cooperatives are no exception. In mixed economies as well, a section of powerful cooperative
opinion is in favour of compulsory cooperation as a means for achieving social justice and
speedy development. Eminent Indian co-operators like D.R.Gadgil belong to this school.

SRD II (N) 6

According to Dulfer, the compulsory cooperation may be of three kinds: first is legal
compulsion, by which individuals are obliged by legal regulation to enter an organisation and
to take on duties accordingly. Apart from legal compulsion, political and ideological means
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authorities of the political party. The third way of compulsion is through a centralised economic
system, which by implication, means that an individual can preserve his social status and
economic existence only by participation in the prescribed form of cooperative and the
individual is left with no other economic alternative.
Merits
The compulsory method of organising cooperatives has no great merit except that:
1.

It brings quick result, and can be helpful in replicating the success example in other countries
or regions.

2.

It can be used as a means for implementing the socio-economic policies of the State.

Demerits
The compulsory cooperation is a top-down and bureaucratic type of development, alien
to cooperative values; and, as such, it has the following demerits:
1.

Since the Government spearheads the organisation of cooperatives there is minimum


involvement of members.

2.

There is very little scope for leadership development in this approach.

3.

Cooperatives cannot develop as a popular movement and the credibility and image of
cooperatives will be affected.

4.

There is a danger of cooperatives inheriting the dysfunctions of bureaucracy and


cooperatives getting the image of a big bureaucratic edifice.

Therefore, whatever is the merit of compulsory cooperation, it can never substitute


voluntary cooperation and the result can never be same. Nevertheless, there are certain
circumstances, wherein the compulsory membership can be adopted as a temporary measure
for larger socio-economic development. These are as follows:
In some special projects, the voluntary participants of the project are legally obliged to take
up membership in cooperative.

2.

In certain situations where the cooperatives are the monopoly institutions in rendering
certain services, there is no other choice left to the individuals except joining the cooperatives.

3.

When a large segment of the beneficiary group get admitted into a cooperative, the
minorities join the cooperative out of social compulsion.

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1.

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ii)

Limited Vs Unlimited Liability

Opinion is divided among co-operators as to the type of liability suitable for a


cooperative organisation. Limited liability was permitted in the case of cooperatives of England
by the Industrial and Provident Societies Act 1862. The unlimited liability was adopted in the
Raiffeisen Credit Societies of Germany. In India, the unlimited liability was adopted in the Primary
Agricultural Credit Societies (PACS) of the Raiffeisen model in the early period.
Limited Liability
Limited liability means that a member of a cooperative society is liable to the debts of
the society up to the unpaid balance of his shareholdings or up to a multiple of his shareholding
as specified in share certificate.
Several committees have since then recommended for the adoption of limited liability
principle. The Cooperative Planning Committee stated that, We recommend that except where
unlimited liability has produced good results, the liability of cooperatives may be limited.
Subsequently the All India Rural Credit Survey Committee (1954), Committee on Cooperation
(1960), All Indian Rural Credit Review Committee (1969), etc., have also recommended the
desirability of adopting limited liability principle, particularly at the primary level.
Limited liability is a privilege of modern times to be enjoyed, subject to certain conditions
or restrictions. Limited liability is of two kinds: a) liability limited by shares, and b) guaranteed
limited liability. In the second type, the liability is limited to such amount as each member
undertakes to contribute to the assets at the time of liquidation. The extent of members
contribution is usually in proportion or multiples of share capital.
The theoretical arguments on the question of liability have in recent time lost their
relevance. The nature of liability is not the real test of cooperation. However, the recent world
opinion is in favour of abolition of the principle of joint and several liability and what is found
to be most essential for the success of cooperation is good organisation, sound economic
purpose rather than most complete form of liability of members.
Unlimited Liability

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Unlimited liability means that a member is liable to the debts of the cooperative up to
the last pie of his property. It is still viewed by certain cooperative fundamentalist that the
unlimited liability is in conformity with cooperative values and reinforces the principle of each
for all and all for each, and strengthens mutualism, whereas there are others who view this as a
stumbling block to the progress of cooperative movement. The classical cooperative tradition
of small society, i.e., closed communities, is no longer relevant to the contemporary reality. The
corporate character of cooperatives has since transformed.

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Merits
The unlimited liability has been found to carry with it certain advantages of considerable
importance in a cooperative society. The merits of the system are as follows:
1.

It is the cheapest form of liability, and it is the only security that can be developed in a poor
community.

2.

It would oblige each member to watch his associate as well as himself.

3.

It creates confidence among intending depositors.

4.

It secures careful discrimination and selection of members for purpose of lending.

5.

If a society accumulates its own funds and reserves, the risk of unlimited liability is reduced.

Demerits
The unlimited liability is not favoured by many due to the following reasons:
1.

Majority of rural people do not understand the full implications of unlimited liability.

2.

Well to do persons are scared of unlimited liability, who may otherwise contribute to strength
the cooperative society.

The original unlimited liability adopted in Germany provided that a creditor may sue
any member for his debt and recovers the same from him and leaves him to recover it from
other members. But when society is a corporate body it is the society and not the members
which enter into contract. Accordingly, the unlimited liability of members is termed unlimited
contributory liability, that is to say, they are liable to make contribution to any deficiency of the
assets on winding up. Thus, the unlimited liability is actually the unlimited contributory liability.
In this connection, it is pertinent to quote from the Report of the Maclagan Committee that,
where there is a deficit it should after the full payment of shares (if any) be recoverable by a
series of per-capita levies upon the members up to the full extent of their property, direct
proceedings by a creditor, against individual member being forbidden. The unlimited liability
comes to effect only when the assets are insufficient to meet the liability, where upon members
have to contribute on a pro-rata basis.

Safeguards

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There are a few safeguards against the impending risk in the adoption of unlimited
liability. They are as follows:
1.

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Members must be selected carefully and admitted formally.

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2.

Members must be allowed to withdraw, if they desire so, when they feel that they cannot
bear the liability.

3.

The liability of a past member must continue for a period, so that the surviving members
can decide to liquidate the society if they feel that the liability is too great for them.

4.

The members must not be allowed to transfer their share to any one they please but must
transfer to or through the society.

5.

The members must be able to expel any member whose liability has become worthless and
take action against defaulters.

6.

Amendment of bye-laws, especially to change the liability must require a considerable


majority.

7.

Reserve fund must be built to protect liability. Limits may also be placed on payment of
dividends.

8.

Members must have the right to secure independent inspection of accounts.

9.

There must be intimate mutual knowledge among members and no external pressure is
exerted from outside to make the society to what the members think unwise.

iii) Federal Vs Unitary Structure


Cooperatives may be structurally classified as a) federal type and b) centralised or unitary
type. The structural question arises when the primary cooperatives have the need to organise
on regional basis or to develop hierarchical structure for undertaking certain specialised
functions. Evolving a clear structural pattern is a pre-requisite for the effectiveness of
cooperatives.
Federal Structure

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The federal pattern is the widely prevalent pattern of cooperative development. The
federal structure is created by means of horizontal combination of member units at different
levels. In a federal system, individuals are members of local associations governed by local boards
of directors elected from among their membership and managed by paid executives and staff
hired by the boards. Each local association is a member of the central organisation, which has
its own board of directors, chief executive and staff. The central board of directors consists of
directors elected by the elected representatives of member associations. The federal organisation
takes up a variety of functions, including finance, promotion, marketing and research, which
may be delegated to it by the affiliated primaries. Federation may be either a pure federation
or mixed federation. A pure federal structure is composed of primary societies and central
organisations at secondary and apex levels, respectively. On the contrary, a mixed federation is

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one in which the federal organisation can admit individuals as its members along with the
affiliated societies.
Merits
The federal structure has the following merits:
1.

It is perfectly in conformity with the cooperative ideology, and it strengthens cooperative


democracy.

2.

The policies are more relevant to primary members at grassroots level, and the contact with
them is more easily maintained through local and district associations.

3.

The federal structure is an ideal means for decentralisation of authority and responsibility.
The structure is built from the bottom upwards and the importance of local association is
always recognised. The federal organisation exists for the benefit of its member societies.

Demerits
The notable demerits of the federal pattern are:
1.

When the primaries are weak, the federal structure tends to pool the weakness of the
constituent societies. A strong superstructure can never be built on weak foundation.

2.

The pure federal structure develops a built-in vested interest whose policies are more
oriented towards the affiliated units to the extent that it fails to develop an independent
identity. Certain amount of laxity and ineffectiveness thus becomes an inevitable feature of
the federal structure.

Unitary Structure
An alternative pattern of organisation is the formation of cooperatives at central level,
having wider area of operation, admitting individuals as members and operating through
branches which serve as the limbs of the central unit. In the centralised pattern each individual
holds direct membership in a single large association governed by a single board of directors
and operated by a manager and his staff. The scattered branches and plants serve the needs of
members, and are supervised by the central management in accordance with the policies
established by the board of directors.
Merits

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The unitary structure has certain operational advantages, viz.:


1.

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It is a pattern which is organisationally easier and operationally convenient. It can be


established in a short time.

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2.

Planning, implementation and control are made easy. Unitary structure is particularly
valuable where strong control is required.

3.

The structure is cost effective. The volume of transactions associated with this structure
would help to reduce the cost and market price.

Demerits
The critics of the unitary pattern put forth the following negative arguments:
1.

The cooperative values of participation of primary members in the organizational process


and diffusion of ownership is sacrificed.

2.

The concentration of authority in the hands of a few leads to authoritarianism and


bureaucratisation of administration which tend to become insensitive to the needs of
primary members.

3.

There will be no mutual knowledge and understanding among the members and thus, the
democratic control will lose its spirit and real significance.

Thus, the economic gains attributed to the unitary pattern probably have to be achieved
at the cost of democratic members participation.

iv) Univalent Vs. Polyvalent Cooperatives


The pattern of cooperative development in different countries gives rise to two structural
models : 1) Univalent or single-purpose cooperatives, and 2) Polyvalent or multi-purpose
cooperatives.
Single purpose cooperative
Single purpose cooperation is a fundamental type, which started with Rochdale tradition.
In this pattern the cooperative organisation at primary level concentrates on only one main
function. In some European countries, such as Denmark, the organisational pattern has been
conceived essentially in terms of individual functions. In almost all the Asian countries, the
cooperative movement began with single purpose, namely, credit, and the dictum that banking
and trading should no be combined was applied in a rather misconceived manner.
Merits

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The protagonists of the single purpose model attribute to it the following merits:
1.

It leads to specialisation, efficiency and expertise in the selected field of activity.

2.

Because of the homogeneity of membership, members loyalty and ties with the organization
may be strengthened.

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3.

Vertical integration facilities provision of comprehensive services connected with all aspects
of a particular function.

4.

The managers and employees can be trained easily and hey become thorough with the
practical aspects of operation.

5.

Single purpose cooperatives are more suitable to the target group or commodity oriented
rural development projects.

Demerits
A single purpose cooperative organisation is beset with certain limitations. They are:
1.

The subsistence nature of the rural economy of several developing countries offers limited
scope for the formation of functional cooperatives, since they have not achieved the degree
of development to support functional cooperatives.

2.

The primary cooperatives catering only one need of the members find it difficult to achieve
economic viability.

3.

The members have to approach different functional cooperatives for satisfying various needs,
and, in the process, dissipate their resources and time.

Multi-Purpose Cooperative
It is F.W. Raiffeisen who first combined credit with supply and marketing function, which
has since then become a universal phenomenon. The multipurpose idea slowly gained ground,
particularly in Asia, following the success achieved by the multipurpose cooperatives of Japan.
In India and Sri Lanka the primary agricultural cooperative credit societies were reorganized
on multipurpose basis, covering all aspects of the life of the rural population.
Merits
The strength of the multipurpose concept lies in the following merits:
It provides multipurpose services to the small farmers in a single window.

2.

Farmers need not waste their time and energy in moving from one agency to another for
getting the required inputs and services.

3.

The cooperative society becomes a centre of multifarious services. The members keep in
constant touch with the society and develop lively interest in the working of the society.

4.

The managers of the cooperatives gain better knowledge of the members situations.

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1.

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5.

The financial involvement of members in a multipurpose society is relatively smaller than


in the case of several single purpose societies.

6.

There is greater chance of hiring qualified managers on the basis of increased turnover and
reduction of fixed cost per unit.

Demerits
The multipurpose model is not without limitations.
1.

The combination of business transaction of diverse nature needs business acumen and
skilful management, which are lacking among the cooperatives.

2.

The required managerial talent and manpower are not readily available in the cooperative
sector of many developing countries.

3.

The mix-up of functions renders the financial control difficult; and the computation of unit
cost of different services poses a real problem; as the fixed cost is distributed among different
kinds of services.

4.

The success of multipurpose cooperatives depends on the effective coordination and high
degree of integration.

Multipurpose ideas found acceptance widely and it has been regarded as the most
suitable approach. However, the functional pattern has regained its significance, particularly in
the context of the development of weaker sections and diversification of rural economy. In the
opinion of Committee to Review Arrangements for Institutional Credit for Agriculture and Rural
Development (CRAFICARD), a group engaged in a single activity with several linkages, as in the
case of animal husbandry, has a common economic identity and social coherence and as such
can be more effectively catered to by an organization exclusively of that group.
In practice the choice between single-purpose and multipurpose depends on: a) the
need of the members, b) the economic structure and development standards of the region, c)
legal and institutional tradition and availability of managers.

v)

Conventional Vs. Integrated Model

Conventional Model

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In the early periods of cooperative development, cooperatives were meant to provide


certain common services to the members, as manifested in classical Rochdale and Raiffeisen
societies. In this model, the cooperative organisation serves as an executive unit of members
enterprises. The cooperative organisation does not acquire the status of a full-fledged enterprise.
Being an ancillary organ of the member economics, its functions are purely determined by the
needs of member economies. Thus, the main focus in this type is on the members economies.

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In the second stage of cooperative development, the cooperative establishment acquired
some degree of independence. Gradually the close tie with member economics was relaxed.
For the reasons of competition the cooperative organisation had to be developed as an
independent firm with an aim system independent of the member units. It is not always
necessary that a cooperative society should be oriented towards the members units. The
relationship between members units and the cooperative enterprise is quite similar to the
relation between ordinary partners in the market. Management has become professionalised
and specialised. In the long run members may lose interest in the cooperative organisation,
and may cease to use its services, while the cooperative enterprise may expand its business
with non-members.
This conventional model is most commonly prevalent in the cooperative movements
anywhere in the world. The characteristic features of this model are:
*

There is lack of balanced development between the member units and the cooperative
enterprises.

The aim systems at these two levels are not properly coordinated.

The cooperatives tend to lose cooperative character in the long run.

Integrated Model
In this type the member economies being independent legal units are bound by the
cooperative enterprise in such a way that the cooperative management makes decision not
only for cooperative establishment but also for the operations and economic interests of
member economies. This is a complex form of organisation but is highly relevant to the
developing countries. In the integrated type, the aim system of the individual member
economies is linked t the aim system of the cooperative enterprise and influences the same. A
common operational strategy is pursued to achieve the objectives of both.
Dr. H. Munkner has defined such integrated structure as coordinated distribution of
tasks and functions between various organisations in such a way that each member unit of the
joint organisation takes over all those functions and tasks, which can be executed by the
respective unit with best expertise and minimum cost.
It is, therefore, a voluntary collaboration of independent economic units for common
objectives, with functional dichotomy at the two levels. The following are the characteristics of
such integrated model:
The economic units are independent and autonomous in the matters of finance, decisionmaking and internal management.

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*

They agree to work together on the basis of a common plan and the member-units
voluntarily accept the joint leadership, while they delegate some of the decision making
power to the higher level units.

The integrated system can achieve the full economic advantage by means of joint action,
strengthening the market position, increasing efficiency and reducing cost.

vi) Collective Vs. Cooperative Organisations


The word cooperation connotes the two prevailing basic patterns of cooperatives,
namely, collective enterprise and cooperative service type society. The former is a form of
collective production in both manufacturing and agriculture, which in its classical industrial
form is workers cooperative society. The latter type of cooperatives covers various economic
activities for the promotion of individual economies of the members of the cooperative group,
i.e., their households, business or farms.
Collective Enterprise
The production cooperatives are based on membership of persons who no longer carry
on their economic activity separately but do so as member-workers in and owners of the
communal cooperative enterprise. It is essentially a self-managed workers enterprise in which
the people working in it can become members by owning share. The operations of the enterprise
are completely centralised. The member-enterprises cease to exist and the members get income
from their labour. In this type of organisation, social and economic motive of members interact
with ideological considerations. Politically motivated members attach higher value to a particular
life-style and socialist ideals than to economic consideration.
In agriculture, this form is manifested in collective farms and cooperative settlements,
land colonisation societies and communes where the private property is abolished or cultivation
is undertaken jointly and the cooperative farm is a single enterprise. Communes of China, Kibbutz
settlements of Israel and Kolkhoz of Russia are the prominent examples of this type. In the
industrial field, the workers cooperatives are still a rather insignificant sector compared to other
sectors. The workers self-managed cooperatives of France and Italy have been very successful.
The Mandragon Cooperatives of Spain and Longo Mai Cooperatives of France are interesting
examples of successful collective enterprises in industrial production. The experience of
Mandragon Cooperatives suggest that the workers cooperatives is likely to succeed when the
level of consolidation is high, all those who work in the enterprise are members, the wage
differential between the highest paid and lowest paid is low, and the internal democracy works
well.
Operational constraints

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The workers cooperatives encounter the following operational constraints:

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1.

Division of labour is a day to day problem which has to be planned and executed thoroughly.

2.

Usually in the collectives, labour efficiency is found to be low, and proper motivation and
incentives must be provided to the workers.

3.

Allotment of work is an intricate problem and distribution of managerial and non-managerial


work or pleasant and unpleasant work leads to strained relations among members.

4.

The success of the collective enterprise depends on the ideological orientation of the
members, and the level of involvement and high degree of social cohesion.

5.

When the collective enterprise employs hired labour, there arises a clash of interest between
the member-workers and non-member workers.

Van Dooren has identified a few essential conditions for the success of the collective
enterprises:
*

Competent management ability to comprehend problems,

Clear allocation of responsibilities within the cooperative,

Just division of various tasks among the members backed by programmes of education
and training,

Member participation in decision making and operation,

Attention to economic and moral incentives in order to strengthen loyalty and group
solidarity, and

Preference for a rather limited size of cooperative group, particularly in the initial state of
formation.

SRD II (N) 6

Service-type cooperative
This type of cooperatives may be called Cooperative Proper. They provide services for
the benefit of the family or business, which operates on an individual basis. In the case of service
type of cooperatives, there is only incomplete and partial integration of members and memberenterprises in the cooperative. In this pattern the cooperative organization is conceived as one
wherein there is economic cooperation between, otherwise totally independent, family and
business units. Otto Schillers scheme of individual farming on cooperative lines or cooperative
production promotion societies is an example of this type, apart from the classical pattern of
consumers, marking and supply cooperatives. It is neither a challenging model of cooperative
development nor does it involve any ideological orientation. In this pattern the cooperation
organisation simply serves as an executive arm and provides services for the benefit of the

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family or business units undertaking production on an individual basis. Nevertheless, the servicetype cooperatives may face certain operational constraints, such as:
*

Aims system associated with this kind of cooperative is complex.

Management decision making, planning and control have to be exercised at two levels, i.e.,
the level of the joint enterprise and the member-economies.

It requires high degree of coordination and development information and educative


communication.

In the opinion of Dulfer, this model corresponds to the educational model of cooperative
organisation and, therefore, highly suitable for development projects.

vii) Formal Vs. Informal Cooperatives


Formal Cooperative (FC)
Formal Cooperative is an autonomous association of persons united voluntarily to meet
their common economic, social and cultural needs and aspirations through a jointly owned
and democratically controlled enterprise. The cooperation that flows from social feeling, coupled
with the economic rationale of synergistic effect of collective action, has led to the genesis of
formal cooperatives. This formal cooperative favours a creation of new social order and new
moral world.
Cooperative is an organisation of the weak and the vulnerable and a means of selfdefensive mechanism against unequal competition. It seeks to remedy the economic inequality
and the evils of concentration of income and wealth and prevents the exploitation of the weaker
sections by the economically affluent. It evokes a sense of brotherhood and harmony, honesty,
integrity and fairness in dealing with fellow human beings in all social and economic
transactions.
Though the principles of cooperation are followed in the formal cooperatives worldwide
people adapt them to suit the politico-economic systems of their respective country. The formal
cooperatives as a golden-mean between capitalism and socialism coexist with these two good
old economic systems. Their presence is formally recognized in almost all countries in the world.
Informal Cooperative (IC)

SRD II (N) 6

Informal cooperative is a voluntary association of poor people who are having same/
similar socio-economic background and are involved in solving their common problems through
self-help and mutual help. It creates small saving among the members and the amount is kept
with bank. The SHG has 15 to 20 members. (Note: Though the word cooperative is used by formal
cooperative institutions, it is used purposively here to indicate SHGs because it has the values
and principles of formal cooperative institutions in their operation.)
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The credit for the fast development of self-help group (SHG) movement in India goes to
the pioneering attempt made by Prof. Mohammed Yunus in Bangladesh the Winner of Noble
Prize 2006. It is he who introduced the concept of micro credit (through SHGs) for the first time
among the poor women in late seventies under the Grameen Bank. This has got momentum at
a later stage in almost every corner of the world. Eventually, NGOs in India plunged into action
and the NABARD supported such efforts by the NGOs. And today, we have a variety of micro
credit and micro finance institutions in India. The growth in the movement is drastic and
remarkable.
Common characteristics of informal cooperatives
The following are the common characteristics of informal cooperatives:
1.

Each SHG has 15 to 20 members.

2.

The members of SHG live below poverty line.

3.

The members have identical interest/common occupation/social heritage, homogeneity


and affinity.

4.

SHGs create self-help, awareness, and bring economic and social empowerment to the poor.

5.

SHGs develop confidence among the members especially among the rural women.

6.

They inculcate the habit of thrift and savings among members.

7.

It has full support from Government and non-government organisations.

8.

It maintains simple records and documents, which show the details such as meetings held,
savings made, and expenses increased, etc.

9.

It follows the principle of collective leadership.

10.

The SHGs get loans in small quantity from banks and NGOs.

The primary objective of informal cooperatives includes economic and social


empowerment of rural masses through skill development; helping them financially and
technically.

SRD II (N) 6

Formal Vs. informal cooperatives


Both the formal and informal cooperatives have emerged during the 20th century. The
formal cooperatives were sponsored at the beginning of the century and the informal
cooperatives have emerged spontaneously at the end of the century. These cooperatives have
commonality in several respects. They are, in brief, as follows:

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*

Association of human beings, the poor and the marginalised

Voluntary and democratic associations

Democratic control and management

Autonomy and independence

Common economic and social development as the explicitly stated goal

Promotion of self-help through mutual help

Promotion of economic self-dependency.

Inculcation of the habit of thrift and savings

Emphasis on social, moral, and ethical values

Mutual trust

Concern for the community

Distributive justice

Network with external agencies

Linkages with other development players

Consistent member education

Despite these commonalities, one could also notice some differences, especially in their
way of functioning between formal and informal cooperatives. The following are some of them.

SRD II (N) 6

Formal Cooperatives

Informal Cooperatives

Formal association

Informal association

Universal principles

Regional/Local principles

Large size (minimum 25 members)

Small size (10-20 members)

Indirect Politicisation

Purely non-political

Voluntary but target orientated


participation

Voluntary but demand orientated participation

Legal provisions govern leadership

Rotational leadership, not legally governed.

Democratic management

Participatory methods in management

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Faith on credit-worthiness

Faith on trust-worthiness

Lending on collateral

Lending without collateral

Banks/Cooperatives are more with


what they are lending against.

SHGs are more concerned with what they are


lending for.

Recovery and monitoring by the


professionals

Recovery and monitoring by the peer groups

Legal action against the defaulters

Peer group pressure against the defaulters

Repayment in lump-sum

Repayment in easy instalments

4. Keywords
Voluntarism, bottom-up approach, Limited liability

5. Summing up
From the foregoing pages, we understand that the organisation and management of
cooperatives have various issues at the micro and macro levels. The issues are both structural
and functional in nature. The issues discussed above are mostly micro level issues, i.e., concerned
with ground level. Understanding these issues would enable the students appreciate the
distinctive features of cooperative form of organisation and also help realising the significance
of different forms of cooperation.

6. Know your Progress


What are the various structural and functional issues in cooperation?

2.

What is meant by limited liability?

3.

What is meant by unlimited liability?

4.

What are merits and demerits of limited liability?

5.

What are merits and demerits of unlimited liability?

6.

Explain the concept of voluntary cooperation.

7.

What do you understand by compulsory cooperation?

8.

Bring out the difference between Univalent vs. Polyvalent Cooperatives.

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1.

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9.

How far federal structure is superior to unitary structure?

10.

What do you understand by integrated model? How is it different from conventional model?

11.

What are collectives? Give two examples.

12.

Bring out the features of collectives.

13.

How collectives are different from cooperative organisations?

14.

What are called formal cooperatives?

15.

What are called informal cooperatives?

16.

Bring out the commonalities between formal and informal cooperatives.

7. Further Readings/References
Books
1.

Kulandaiswamy, V& O.R. Krishnaswamy. (2000). Cooperation Concept and Theory.


Coimbatore: Arudra Academy.

2.

Ravichandran, K & S. Nakkiran. (2009). Cooperation Theory and Practice. Delhi: Abhijeet
Publications.

3.

Mathur, B.S. (2000). Cooperation in India. Agra: Sahitya Bhavan Publishers & Distributors (P)
Ltd.

Journals
1.

The Co-operator, published by NCUI, New Delhi.

2.

Cooperative Perspectives, published by VAMNICOM, Pune.

3.

NCDC Bulletin, published by NCDC, New Delhi.

SRD II (N) 6

8. Model Answers
2.

Limited liability means that a member of a cooperative society is liable to the debts of the
society up to the unpaid balance of his shareholdings or up to a multiple of his shareholding
as specified in share certificate.

6.

Voluntary cooperation means that cooperative established on the basis of complete freedom
to join or leave and people should associate voluntarily on terms of equality in order to
secure the satisfaction of some common need.

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BLOCK - 3 : CREDIT AND MICROFINANCE

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BLOCK - 3 : CREDIT AND MICROFINANCE


Introduction
Role of credit and microfinance is very significant in rural development and this Block
discusses different aspects of institutional credit, microfinance institutions and community based
microfinance organisations. It offers the reader a good understanding of the role of these
institutions in rural development. An understanding of these aspects is indispensable for the
students of rural development and this Unit equips the rural development managers with
adequate knowledge to meet the challenges. These aspects are discussed in this Block in the
following three Units:
Unit- 1: Institutional Finance : This Unit discusses different phases of development of
institutional credit and discusses the need for institutional credit, role of institutional credit in
rural development and the need for public intervention in rural credit. It also delineates the
role of NABARD, RRBs and cooperative banking in rural credit.
Unit- 2: Microfinance Institutions : This Unit begins with the definition of microfinance
and then discusses types of MFIs. It also outlines the two prevailing models of microcredit
SHG bank linkage model and MFI bank linkage model. This Unit brings out the critical issues
involved in MFIs.

SRD II (N) 6

Unit- 3: Community Based Microfinance System : This Unit introduces the concept of
SHGs, need for mobilising communities to form SHGs, and the demand for microfinance services
in rural areas. It differentiates between micro-credit and micro-finance and discusses different
approaches to microfinance. It also explains about the community based thrift credit groups
and linkage programmes as alternative for rural finance system by providing the ten pillars of
linkage programme.

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UNIT - 1 : INSTITUTIONAL FINANCE


Structure
1.

Introduction

2.

Objectives

3.

Agricultural Credit

4.

Phases of Development of Institutional Finance

5.

Institutional Credit for Rural Development

6.

Need for Public Intervention in Rural Credit

7.

The Regional Rural Banks (RRBs)

8.

Direct and Indirect Advance of Commercial Banks

9.

Development in Co-Operative Banking


Initiatives of NABARD in Promoting Rural Development

11.

Keywords

12.

Summing up

13.

Know your Progress

14.

Further Reading/References

15.

Model Answers

SRD II (N) 6

10.

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1. Introduction
Easy access to institutional finance is a crucial factor in the process of rural development.
In fact, rural backwardness is attributed to two types of dualism, one is unequal provision of
government services coupled with unequal access to public economic facilities between the
big and small farmers and the other one is financial dualism which stands as serious obstacle
to the adoption of innovative technological practices by poor farmers. A majority of Indian
farmers live in a state of perpetual debt by getting into the firm grip of moneylenders. With his
land mortgaged to the moneylender at usurious rates of interest, the farmer has to borrow
even to meet the barest minimum needs and thus keeps on accumulating debt. It has rightly
been observed that worm, beetle, drought or tempest on farmers land may befall, each is loaded
full of ruin, but a mortgage beats them all.

2. Objectives
The main objective of this Unit is to acquaint the students with the significance of
institutional finance, various institutions involved, and their achievements and limitations. After
the completion of the unit the students should be able to :
*

understand the causes of rural indebtedness

comprehend the phases of institutional credit in India

describe the important typologies of sources of credit

identify the limitations of institutional credit system

appreciate the recent financial reform measures

3. Agricultural Credit

SRD II (N) 6

All India Rural Credit Survey Committee (AIRCSC) appointed by the RBI in 1951 pointed
out that 69.7 percent and 7.3 percent of the total borrowings were met by the professional and
agricultural moneylenders, and Institutional credit, respectively, thereby confirming the
dominant position held by the moneylenders in the provision of credit (Table 1).

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Table 1: Agricultural credit from different agencies (per cent)
Source of Credit

1951-52

1961-62

June 30, 1971

Institutional sources:
Government

3.3

2.6

7.1

Co-operatives

3.1

15.5

22.0

Commercial Banks

0.9

0.6

2.4

Total

7.3

18.7

31.5

1.5

0.6

Agricultural moneylenders

24.9

36.0

professional moneylenders

44.8

13.2

5.5

8.8

14.2

8.8

1.8

13.9

92.7

81.3

68.5

100.00

100.00

100.00

Non-Institutional sources:
Land lards

Traders & commission agents


Relatives
Others
Total

68.5

Sources: 1) All-India Rural Credit Survey Committee Report, 1954, 2) All-India Rural Credit Review
Committee Report, 1969, and 3) All-India Debt and Investment Survey, 1971-72
Agricultural credit is available from different sources. The credit delivery system in Rural
India can be classified as institutional credit sources (formal banking system), including
government, co-operatives, commercial banks, Regional rural banks and non-institutional
sources (cum formal sources), including professional moneylenders, agricultural moneylenders,
commission agents, merchants, friends, relatives and others. The above Table presents the extent
of credit available to the rural people from different sources. It is clear that non-institutional
agencies dominated the rural credit scene. In recent years there has been considerable increase
in flow of institutional finance.

Causes for Rural Indebtedness

SRD II (N) 6

The important causes for rural indebtedness are:


*

140

Ancestral debt,

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*

Subdivision and fragmentation of landholdings,

Ignorance, illiteracy

Superstitious beliefs of the rural people,

Vagaries of monsoons,

Low income of farmers,

Non-availability of work for agricultural labourers,

Exploitative rate of interest by moneylenders,

Extravagant and improvident borrowing,

Litigation leading to high amounts of payment to lawyers, court fees and expenses to secure
required documents,

Consumption loans,

Medical expenses,

Failure of crops and other variety of reasons.

In the case of marginal farmers and small farmers, the prospects of plough back are
very weak. Therefore, they need credit for productive purpose. Moreover, out of pressing cash
requirements, the farmers sell away their produce even at a lower price. Quite often the
moneylenders take away the harvested products at rock-bottom prices. This type of distress
sale also accounts for rural indebtedness. In fact, as the Royal Commission on Agriculture
remarked The Indian peasant is born in debt, lives in debt and dies in debt and bequeaths
debt to the posterity.

4. Phases of Development of Institutional Finance


The phases of development of institutional finance could be categorized broadly into
three phases: (i) Initial Phase (1947 to 1967). (ii) Stabilizing Phase (1967 to 1991-92); and (iii)
Reforms Phase (1991-92 and beyond).

Initial Phase (1947 to 1967)

SRD II (N) 6

The banking scenario that prevailed in the early independence phase faced three main
problems. First, bank failures had raised the concerns regarding the soundness and stability of
the banking system. Second, there was large concentration of resources in a few hands of
business families or groups. Banks raised funds and lent them largely to their controlling entities.
Third, agriculture was neglected in so far as bank credit was concerned.

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In order to address the issue of bank failures, the Banking Companies Act was enacted
in 1949 (renamed as Banking Regulation Act in March 1966) empowering the Reserve Bank to
regulate and supervise the banking sector. Banks continued to fail even after the enactment of
the Banking Companies Act, although the number of banks that failed declined. It was felt that
it would be better to wind up insolvent banks. The Reserve Bank, therefore, was granted powers
in the early 1960s for consolidation, compulsory amalgamation and liquidation of small banks.
Although some banks had amalgamated before 1960s, the number of banks amalgamating
rose sharply between 1960 and 1966. The Reserve Bank was fairly successful in improving the
safety and soundness of the banking sector.
The deposit insurance was introduced to encourage deposit mobilisation. Efforts were
made to spread banking to rural and unbanked areas. The number of bank branches rose
significantly between 1951 and 1967, as a result of which the average population per branch
fell from 1,36,000 in 1951 to 65,000 in 1969. However, the benefits of this did not percolate
down to the general public in terms of access to credit. This was primarily due to the nexus
between banks and industrial houses that cornered bulk of bank credit, leaving very little for
agriculture and small industries. Efforts, therefore, were made to increase the flow of credit to
agriculture. However, the share of agriculture in total bank credit remained broadly at the same
level between 1951 and 1967.

Stabilising Phase (1967 to 1991-92)

SRD II (N) 6

The focus in this phase was to break the nexus between the banks and industrial houses
and to improve the flow of credit to agriculture. The main instruments used for this purpose
were nationalisation of major banks in the country and priority sector lending. These initiatives
had a positive impact in terms of spread of the bank-branch network across the country, which
in turn, accelerated the process of resource mobilisation. As a result of rapid branch expansion
witnessed from 1969, the average population per bank office, which was 65,000 at the time of
nationalization, declined to 14,000 by end-December 1990. Large branch expansion also resulted
in increase in deposits and credit of the banking system, especially in rural areas.
The share of credit to agriculture in total bank credit increased from 2.2 per cent in
1967 to 15.8 per cent in June 1989. However, these achievements extracted a price in terms of
health of banking institutions. Banks did not pay adequate attention to their profitability, asset
quality and soundness. The increase in credit to the priority sector led to the reduction of credit
to the other sectors. Attempts were, therefore, made to bring some financial discipline in respect
of credit to the corporate sector. However, norms stipulated for the purpose were found to be
too rigid. On the other hand, in order to meet the priority sector targets, credit appraisal standards
were lowered. The high statutory preemptions eroded the profitability of the banking sector.
Lack of enough competition resulted in decline in productivity and efficiency of the system. At
the end of this phase, banks were saddled with large non-performing assets. During this period,
the deposit and lending rate structure became very complex. By the early 1980s, the banking
sector had transformed from a largely private owned system to the one dominated by the public

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sector. In the mid-1980s, some efforts were made to liberalize and improve the health and
soundness of the banking sector. This phase also saw some diversification in banking activities.

Reforms Phase (1991-92 and beyond)


The most significant phase in the evolution of banking was the phase of financial sector
reforms that began in 1991-92, which had two sub-phases 1991-92 to 1997-98; and 1998-99
and beyond. The main issue faced in the first sub-phase (1991 -92 to 1997-98) was the weak
health of the banking sector, low profitability, weak capital base and lack of adequate
competition. The reforms in the initial phase thus focused on strengthening the commercial
banking sector by applying prudential norms, providing operational flexibility and functional
autonomy and strengthening the supervisory practices. To infuse competition in the banking
sector, several measures were initiated such as allowing the entry of private banks into the
banking sector. Some improvement was also observed in the asset quality, capital position and
competitive conditions. However, banks in this phase developed risk aversion as a result of
which credit expansion in general, and more particularly into agriculture, slowed down.
The focus in the second sub- phase (1998-99 and beyond) was on further strengthening
of the prudential norms in line with the international best practices, improving credit delivery,
strengthening corporate governance practices, promoting financial inclusion, strengthening
the urban co-operative banking sector and improving the customer services. Focused attention
was paid to put in place appropriate institutional measures to enable banks to recover their
non-performing loans (NPLs). The impact of these measures was encouraging as banks were
able to bring down their non-performing assets sharply. This was the most important
achievement of this phase. As the asset quality began to improve, banks also started expanding
their credit portfolio. Capital position of banks also improved significantly. Competition
intensified during this phase as it was reflected in the narrowing down of margins. Despite
narrowing margins, banks slightly improved their profitability due to increased volumes and
improvement in asset quality. The corporate governance practices were strengthened. Another
major achievement in this phase was the sharp increase in the flow of credit to the agriculture
and small and medium enterprises (SME) sectors. With a view to bring in a larger segment of
excluded population into the banking fold, banks were advised to introduce a facility of no
frills account. About 13 million no frill accounts were opened in a short span of two years. This
phase also witnessed some significant changes in the use of technology by banks, which helped
to improve the customer service.

5. Institutional Credit for Rural Development

SRD II (N) 6

Realising the gravity of rural credit problems, the government of India soon after
Independence formulated the Rural Credit Policy that aimed at enhancing the role of
institutional credit and reducing correspondingly the role of non-institutional agencies. A large
number of institutions have been set up to achieve the main objective of National Credit Policy,
i.e., development through credit.

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The strategy of developing rural financial services was a three pronged one,
consisting of
1)

expansion of institutional structure

2)

directed lending and

3)

concessional and subsidised credit (C. Rangarajan 1986)

This approach has ushered in an impressive growth of rural banking in India over the
last three decades in terms of its outreach, credit disbursement and support to the poverty
alleviation programmes.

Expansion of Institutional Structure


The institutional vehicles selected for the purpose have been the rejuvenation of cooperatives, branch expansion policy of commercial banks and creation of new instruments in
the form of Regional Rural Banks (RRBs). The foundation for the building of a broad credit
infrastructure for credit system in rural areas was laid down by the report of All India Rural
Credit Survey of 1951-52. As a result of the studies conducted by the All India Rural Credit Survey
Committee during 1951-52, it was revealed that as much as 92.7 percent of the cultivators
borrowings came from private sources of which the major share of 44.8 percent of the total
was accounted for by the professional moneylenders. This was followed by the agriculturists
cum moneylenders accounting for about 21.9 percent of the total borrowings. The institutional
agencies comprising of the co-operative credit societies, the government and the commercial
banks accounted for only 7.3 percent of the total borrowings of the cultivators. Out of this
government credit amounted to 3.3 percent, co-operative credit 3.1 percent and commercial
banks credit 0.9 per cent.

SRD II (N) 6

After examining all the pros and cons of problems of agriculture credit and the urgent
need for complete institutionalisation of agricultural finance, the All India Rural Credit Survey
Committee (AIRCSC) came to the conclusion that the long term solution of the problem could
be found in the continuous strengthening of the co-operative credit institution which eventually
should meet the entire requirements of both production credit and investment finance. The
committee envisaged development of co-operative credit system as an exclusive agency for
providing agriculture credit supplanting the moneylenders. The chief merit of the co-operative
banking structure was seen to be fulfilling the twin objectives of:
1.

Providing a credit delivery system operating at the door steps of the farmer, and

2.

Making such credit available at relatively cheaper rates in view of the economy in the
operating cost.

It was for this reason that despite the uneven and tardy progress of co-operatives in the
preceding fifty years the committee came to the much quoted conclusion co-operation has
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failed but co-operation must succeed. The committee viewed rural credit in India as being
inadequate and unsuitable and, therefore, recommended an integrated scheme of rural credit
based on the co-operatives. The integrated scheme contemplated the strengthening and
development of co-operative credit institutions at all levels based on the principles of state
partnership (including financial partnership) throughout the federal structure comprising the
State Co-operative Bank at the State level, District Co-operative Banks at the district level and
Primary Agricultural Credit Societies for a compact group of villages. The second component of
the integrated scheme of rural credit was a co-coordinated development of agricultural
processing, storage, warehousing and marketing. The third ingredient of the integrated scheme
was the management and administration of the co-operative movement by qualified, competent
and well trained personnel.
Other important recommendations included the amendment of Reserve Bank of India
Act to enable the bank to play a positive role in the financing of agricultural sector through cooperatives, nationalization of the Imperial Bank of India into State Bank of India with a wider
network of branches to supplement the efforts of co-operative movement, establishment of a
National level Co-operative Development Corporation and creation of suitable agency for
organising a comprehensive programme of co-operative training.
All these measures were accepted by the Central and State governments and
implementation gained momentum during the second five year plan. The rural credit policy
throughout the fifties was based on the integrated scheme of institutionalised credit but with
the co-operative system at its centre piece. The policy of single agency approach to solve the
problem of agricultural credit was followed till the year 1968-69 when an epoch-making event
of multi agency approach was ushered in, which almost sounded the end of an era which was
marked by the virtual monopoly of co-operatives over the field of agricultural finance.
The nationalisation of State Bank of India in 1955 had drawn it into rural banking, but
the other commercial banks have kept away from it. Despite the implementation of the
recommendations of AIRCSC, several weaknesses were visible in the rapidly changing
environment of the mid-sixties. Agricultural structure had begun to develop several weaknesses
in the form of over dues and organisational effectiveness. Hence, efforts of the co-operatives
had to be supplemented.

SRD II (N) 6

It was in this context that the Rural Credit Review Committee was appointed in 1966
under the chairmanship of B. Venkatappaiah by the Reserve Bank of India to assess the
performance of co-operative credit structure and the committee submitted its report in July
1969. The committee acknowledged the inadequacy of the co-operative system alone to meet
the credit requirements of agriculture, which was estimated to be of the order of Rs.2500 crores
consisting of Rs.200 crores of short term production credit and Rs.500 crores of medium term
loans in the last year of Fourth Five Year plan, i.e., 1973-74. Out of these, co-operatives were
expected to meet Rs.750 crores. Thus, the committee prepared the ground for a multi-agency
approach to agricultural finance. The All India Rural Credit Review Committee undertook a

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comprehensive review of the agricultural credit system and recommended for a substantial
contribution from commercial banking sector in order to provide credit for both current
production and long term development. The specific recommendation of the agricultural sector
was so large and diverse that commercial banks and co-operative banks can both play a mutually
complementary role without getting into conflict with each other. While recommending a large
role for commercial banks in rural credit so as to fill the gap in the rural credit system, the
committee emphasised the necessity to ensure that the co-operative system was not damaged.
No sooner it was realised that commercial banks must necessarily be involved in
financing agricultural sector consistent with the overall objective of establishing a socialistic
pattern of society. Under the scheme of social control which was approved by the parliament
two main steps were envisaged.
*

The creation of a National Credit Control to formulate and integrate credit policies.

A change in the composition of the Board of Directors.

Accordingly, the National Credit Council was setup in 1968. But the Social control over
commercial banks did not result in active involvement of commercial banks in financing priority
sectors. The turning point in the history of Indian Banking, particularly Rural Banking came in
July 1969, when the major commercial bank were nationalised, to be followed by the
nationalisation of six more banks in 1980. Since then the commercial banks have witnessed a
phenomenal change in the profile of banking which is perhaps without a parallel in the world.

Objectives of Nationalisation of Commercial Banks


*

To exercise public control over commercial banking consistent with the goal of socialistic
pattern of society.

To involve nationalised banks actively in financing the priority sectors of Rural Economy
like agriculture, small industries, etc., by vigorously expanding their branches in Rural Areas.

To extend credit facilities not only to the already viable cultivation but more importantly to
the marginal and potentially viable cultivators.

SRD II (N) 6

Branch expansion
In the post-nationalisation period, the commercial banks were directed to open large
number of rural and semi urban branches in hitherto unbanked centres. The branch expansion
policy till recently required the banks to open four rural branches for every branch opened in a
metropolitan / urban centre. The number of commercial bank branches in the rural areas
increased from 1,832 in 1969 to 32,981 as on June 1997. The share of rural branches in the total
number of public sector banks as on 1997 accounts for 51.90 percent (Table 2).

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Table 2 : Growth of Commercial Banks, 1969-1999
Year

Total

Population
per Branch
in 000S

Number of Branches
Rural

Semi- urban

Urban

Metropolitans

1969
June

1832
(22.18)

3342
(40.46)

1584
(19.17)

1503
(18.19)

8261

64

1985
June

28782
(55.4)

10460
(20.1)

7542
(14.5)

5194
(10.0)

51976

15

1990
June

34494
(58.1)

11255
(18.7)

7582
(12.8)

6057
(10.2)

59388

12

1991
June

35212
(58.4)

11281
(18.7)

7630
(12.7)

6128
(10.2)

60251

11

1996
June

33068
(52.4)

13507
(21.4)

9105
(14.4)

7411
(11.7)

63092

15

1997
June

32981
(21.6)

13694
(21.6)

9283
(14.6)

7555
(11.9)

63513

15

Source: Report on Trend and Progress of Banking in India 1995-96 (June-July), Reserve Bank of India
and Rural Development Statistics, 1999, NIRD.
Consequently, branch banking in the rural areas acquired a new momentum and
commercial banking system was able to broaden the credit delivery system.
The Lead Bank Scheme was introduced soon after nationalisation in 1969. The systematic
identification of unbanked centres with potential for banking development and preparation of
district credit plans to meet the credit requirements of all sectors of the economic were
undertaken by the Lead banks.
In order to provide adequate credit support to the rural economic, it was stipulated
that the credit deposit ratio of banks in the rural and semi-urban areas should be 60 percent.

6. Need for Public Intervention in Rural Credit

SRD II (N) 6

Public intervention in rural credit was considered essential to overcome hostile factors
which discouraged lending to agriculture, such as

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1.

absence of collateral, particularly among the poorer sections,

2.

high cost of servicing geographically dispersed customers,

3.

lack of trained and motivated rural bankers, and

4.

seasonal nature of agricultural activities.

Consequently, special credit programmes were drawn up for channelling subsidised


credit to the rural sector.
Since the nationalisation of the major banks in 1969, commercial banks have made a
good deal of progress in advancing credit to rural development through priority sector lending.
Now, they are the prime movers in the process of rural development based on social justice.
The lending strategy adopted by the banks aims at ensuring bank credit to agriculture, allied
sectors and rural industries. It is purposive, productive and income generating thereby shifting
the focus of Indian banking from class banking to mass banking from elite banking to social
banking and from urban based to rural based banking. There has been an unprecedented
growth and diversification in banking sector with no parallel in the annals of banking anywhere
in the world.

Priority Sector Lending


The concept of priority sector was evolved in the late sixties to focus attention on the
credit needs of certain neglected sectors. The priority sectors which form the backbone of the
rural economy, viz., agriculture, small scale industries, village and cottage industries, retail trade,
small business, professional and self-employment, transport, education, etc., were specifically
defined for channelling bank credit on easy terms. Public sector banks were asked to extend
credit to the priority sector to the extent of at least one-third of their total credit outstanding
by March 1979. The target was raised further to 40 percent to be achieved by March 1985. In
consonance with the concept of growth with social justice, it was also stipulated that 25 percent
of the priority sector advances should benefit the weaker sections of the society such as small
farmers, marginal farmers, agricultural labourers, persons engaged in village and cottage
industries, Scheduled Castes and Tribes, etc.

SRD II (N) 6

Several poverty alleviation schemes envisaging provision of productive assets to poor


village households with the help of the government subsidy and banks credit, such as Integrated
Rural Development Programme (IRDP), Self-Employment for Educated Unemployed Youth
(SEEUY ), Self-Employment Programme for Urban Poor (SEPUP), Scheme of Urban Micro
Enterprises (SUME), Development of Women and Children in Rural Areas (DWCRA) and Prime
Minister Rozgar Yojana (PMRY) were implemented throughout the Country.

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Table 3 : Sector-Wise Details of Priority Sector Lending
Year

Note:

Agriculture

Small Scale
Industries

Other
Priority
Sector

Total
Priority
Sector

Direct

Indirect

June 1969

1.3

4.0

8.6

0.7

146(441)

December 1979

7.6

2.5

13.0

2.6

25.7(3395)

December 1980

12.3

3.3

16.5

3.8

35.9(7888)

December 1985

15.4

2.4

19.5

5.0

42,9(20648)

June 1990

16.9

1.3

15.6

9.0

42.3(38649)

June 1991

15.0

1.0

15.8

8.2

400(42093)

December 1992

14.4

1.3

14.9

7.3

37.9(46596)

December 1993

13.8

1.2

14.9

6.8

36.4(49822)

December 1994

13.0

1.5

14.4

8.7

37.4(57349)

March 1995

12.3

1.6

15.3

7.4

36.6(61794)

March 1996

12.4

1.9

16.0

7.5

37.8(69609)

March 1997(p)

13.6

2.7

16.6

8.7

41.7(79131)

Figures in parentheses indicate amount (Rs. crores) of credit for priority sector.

The number of priority sector borrowed accounts of banks increased from 2.6 lakhs in
1969 to 240.4 lakh in 1987 and 337.61 lakh in 1997. The priority sector advances of public sector
banks registered an increase from Rs. 4410 million in 1969 to Rs. 93,3070 million in 1997 thus
pushing up the percentage of priority sector advances to the total bank advances from 14.6
percent in 1969 to 39.9 percent in 1997. Sector-wise details of priority sector credit are given in
the above table:

7. Regional Rural Banks (RRBs)

SRD II (N) 6

The programme of establishing Regional Rural Banks (RRBs) was initiated in 1975 when
the Narasimham Working Group recommended the setting up of RRBs known as Small mans
bank to look after the credit needs of rural areas, particularly of weaker sections. These new
institutions were expected to combine in themselves the low cost profile and local feel of the

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co-operative credit system and the commercial outlook and professional management of the
commercial banks.

Genesis of Regional Rural Banks


The government of India appointed on July 1, 1975, a working group on Rural Banks
under the chairmanship of Mr. N. Narasimham, the then Additional Secretary in the Department
of Economic Affairs, Government of India to examine in depth the setting up of new rural banks
as subsidiaries of public sector banks to cater the needs of the rural people.
The main motivation to set up the RRBs is best conveyed in the following observation
of the Narasimham Working Group: the main disabilities in the co-operatives in purveying the
needed quantum of credit arise from their inability to mobilise adequate deposits resources,
their managerial weaknesses and the character of their functioning marked by dominance of
the vested interests which have come in the way of their efficient functioning, especially in
effective supervision of credit and the inadequate coverage of the small and marginal farmer.
Yet another weakness has been of the limited absorptive capacity of refinance from the higher
tiers of the co-operative structure because of the inadequate non-overdue cover efforts at
rehabilitation of the co-operative credit structure urged repeatedly and attempted over the
last two decades do not appear to have yielded any appreciable results and there was probably
an urgent need to try out new experiments, specially in credit starved areas of the country
the commercial banks suffered from two basic weaknesses in dispensation of rural credit i.e. (1)
their high cost structure and (2) their attitudinal character, basically urban oriented in a
country of the size and regional diversity as India, no single pattern, be it commercial banking
or co-operative credit, can be expected to meet all the emerging requirements in all areas. A
degree of adaptation and improvisation is called for and the range of institutional alternatives
widened.
The Group submitted to report in 1975. It identified the various weaknesses of the cooperative agencies and commercial banks and felt that the existing institutions with the present
structure would not be able to fill the regional and functional gap in the institutional credit
system. Thus, in order to supplement the other institutional agencies in the field, rural oriented,
regionally based, State sponsored and rural oriented commercial banks, known as Regional
Rural Banks (RRBs) came into existence.

Main Features of RRBs

SRD II (N) 6

The jurisdiction of each RRB was to be within specified district in each State. Generally,
the RRB was to have as its area of operation a compact area of 1 to 5 districts with homogeneity
in agro-climatic conditions and rural clientele. A branch office was to cover 1 to 3 blocks and be
in a position to finance 5 to 10 farmers service societies.
Each RRB was to be sponsored by a scheduled commercial bank, mainly a public sector
bank in consultation with the State and Central governments. The sponsor bank was to provide
assistance to the RRB by way of subscription to its share capital, provision of managerial and
other staff assistance mutually agreeable. The authorised capital of each RRB was placed at

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Rs.10 million and issued capital at Rs. 2.5 million. The issued capital would be subscribed by the
Government of India, the sponsoring bank and the concerned State government with proportion
of 50 percent, 35 percent and 15 percent, respectively. Formerly, RBI provided refinance facilities
and this task is now taken up by the NABARD.
The management of each RRB is to be through a Board of Directors, consisting of 9 to 12
members headed by a Chairman. The Chairman is to be appointed by the Government of India
on the recommendation of the sponsoring bank.

Functions of RRBs
The RRB has the status of a scheduled commercial bank. It mobilizes deposits and grants
short term loans to the small and marginal farmers, agricultural labourers, small artisans and
small entrepreneurs engaged in productive activity. It also grants loans to all types of cooperative societies and farmers service societies, LAMPS operating within its area of operation.
Thus, today in India there are three institutional agencies namely co-operatives,
commercial banks and RRBs extending credit to rural areas. The chart below depicts the current
structure pattern of the rural credit

Institutional Arrangements-Agricultural and Rural Credit


RBI GOI
NABARD
Cooperative
Credit institutions

Commercial
Banks (100)

Regional Rural
Banks (196)

Metropolitan
Branches (7331)

Metropolitan
Branches (2)

Short term
Structure

long term
Structure

Urban
Branches (8821)

Urban
Branches (204)

28SCBs
Branches
(779)

19 SLDBS

Semi-urban
Branches
(12119)

Semi-urban
Branches (1280)

Rural
Branches (20081)

Rural
Branches (13023)

383DCCBS 738 PLDBS


(11633) branches (745)

Local Area
Banks (2)

PACS (91720)
SCB State co-operative Bank; DCCBDistrict Central co-operative bank; PACSPrimary
Agricultural Credit Societies; SLDBSState Land Development bank renamed as State
Cooperative Agricultural and Rural Development Banks.
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Source: Ropert on Trends and progress of Banking in India 1997-98


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8. Direct and Indirect Advance of Commercial Banks
The commercial banks provide short term, medium term and long term loans directly
to the agriculturists. The crop loans are provided to meet the cost of raising crops in a year and
it has to be repaid within one year soon after the harvest of the crops. The medium and long
term loans are provided to meet the investment costs retailing to various agricultural
development programmes. This category of loans are provided for minor irrigation works, like
digging of new wells, deepening of existing wells, purchase of electric/diesel pump sets,
purchase of farm machinery, dairying, poultry plantation, horticulture, construction of bio-gas
plants, etc.
The commercial banks also finance agriculture and allied sector indirectly through
certain agencies like Farmers Service Societies, Primary Agricultural Credit Societies, Co-operative
Milk Societies, etc., which in turn finance their members. The State Electricity Board is also
financed by the commercial banks for extension of electrification, energisation of wells, etc., for
agricultural purposes. The dealers in chemical fertilizers are provided with credit facilities and
they also account for indirect financing of agriculture by commercial banks.

9. Developments in Cooperative Banking


The co-operative credit structure has two aims, namely, production credit (short term
credit structure) and investment credit (long term credit structure). The short term credit
structure comprises Primary Agriculture credit Societies (PACS) at the base level, District Central
Co-operative Banks (DCCBS) at the intermediate structure level and State Co-operative Banks
at the apex level. The long term co-operative structure came into existence as Central Land
Mortgage Bank in the twenties, primarily, as surveyors of credit for redemption of debts. It
evolved over the years to meet investment credit needs of the farmers and later came to be
known as State Land Development Banks (SLDBs) now known as State Co-operative Agriculture
and Rural Development Banks (SCARDBS). They have either a unitary structure with branches in
some State or a federal structure supporting Primary Co-operative Agriculture and Rural
Development Banks (PACRDBs) and their branches in other States. PACS form a pivotal part of

SRD II (N) 6

the short term structure of co-operative credit institutions. As at the end of March 1997, there

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were around 91720 PACS with a total membership aggregating to 982.2 lakh, of which borrowing
membership constituted 40.2 percent. As most PACs are totally dependent on the finance
provided by DCCBs, resource mobilisation is a weak spot in their growth. The total deposits and
loans of PACs as on March 31, 1996 aggregated Rs.3450.2 crore, Rs. 10459 crore, respectively.

10. Initiatives of NABARD in Promoting Rural Development


National Bank for Agri & Rural Development(NABARD )was established in 1982 as an
apex refinance and development bank at the national level as recommended by the Committee
to Review Arrangements for Institutional Credit for Agriculture and Rural Development
(CRAFICARD) with a view to promoting integrated rural development with the authorised share
capital of Rs.5,000 million and paid-up capital of Rs.1,000 million.

Functions of NABARD
1.

Development policy, planning and operational matters relating to credit for agriculture,
allied activities, rural artisan and industries and other rural development activities.

2.

Training, Research and Consultancy relating to credit for agriculture and rural development.

3.

Refinance to co-operatives and RRBs including production, marketing and distribution.

4.

Refinance to commercial banks against term lending, short-term accommodation for special
purposes like crop loans, marketing of crops, input distribution, working capital to cooperative sugar factories, procurement of raw materials, production and marketing activities
of weavers, other industrial societies and artisans, etc.

5.

Direct lending singly and through consortium arrangements in special cases.

6.

Co-ordination and monitoring of all agricultural and rural lending activities and inspection
of co-operatives banks and RRBs and

7.

Advice and guidance to State governments, Federations of Co-operatives with regard to


co-operative movement in close collaboration with the RBI and Central government.

SRD II (N) 6

Loans provided by NABARD to banking sector and State governments reached to a new
height of Rs.103,250 million in 1996-97. Amongst the agencies, State Land Development Banks
(SLDBS) have been the largest beneficiary accounting for Rs.18,960 million, followed by Regional
Rural Banks (Rs.6,540 million), commercial banks (Rs.6,010 million) and SCBs (Rs.3,720 million).
Region wise, Southern region accounted for 32 percent of the total, followed by northern region
(20 percent). NABARD laid more emphasis on generation of employment opportunities. Purpose
wise, minor irrigation (including sprinkler and drip) accounted for Rs.5,860 million. For other
purposes for which loans were given on priority basis included animal husbandry, agricultural
machinery, plantation and horticulture, wasteland and dry land development and hi-tech export

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oriented projects. Non-form sector which has inherent potential to generate employment in
the rural areas has accounted for 18 percent of the loan disbursed during 1996-97 at Rs.6,390
million.

Rural Infrastructure Development Fund (RIDF)


RIDF was initially set up with a corpus of Rs.20,000 million in 1995-96 with a major
objective of providing funds to State governments to enable them to complete various types
of infrastructure projects pertaining to irrigation, flood protection, rural roads, bridges, etc. Under
RIDF-I, the bank has committed Rs.20,100 million to 10 States for supporting mainly medium
and minor irrigation projects, watersheds and other rural infrastructure development projects.
This development scheme continued in the subsequent years as RIDF-II in 1996-97 (Rs.25,000
million) and RIDF-III in 1997-98 (Rs.25,000 million). In the fourth tranche of RIDF, an amount of
Rs.30,000 million has been budgeted.

Promotional Schemes of NABARD


NABARD aims at developing working skills and managerial traits in prospective
entrepreneurs through the network of NGOs. Such promotional schemes include
Setting up of training cum production centres to impart training to perspective
entrepreneurs in technical and managerial skills and others allied common facilities for
technology up gradation, quality control and to provide market information.

b.

Grants to NGOs and banks involved in rural entrepreneurship development to promote


project guidance and to disseminate information about legal framework, marketing and
accounting practices.

c.

Market oriented training for rural artisans aiming at helping rural artisans understand the
composition of market, its preferences, product development and product diversification.

d.

Promotion of mother unit scheme under which mother units located in urban area is
expected to orient the production of several small rural area based decentralized units
towards common market options through material, technology and brand (MTB) approach.

e.

Venture capital finance scheme to support risky but potentially viable rural innovative
ventures through creation of Agricultural and Rural Enterprise Incubation Fund (AREIF) with
a corpus of 50 million for refinance, direct incubation assistance and issue of guarantees.
Voluntary organisation supporting rural enterprises can also avail this credit.

f.

Support schemes are extended to export oriented rural industries through allocation of
separate budget for assisting hi-tech innovative export oriented and agro-processing projects
in liaison with export houses. Refinance is provided at the enhanced rate of 40 percent for
hi-tech export promotion councils, export associations and formulation of new model

SRD II (N) 6

a.

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projects having export potential, like horticulture, floriculture, animal husbandry, fishery
and storage houses, are encouraged.
g.

Promotion of Rural Artisan Guild to facilitate collaboration among a cluster of working


artisans so as to enhance the bargaining power in the market.

NABARD and Womens Development


NABARD pays attention to gender issues in credit and support services since July 1992
by setting up of a womens cell in its head office at Bombay and designing nodal offices in all
its regional offices. The exclusive women oriented schemes introduced by NABARD are:
1)

Assistance to Rural Women in Non-farm Development (ARWIND),

2)

Women Development Cells, and

3)

Linking women SHGs with banks.

The availability of institutional credit and its timely distribution is crucial in rural credit
delivery system. The NABARD as a developmental change agent is playing a pivotal role in the
development of agriculture, in particular, and in the management of proper flow of credit for
the development of the rural sector. In order to cater to the needs of local people, to provide
efficient and comprehensive financial intermediation devices and to tap retail savings where
the branches of commercial banks are insignificant, the RBI has given in principle approval for
setting up of Local Area Banks (LABs) one each in Maharashtra, Karnataka and Andhra Pradesh.
Such banks will have to observe overall priority sector lending target of 40 percent of net bank
credit and the sub-target of 10 percent of net bank credit for lending to weaker sections.

SRD II (N) 6

The growth of grass root level rural financial institutions has been spectacular. To a
considerable extent, the institutional agricultural credit system has been successful in piercing
the stronghold of private moneylenders. In spite of an impressive expansion of credit system, it
is often felt inaccessible to the rural poor the coverage of small farmers credit system in the
country. About 68 percent of the term credit from commercial banks was extended to farmers
holding above 2 ha (5 acres) of land. The restricted access of small farmers to co-operative credit
is highlighted by the fact that only 30 percent of the farmers having less than one hectare were
members of PACs whereas almost all the farmers holding above 4 ha were members of PACs.
The limited access of small farmers to credit is well documented in literature. It has been reported
that the households with a low asset base (below Rs.10,000) depended on non-institutional
sources for their credit needs and the dependence on institutional source increased with
increasing asset base. Thus, access of small farmers to institutional credit is restricted. It is evident
from field studies that marginal and small farmers still depend on non-institutional sources for
as much as half of their credit needs.

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The advantages of formal credit system are mainstream banking with extensive network,
multi-agency approach, vertically integrated structure, diversified services and rural areaoriented services. The limitations of the formal institutional credit system are:
a.

Target oriented credit with less emphasis on viability and self-sustainability

b.

High transaction cost associated with centrally sponsored credit schemes

c.

Application of concession in lending rates that are below the market determined rates

d.

Low recovery rate and existence of persistent loan delinquency

e.

Lack of responsiveness and flexibility in lending system

f.

Negative mind set of bank officials towards poor

g.

Politicisation of loans

h.

Over-bureaucratisation in credit delivery system and low resource efficiency.

i.

Unsatisfactory operational efficiency characterized by low profitability and growing nonperforming assets.

The main concerns, however, centre around viability and over dues. The directed credit
system with emphasis on quantitative targets has resulted in all pervasive sickness.
Implementation of government sponsored credit linked poverty alleviation programmes with
high transaction cost and default rate affected the viability of rural lending. The margin between
their lending rates and cost of funds was not enough to cover the non-financial transaction
cost. The mandatory lending to priority sector at concessional rate, centrally administered rates
of interest and rising cost of establishment, etc., are also the contributory factors to their nonviability.

SRD II (N) 6

The basic concept of Development Banking is that credit is used as a lever of


development. It is different from simply making subsidy available or distributing credit as and
when required. It assumes adoption of plan of action and calls for initiative and energetic
involvement of the banking institution in developing the potential opportunities for the
underdeveloped sections through purposeful credit extension. The requisites of a good credit
system are:
1.

Quantum of credit should be adequate and timely

2.

Credit should be provided to those who really need it for development purpose and must
be made available as near to his/her door-step as possible.

3.

The credit system should effectively counter local monopolies.

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4.

Savings and credit must be linked. The credit system should make mobilisation of savings
as integral part of loan programme to mop up surplus income of farmers.

5.

Transaction cost of credit must be minimum.

6.

There should be absence of risk to the credit giving agency in recovering the loans advanced.

7.

The period of repayment should be in tune with the repaying capacity of the farmers.

8.

Credit should facilitate asset-building and help to generate additional income so that
repayment of loan becomes easier.

9.

There should be optimum measure of supervision over the end use of credit and assistance
in the utilisation of credit by the farmer.

10.

There must be flexibility in administration of credit to meet the unforeseen contingencies.

11. Keywords
Credit delivery system, Distress sale, Lead banks, Priority lending

12. Summing up
This Unit covered a wide range of issues related to institutional finance. It discussed the
causes of rural indebtedness, need for institutional credit for rural development, and expansion
of institutional support structures for institutional finance. It outlined the historical
developments of changes in the outlook of institutional financing and establishment of RRBs
and the role played by NABARD to meet the credit needs of the rural sector in providing succour
to the SHGs and poorer sections.

SRD II (N) 6

13. Know your Progress


1.

Define priority sector lending.

2.

What is meant by distress sale?

3.

What are the salient aspects of the Initial Phase of development of financial institutions in
India?

4.

Discuss the significant developments in the banking sector during the Stabilising Phase of
development of financial institutions in India?

5.

How the changes that have come about in the Reforms Phase of financial institutions in
India are helpful in meeting the credit needs of agriculture sector?

6.

State the objectives of Regional Rural Banks.

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7.

Explain the functions of NABARD and also mention four of its programmes.

8.

Give examples for formal and informal credit system.

9.

Explain the causes for rural indebtedness.

10.

What are the features of a good credit system?

11.

Explain the components of transaction cost.

12.

Explain the limitations of credit delivery system of formal credit system.

14. Further Reading/References


1.

Subramanian. K and Velayathum, T. K. (1997). Banking Reforms in India. New Delhi: Tata
McGraw Hill Publishing Co. Ltd.

2.

Venkata Reddy. K. (2008). Rural Development in India. Delhi: Himalaya Publishing House.

3.

Lalitha. N. (2004). Rural Development in India Emerging Issues and Trends, Vol. II. New Delhi:
Dominant Publishers and Distributors.

4.

Someshwara Rao, K. (1998). Economics of Rural Banking. New Delhi: Anmol Publication.

15. Model Answers


Priority sector lending means focusing on the credit needs of certain neglected sectors,
which are significant to the rural economy, such as agriculture, small scale and village
industries and self-employment.

6.

Objectives of Regional Rural Banks are meant to cater the credit needs of rural areas by
combining the low cost profile and local feel of the co-operative credit system and outlook
and professional management of the commercial banks.

7.

The functions of NABARD mainly include policy planning and its operation with regard to
rural credit, providing training, support to research and consultancy on credit for agriculture
and rural development, Refinance to RRBs and Cooperatives.

SRD II (N) 6

1.

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UNIT - 2 : MICRO FINANCE INSTITUTIONS (MFIs)

SRD II (N) 6

Structure
1.

Introduction

2.

Objective

3.

Definition of MFI

4.

Types of MFIs

5.

SHG Bank Linkage Model vs. MFI Bank Linkage Model

6.

MFIs Critical Issues

7.

Keywords

8.

Summing up

9.

Know your Progress

10.

Further Reading/References

11.

Model Answers

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1. Introduction
Micro- finance plays a vital role in providing financial services to the poor people thus
enabling them to utilise their abilities to the fullest extent possible. Generally microfinance
services fall under four mechanisms: loans, savings, insurance and other financial services.
Microfinance institutions(MFIs) can provide one or a combination of services depending upon
the objectives of their operation. There are some institutions that are solely savings led institution
and so do not provide other services while some of them provide combination of different
services like loans and savings, savings and insurance. There are also bigger institutions that
provide all these services under one umbrella but these kinds are very few in numbers. Majority
of the MFIs play a vital role in poverty alleviation. There is a need to understand characteristics
that make these institutions unique. Some of them are given below:
*

Formal providers

Ownership structures

Focus

Services

Formal providers are organisations that are legally registered and are subject to not
only general laws but also specific banking regulations and supervision laws. They are generally
part of mainstream financial institutions like commercial banks, development banks, nonbanking financial institutions, postal banks and savings. These institutions have a microfinance
department or fully owned subsidiary that specially caters to the needs of the poor rural
households. Most prominent example of these institutions is SIDBI which has a separate
subsidiary (SFMC) that is involved microfinance services in India.

SRD II (N) 6

Ownership structure is another unique feature of microfinance institutions. The


ownership of MFI is varied and can be seen in various formats like government owned rural
cooperatives, members owned credit unions, not-for-profit NGOs usually started by socially
minded citizens in a particular country, for-profit NGOs, Self Help Groups and microfinance
banks that are generally profit oriented. This allows MFIs to build an institution that is tailored
to meet the needs of the society in which it is working and it helps them to adapt to the societal
changes quickly and efficiently. However, it can also act as a disadvantage because these
institutions in their eagerness to follow the societal norms tend to lose their integrity and service
oriented nature in the long run.

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The focus on MFI operations is an important feature for understanding these institutions.
Some MFIs concentrate only on providing the financial services to the poor households while
others tend to provide all the possible services, depending upon the requirements of the
community or communities that they are serving. Again, these services are tailor-made to the
requirements of the households which provide them economics of scale and help them in
enhancing their survival chances in the short run.
The services provided by the MFI differ from the other formal financial institutions.
Generally, poor people demand the same kind of services like everyone else but these services
have to be modified to the specific needs of the poor because of their inability to provide
collateral. The most common type of service that is provided by the MFIs is a non-collateralized
micro loans that is distributed through self- help groups. The services provided by the
regulated MFIs are generally limited to their legal structure while unregulated ones can provide
a range of services that an organisation can provide and much more.
In India the SHG based Micro finance delivery system has been recording an exponential
growth in the last few years. As of March 2006, cumulatively 22,38,525 SHGs had been credit
linked with the banks and the bank loan disbursed amounted to Rs.113,970 million benefiting
32.98 million poor households. The major micro finance programme is SHG bank programme
and lending to SHGs through MFIs, the former accounts for 92 percent and the later accounts
for 8 percent of share. It is estimated that the share of lending through MFIs will reach 25 percent
in the near future as NABARDs mission is to reach 225 million poor through 3.0 million SHGs by
2010.
The NGOs facilitate the formation and development of SHGs. Of late, the support cost
given by the donors and government agencies to NGOs for SHG formation have come down or
almost stopped. The SHG training disbursement cost to NGOs also has been reduced. The NGOs
find it difficult to meet their operational cost. To make the operations sustainable and to increase
the outreach, many NGOs are turning themselves into MFIs. This kind of role transformation is
taking place at a faster rate in India.

2. Objective
The main objective of this Unit is to acquaint the students with the concept of MFI and
its legal forms, problems faced by the MFIs, progress of MFI sector in India and the promotional
efforts undertaken by NABARD.

3. Definition of MFI
It is an organisation or association of individuals established for the purpose of carrying
on the business of extending micro- finance services.

SRD II (N) 6

Micro Finance Services Regulation Bill defines micro finance as Providing financial
assistance to an individual or an eligible client either directly or through a group mechanism

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for an amount not exceeding Rs. 50,000/- in aggregate per individual for small and tiny
enterprises, agriculture, allied, including for consumption purpose of such individuals or an
amount not exceeding Rs. 0.15 million per individual for housing purpose.
There are several legal forms of MFIs. It is roughly estimated that there are about 1000
NGO-MFIs and more than 20 Company-MFIs in India. In Andhra Pradesh nearly 30,000
Cooperative organizations are engaged in micro finance activities. However, Company-MFIs are
major players accounting for over 80 percent of loan portfolio.

4. Types of MFIs
There are a wide variety of institutions in India in the public sector as well as in the
private sector offering micro finance services. These can be broadly classified under two
categories.
*

Formal Institutions

Semi-formal Institutions

The formal category comprise apex development financial institutions, commercial


banks, Regional Rural Banks and Cooperative Banks that provide micro finance services in
addition to their general banking activities and are referred to as Micro finance Service Providers.
On the other hand, semi-formal Institutions that undertake microfinance services as their main
activity are generally referred to as Microfinance Institutions (MFIs). While both private and
public ownership are found in the case of formal financial institutions offering microfinance
services, the MFIs are mainly in the private sector.

5. SHG Bank Linkage Model Vs. MFI Bank Linkage Model


SHG Bank Linkage Model
This model involves the SHGs financed directly by the banking agencies, viz., commercial
banks (public sector and private sector), Regional Rural Banks and Cooperative Banks.

MFI Bank Linkage Model

SRD II (N) 6

Under this model, Micro Finance Institutions avail loans from banks for on-lending to
SHGs and other small borrowers

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Various forms of Micro Finance Institutions
Type of entity

No Profit

Mutual benefit

For profit

Association

Society under
Societies
Registration Act

Cooperatives which can


be just a savings and credit
cooperative or be further
licensed as cooperative bank

Association of
persons/
partnership firms

Trust under
Indian Trust
Act 1920

Charitable Trust

Mutual Benefit Trust

Private trust running


credit institutions

Company
under Indian
Companies
Act 1956

Section 25
Company

Mutual Benefit (See 620 A


Nidhi Company)

Company which is
either an NBFC or a
bank

The MFIs can broadly be sub-divided into three categories of organisational forms:

Not-for Profit MFIs


*

Societies registered under Societies Act, 1860 or similar state Acts

Public Trusts registered under the Indian Trust Act 1880 or any state enactment governing
religious or charitable public trusts

Non Profit Companies registered under Section 25 of the companies Act 1956 that are
specifically exempted from registration with RBI

Mutual Benefit MFIs


*

State Credit Cooperatives

National credit cooperatives

Mutually Aided Cooperative Societies (MACS)

For Profit MFIs


*

Non-Banking Financial Companies registered under the Companies Act 1956 and as defined
in the Reserve Bank of India Act 1934 whose principal business is the provision of
microfinance.

SRD II (N) 6

Approaches adopted by the MFIs in providing financial services with exclusive focus on
MF Services

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*

Under this category NGOs implementing a variety of MF programs are the major players.
These NGOs act as financial intermediaries in mobilizing savings and on lending donor funds
or loan funds to the poor. These funds may or may not be added to the client savings to
form a corpus for on lending. There are a few cooperative organizations that fall under this
category of MFIs. These are registered under the Central Cooperative Societies Act such as
the Indian Cooperative Network of women of the working Women Forum and the thrift and
credit cooperative societies promoted by the Cooperative Development Forum in Andhra
Pradesh. Also a few of the MACS in Andhra Pradesh are engaged in providing MF services
exclusively.

Microfinance services as one of their major objectives


*

Under this type, a large number of NGOs that are engaged in various social sector
programmes in health, education and environment also provide MF services as add on
activity. BASIX, a Non-Banking Finance Company, falls under this category.

Intermediary or apex Institutions


*

Institutions like Rastriya Mahila Kosh(National Women Fund), the Friends of WWB,
Ahmedabad, and Rastriya Gramin Vikas Nidhi (RGVN)- National Rural Development Fund,
Guwahati are among the few institutions providing indirect services in the MF sector by
supporting smaller institutions offering micro financial services. Recently SIDBI has set up a
foundation, viz., SIDBI Foundation, for Micro Credit for supporting micro credit provided by
the MFIs.

Various committees have been appointed by the Government of India and Reserve Bank
of India to regulate and supervise the activities of MFIs. They are as follows:
Task Force (appointed by NABARD) Report on Regulatory and Supervision Framework for
MFIs, 1999.

Working Group (constituted by the Government of India) on legal framework and regulations
of MFI, 2002.

Informal Groups (appointed by Reserve Bank of India) on Microfinance that studied issues
relating to structures and sustainability, funding, regulations and capacity building, 2003.

Advisory committee (appointed by RBI) on flow of credit to agriculture and related activities
from the banking system, 2004.

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Progress of MFIs - 2006- 2007
Particulars

Units

2006-07

Bank loans disbursed to MFIs

No.
Amount (in Crores)

334
1151.56

Bank loan outstanding with MFIs


as on 31 March

No.
Amount (in Crores)

550
1584.48

Models of MFIs
There are different models of MFIs:
*

Bank Partnership model

Service company model

Banking correspondent model

Bank Partnership Model


This model is an innovative way of financing MFIs. The bank is the lender and the MFI
acts as an agent for handling items of work relating to credit monitoring, supervision and
recovery. In other words, the MFI acts as an agent and takes care of all relationships with the
clients from first contact to final payment. The model has the potential to increase the amount
of funding that MFIs can leverage on a relatively small equity base.

Banking Correspondent Model


This model allows MFIs to collect savings from the poor on behalf of the bank. It would
use the ability of the MFI to get closer to the clients while relying on the financial strength of
the bank to safeguard the deposits.

Service Company Model


This model is developed by ACCION and used in some of the Latin American countries.
Under this model the banks form their own MFI, perhaps as an NBFC and then work hand in
hand with the MFI to extend loan and other services. This model has distinct operational features.

SRD II (N) 6

1.

The MFI uses the branch network of the bank as its outlets to reach clients. This allows the
clients to be reached at lower cost than in the case of a standalone MFI. In the case of banks
which have large branch networks it also allows rapid scale up. In the partnership model,
MFIs may contact with many banks. In the service company model, the MFIs works specifically

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for the bank and develop an intensive operational cooperation between them to their mutual
advantage.
2.

The partnership model uses both the financial and infrastructure strength of the bank to
create lower cost and faster growth. The service company model has the potential to take
the burden of overseeing micro finance operations off the management of the bank and
put it in the hand of MFIs managers who are focused on micro finance.

Limitations of the MFI Sector in India


In India, MFI sector as a whole is still in an evolving phase:
*

Majority of the MFI are small in size and lack appropriate operating system

Desirability of NGOs taking up financial intermediation

Unproven financial and organisational sustainability of the model

High transaction costs leading to high rates of interest being charged to poor clients

Absence of commonly agreed performance, accounting and governance standards. Most


of the MFIs are immature in operation and their internal control and MIS (Management
Information System) are not satisfactory

Heavy expectation of low cost funds

A majority of the MFIs are subsidy dependent and limited resources are a feature of an
MFI. Many of these institutions are donor funded institutions and by nature are underfunded.
Most of the organisations are restarted on a non-profit basis and their financial resources tend
to be limited because of the perceived inability of these institutions to turn profitable. Treating
MFIs as social ventures generally limit the ability of these organizations to raise adequate
finances to run their operations efficiently without a cash crunch. This has also resulted in their
inability to attract talented and professional managers into its payroll.

SRD II (N) 6

Lack of professional management has long been an important factor in the MFI
management. There are many reasons for this problem, the major reason being lack of financial
resources to attract and retain talented mangers and the other reasons include lack of qualified
people who understand the unique nature of many MFI operations. These two factors played a
major role in the collapse of many Micro Finance Institutions. Nevertheless, things are changing
in recent time due to the renewed emphasis on the MFIs by the governments and other
multilateral institutions to improve management systems in these organizations in order to
provide effective and efficient microfinance services to the poor people.

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Inadequate risk management practices are yet another noteworthy feature of the MFIs.
This is mainly due to the ownership structure and lack of professional management team in
place to manage risk in these institutions. Many of these institutions are started by the NGOs to
serve the poor rural communities making it difficult for them to understand and implement
proper risk management structure in the organisations. This is one of the major reasons for the
disintegration of these firms and their inability to survive in the long run. One way to deal with
this problem is to ally with partners like commercial banks and other financial institutions that
are good at managing the risk involved in MFI operations.
Lack of sophistication in the information management is an area where MFIs differ
significantly from the other financial institutions. These organisations by virtue of being a small
operation initially, they do not invest much in technology to manage their information in an
orderly fashion. This becomes a problem the moment MFIs operations start expanding and the
need for information management arises. As there are no systems in place earlier, it becomes
difficult for them to map their processes efficiently into the new system that they are trying to
implement, which, in turn, created confusion among the management and staff, thereby
disturbing the operations. This can be avoided by implementing a proper management
information system from the start making it easier for these institutions to manage their
information in an efficient and effective manner. Given these unique features that define and
shape a microfinance institution and its activities, many challenges arise in the management of
these institutions.
*

Sustainability of microfinance operations is critical for scaling up the provisioning of financial


services to the poor.

Most of the MFIs in India are NGO based and are registered as societies or Trust which are
not appropriate organisational forms to carry on microfinance operations on a commercial
scale.

The transaction cost for handling small amount is usually high. MFIs cover them by charging
high interest rates. For the poor, the lending rate of interest may not be as immediate area of
concern so long as they get hassle free and timely access to credit.

SRD II (N) 6

Development of a regularity system for MFIs envisages three stages:


Stage

Development of a regulatory system

Stage I

Making MFIs appreciate the need for certain common performance

Stage II

Making it mandatory for the MFIs to get registered with identified or designed
institutions

Stage III

Encouraging the development of a network of MFIs which could function as quasi


self-regulatory organization at a later date or identifying a suitable organization
to handle the regulatory mechanism.

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Problems of NGO MFIs
There are a large number of NGOs that have undertaken the task of financial
intermediation. The NGO-MFIs vary significantly in their size, philosophy and approach.
*

They are structurally not the right type of institutions for undertaking the financial
intermediation activities as the bye laws of these institutions restrict commercial operations.

These organisations by their charter are non-profit organisation and as a result face several
problems in borrowing funds from higher financial institutions.

The NGO MFIs cannot accept public deposits, although many do, from their members

Sa-Dhan ( The Associate of Community Development Finance Institution) has


recommended a set of six financial standards for MFIs. They cover three elements of financial
performance sustainability, asset quality and efficiency. A set of financial standards and their
benchmarks are as under:
Indicator

Benchmark

Formula

Sustainability

100 per cent

Operational income

Operational self sufficiency

Asset quality

Operational costs +loan loss provisions


+financing costs
Less than 10
per cent

Unpaid principal, balance of Portfolio


at risk >60days past due
Current repayment rate

Portfolio at risk<60days past


due Current repayment rate
Efficiency

Loans(with over dues>60 days of age


Total gross outstanding portfolio
Less than 20
per cent

Total operating costs

Average outstanding portfolio

Total cost ratio

Total costs

Active borrowers per


credit officer

Average outstanding portfolioAverage


number of active borrowersAverage
number of credit officers.

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Operating cost ratio

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Need for Rating
The rating of MFI raises the credibility of the institution in the eyes of the bankers and
social investors. The MFIs will know about their strength, weaknesses, opportunities and threats.
Rating enables the MFIs to access the mainstream commercial loan funds as the donor grants
are limited. Rating increases their outreach with sustainability; it makes them transparent and
will attract investments in the form of equity or quasi-equity from the social investors or financial
institutions, thus increasing their long term funds, which leads to increased leveraging of equity
to borrow more funds to reach more number of clients

MFI Rating Process


The rating process involves the following steps:
*

Formation of an internal rating team by the organisation

Discussion of the team with Board and senior management personnel

Visit to branch units to understand the operation practices

Rating Teams interaction with the field staff

Village visits and getting feedback from the SHG clients

Participatory SWOT Analysis

Analysis of financial statements by the rating team

Promotional Support MFI Bank Linkage


NABARD has taken initiatives to support MFIs to strengthen them as given below:

Rating of MFIs

SRD II (N) 6

In order to identify, classify and rate MFIs and empower them to intermediate between
the lending banks and the clients, NABARD introduced a scheme for providing financial
assistance by way of grant to commercial banks, RRBs and cooperative banks to avail the services
of accredited rating agencies for rating of MFIs. Banks can avail the services of credit rating
agencies, viz., CRISIL, M-CRIL CARE and Planet Finance for rating MFIs and avail financial
assistance by way of grant to the extent of 100 percent of the total professional fees of the
credit rating agency subject to a maximum of one lakh. The facility is available for the first
rating of an MFI with a minimum loan outstanding of Rs.50.00 lakh and maximum loan
outstanding of Rs.500.00 lakh.

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Capital / Equity Support to Micro Finance Institutions
In pursuance of the announcements made in the Union Budget 2005-06, a scheme called
Capital / Equity support to MFIs from Micro Finance Development Equity Fund (MFDEF) was
announced under which capital / equity support to various types of MFIs would be provided to
enable them to leverage capital / equity for accessing commercial funds from banks.

Revolving Fund Assistance to MFIs


NABARD provides loan funds in the form of Revolving Fund Assistance on a selective
basis to MFIs which is to be used for on-lending to SHGs and the amount is to be repaid along
with the service charges within a period of 5 to 6 years. This enables them to build a credit
history which would help them access credit facilities through the regular banking channels.

Governance of MFIs
The type of governance is an important factor influencing the organisational
sustainability of an MFI. Good corporate governance is needed for MFIs whether non-profit
mutual benefit or for profit organisations. Governance structure emanate from the ownership
pattern.
In the case of non-Profit MFIs, the Board generally comprises of persons invited to join
by the founder. When the work grows, there is possibility to attract independent professionals
along with founder-nominees to the Board.
In the case of non Profit MFIs, the borrowers are not members of the society or the Trust
and thus cannot be on the Board. Indeed it would violate the tax-exempt status of these entities
if the Board members were the beneficiaries. A governance structure comprising elected
members /shareholders is feasible in a co-operative or a mutual benefit Company.
However, mere adoption of these legal forms does not assure that the governance of an
MFI would be with the user-members (borrowers). For the MFI to become truly membermanaged, it takes a particularly enlightened leadership and years of investment in capacity
building of the members. For e.g., the SEWA Bank set up by Ela Bhatt, which is an urban cooperative Bank, entirely has poor women member shareholders as its Board members. The SEWA
Bank is managed by a banking Professional and her colleagues with guidance from the Board.

SRD II (N) 6

Another issue in governance is how to move from the entrepreneurial founders in the
early year to a governance structure comprising investor representatives and independent Board
members overseeing the MFI being run by professional managers.
MFIs are extremely heterogeneous groups comprising Non-Banking Finance Companies,
Societies, Trusts and Co-operatives. They are provided financial support from external donors
and apex institutions, including the RMK, SIDBI Foundation for Micro Credit and NABARD, and

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employ a variety of ways for credit delivery. Since 2000, commercial banks, including RRBs, have
been providing funds to MFIs for on-lending to poor clients. While there is no published data
on private MFIs operating in the country, the members of MFIs is estimated to be around 800.

6. MFIs Critical Issues


Sustainability
The first challenge is related to sustainability. It has been reported that MFI model is
comparatively costlier in terms of delivery of financial services. An analysis of 36 leading MFIs
by Jundal and Sharma shows that 89 percent sample MFIs were subsidy dependent and only 9
percent out of this were able to cover most of their costs. This is due to the fact that the cost of
supervision of credit is high, while the loan volume and loan size are low. It is also commented
that MFIs pass on the higher cost of credit to their clients who are interest insensitive for small
loans but may not be so as loan size increases. It is, therefore, necessary for MFIs to develop
strategies for increasing the range and volume of their financial services.

Lack of Capital
The second area of concern for MFIs which are on the growth path is that they face a
poverty of owned funds. This is critical constraint in their being able to scale up. Many of the
MFIs are society oriented institutions and do not have adequate access to financial capital. As a
result they have high debt equity ratios. The Micro Finance Development Fund (MFDF) set up
with NABARD has been augmented and re-designated as the Micro Finance Development Equity
Fund (MFDEF). The fund is expected to play a vital role in meeting the equity needs of MFIs.

Borrowing from Banks


Compared to earlier years, MFIs are now finding it relatively easier to raise loan
funds from Banks. This change came after 2000, when RBI allowed banks to lend to MFIs and
treat such lending as part of their priority sector lending obligations. Private sector banks have
designed innovative products such as the Bank-partnership Model to find MFIs and have started
viewing the sector as a good business proposition. But as a precautionary measure, the banks
should improve their skill sets for appraising such institutions and assessing their credit needs.

Capacity of MFIs

SRD II (N) 6

It is now widely recognised that widening and depending on the outreach of


the poor through MFIs has both social and commercial dimensions. Since the sustainability of
MFIs and their clients complement each other, it follows that building up the capacities of the
MFIs and other primal shareholders are preconditions for the successful delivery of flexible,
client responsive and innovative Micro Finance services to the poor. Here innovations are
important both of social intermediation, strategic linkages and new approaches centred on
the livelihood issues surrounding the poor, and the re-engineering of the financial products
offered by them as in the case of banks partnership model.
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7. Keywords
Self Help Groups (SHGs), Micro Credit, Rastriya Mahila Kosh, Bank Partnership

8. Summing up
This Unit broadly discussed the differences between the MFIs and other financial
institutions, both formal and non-formal. It discussed about different types of MFIs and their
progress and their limitations in India. Further, this unit discussed about the financial standards
for MFIs and the need for rating them in order to empower them to act as intermediary between
the lending banks and NABARD.

9. Know your Progress


1.

Define Micro Finance Institution

2.

Who are the MFI service Providers

3.

State the problems of NGO MFIs

4.

Give examples for Mutual Benefit MFIs and not-for-profit MFIs

5.

What are the twin objectives of MFIs

6.

Explain limitation of MFIs in India

7.

Explain the factors to be considered for rating of MFIs

8.

Name the committees appointed for regulation and supervision of MFIs

9.

Describe the various stages of regulatory system for MFIs

10.

Discuss the approaches adopted by the MFIs in providing financial services

11.

Explain the various forms of MFIs

12.

Explain the promotional efforts taken by NABARD for MFI Bank linkage programme.

10. Further Reading/References


Karmakar, K.G. 2008. Microfinance in India. New Delhi: Sage Publications.

2.

Lalitha N. 2008. Readings in Micro Finance. New Delhi: Dominant Publishers.

3.

NABARD. Status of Micro Finance in India, 2006-07.

SRD II (N) 6

1.

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SRD II (N) 6

11. Model Answers


1.

Micro Finance Institution (MFI) refers to an organization or association of individuals


established for the purpose of carrying on the business of extending Micro finance services

3.

The major problems of the NGO-MFI are they have structural limitations and cannot take
up commercial activities; they are non-profit institutions and they cannot borrow from
financial institutions; and they are not allowed to accept deposits from public.

8.

The committees appointed for regulation and supervision of MFIs are Task Force appointed
by NABARD in 1999; Working Group constituted by Government of India in 2002; Informal
Groups (2003) appointed by Reserve Bank of India; and Advisory committee (2004) appointed
by RBI.

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UNIT - 3 : COMMUNITY BASED MICRO FINANCE SYSTEM


Structure
1.

Introduction

2.

Objective

3.

Mobilising Communities

4.

Self-Help Group (SHG) Definition

5.

Demand for Micro Finance Services in the Community

6.

Micro Finance

7.

Micro Credit

8.

Approaches to Micro Finance

9.

Community Based Thrift and Credit Groups in India


Linkage Programme as a Rational Alternative in Rural Financial System

11.

Ten Pillars of Linkage Programme

12.

Keywords

13.

Summing up

14.

Know your Progress

15.

Further Reading/References

16.

Model Answers

SRD II (N) 6

10.

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1.

Introduction

While many factors contribute to poverty, its most obvious manifestation is insufficient
household income. Both the extent of income generating opportunities and ability to respond
to such opportunities are determined to a great degree by access to affordable financial services.
Increasing the access of poor households to micro finance is, therefore, being actively pursued
worldwide. Once almost exclusively the domain of donors and experimental projects, micro
finance has evolved during the last decade, with prospects for viability offering a broader range
of services and significant opportunities for expansion. Micro finance in India is based on Self
Help Groups (SHGs) and is dominated by the SHG based credit delivery system.

2. Objective
The aim of this Unit is to furnish a meaningful and comprehensive appraisal of micro
finance, which in India is based on the Self Help Groups (SHGs) in the rural and semi urban
communities. The Unit will explain:
*

The genesis of SHG based Micro Finance in the village communities

Principles and features of Micro Finance

Scope of Micro Finance

Distinction between micro Credit and Micro Finance

Growth evolution and development stages of community based Micro Finance

Wholesalers and retailers in Micro Finance

Role of NABARD in promoting Micro Finance

SRD II (N) 6

The main objective of this unit is to acquaint the students with genesis of community
based Micro Finance System and policy measures taken by NABARD. After completion of the
unit, the students should be able to:
*

Explain the defects in the credit delivery system of formal financial institutions

Recognise the need for alternative credit system

Differentiate formal sector from semi-formal and informal sector

Describe the genesis of CBMF at global level

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*

Assess the policy measures taken by NABARD

Identify the distinction between Micro Finance and Micro Credit

Comprehend the growth evolution and Development stages of SHGs

Understand the scope of Micro Finance

Make a critical assessment of the informal, semiformal and formal financial services in the
community

Assess the progress of SHG Bank Linkage programme and NABARDs role in promoting Micro
Finance

3. Mobilising Communities
Rural Development is a multi-dimensional phenomenon. The demands of development
process are so pressing and the task is so gigantic that no government is in a position to bring
about the desired results through its exclusive exertion. It is neither the government nor the
financial institutions / voluntary organisations which can on their own bring about the total
rural transformation. For realising the laudable objective of rural development, the community
efforts need to be mobilised physically, psychologically financially and materially to
supplement the resources provided by the government and Non-Governmental Organisation
(NGOs). At present, the people in rural areas expect the government to fulfil their needs. It is
high time that the people in rural areas are oriented to become aware of their interests, strengths
and motivated to tap their potential for their own development. In this context SHGs deserve
special merit.

4. Self-Help Group (SHG) Definition


A self-help group is defined as a voluntary group valuing personal interactions and
mutual aid as a means of altering or ameliorating problems perceived as alterable, pressing
and personal by most of its members (Smith1983).

Significance of SHGs in Rural Development

SRD II (N) 6

SHGs are generally considered as desirable organisations providing grass root level
infrastructure. They:
*

encourage local populations to carry out certain tasks jointly, which can be more rationally
performed by a group than by individuals;

are easily accessible as channel for project inputs (credit, supplies, extension services);

become focal points for job-opportunities, local investments and further development
activities;

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*

motivate local populations to participate actively in achieving project activities; and

reduce project supervision burden of national agencies (Kirsh et al 1980).

Characteristic Features of SHGs


Following are the characteristic features of SHGs, as stated by Heinz Bougartz (1992):
*

Voluntary membership

Participatory planning

Education and Training

Resource MobiliSation

Self-Management

Linkage Building

Process Extension and Movement Building

On-going Self-Evaluation

Development practitioners and Policy makers recognize micro finance services for a
variety of reasons. Improved access to micro finance services can enable the poor to smooth
out their consumption, manage their risks, build assets, develop micro enterprises, enhance
their income earning capacity and enjoy an improved quality of life. Micro finance services
have a significant positive impact on the depth of poverty and on specific socio economic
variables, such as health of family members, household nutrition status, childrens schooling,
women empowerment and poverty alleviation.

5. Demand for Micro Finance Services in the Community

SRD II (N) 6

The micro- finance institutions and other micro finance providers have expanded their
outreach from a few thousand clients in the 1970s to over 10 million in the late 1990s in India.
The development of micro finance in Asia and the Pacific have set in motion a process of change
from an activity that was entirely subsidy dependent to one that can be a viable business.
a.

The myth that poor households cannot and do not save has been shattered. Savings can be
successfully mobilized from poor communities.

b.

Poor, especially poor women, have emerged as creditworthy clients, enabling micro finance
service delivery at low transaction cost without relying on physical collateral.

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c.

Micro finance services have strengthened the social and human capital of the poor,
particularly women, at the household, enterprise and community level.

d.

Sustainable delivery of micro finance services on a large scale in some countries has
generated positive developments in micro finance policies, practices and institutions.

e.

Micro finance services have triggered a process of rural financial markets.

Most commercial banks do not serve the poor because of perceived high risks, high
costs involved in small transactions, perceived low profitability and inability of the poor to
provide physical collateral. Thus, a segment of the poor that has viable investment opportunities
persists in poverty for lack of access to credit at reasonable cost. Several poor households also
find it difficult to accumulate financial savings without easy access to safe institutions that
provide deposit services.

Informal Services
The supply of Micro Finance services is dominated by informal sources. Their collective
approach, both breadth and depth, is vast in most countries. They supply mainly short term
credit and charge higher interest rates than semi-formal and formal sources. Because of the
relatively greater bargaining power enjoyed by the informal suppliers, in general, the terms
and conditions under which services are provided do not enable the clients to fully harness
economic opportunities. The informal sources operate in a highly localized area. Therefore, their
contribution to financial intermediation and improvement of resource allocation is also limited.

Semi-Formal Services
Semi-formal services mainly comprise the NGOs. Virtually in all countries NGOs have
become important micro Finance providers. Their involvement is important because their clients
in general are poorer than those reached by many formal institutions. Their services are targeted
in most countries to serve poor women and services are provided largely on the basis of social
collateral. The small average loan sizes of NGOs, which usually range from about Rs. 1400/- ($30)
to Rs. 7000/- ($150) per loan account, suggest that their clients include the poorest. NGOs in
some countries are trying to organize themselves to improve Micro Finance standards and selfregulation.

Formal Financial Services

SRD II (N) 6

Formal refers to an organised registered and regulated system of institutions providing


Micro Finance services. The involvement of formal sources on Micro Finance has increased during
the last two decades. This greater involvement has stemmed from the following:
a.

178

The expansion of the scope of formal institutions into Micro Finance through downscaling
(for e.g., Government /Savings banks in Thailand).

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b.

Establishment of linkage programme with Semi-formal sources of different types (SHGBank Linkage Programme, India)

c.

Emergence of formal institutions focused on Micro Finance (e.g. Grameen Bank of Bangladesh
and Khushhali Bank in Pakistan)

d.

Reforms of state owned financial institutions (for e.g., Unit Desas of Bank Rakyat Indonesia)

e.

Introduction of Micro Finance programmes by the government through Non-financial


institutions (for e.g., Vietnam Womens Union) and

f.

Entry of private sector institutions (for e.g., Badankredit-Desas owned by Indonesia Villagers).

g.

Cooperatives also play a significant role as financial intermediaries in the region, particularly
in India, Sri Lanka, Thailand and Vietnam. However, the formal operations concentrate mostly
on providing credit facilities and savings mobilizations has yet to receive adequate attention
with few exceptions.

6. Micro Finance
Definition
Micro finance refers to provision of thrift, credit, other financial services and products
of very small amounts to the poor in rural and semi urban areas for enabling them to raise
income level and improve their living standards

Evolution of Micro Finance in India


Indian Micro Finance scenario is dominated by the SHG based credit delivery system.
SHG-Bank linkage concept was evolved by Asia Pacific Rural and Agricultural Credit Association
(APRACA), Bangkok and German Agency for Technical cooperation (GTZ) during the workshop
in Nanjing in China in 1986 and the action projects were implemented in Indonesia, Philippines,
Thailand and India. In India, the SHG Bank linkage project was launched by NABARD in 1992 as
a pilot with the RBIs recognition of informal groups in July 1991.
But, earlier Indian Bank, Tamil Nadu Corporation for Development of Women limited
and selected NGOs implemented SHGs based Poverty alleviation program targeting rural women
with the International Fund for Agricultural Development (IFAD) assistance since 1989 in select
districts of Tamil Nadu. Indian Bank, as a sole banker to the IFAD project, lent Rs 480 million to
5200 SHGs benefiting 87500 rural women.

SRD II (N) 6

IFAD undertook a major project titled Banking with the poor in the Asia Pacific region
in October 1990. Under the project, it convened the first regional workshop in Manila in May
1991 for major Asian Banks and experienced NGOs. VYSYA Bank and MYRADA (NGO) had agreed
during the workshop, to test out trial linkages through SHGs in India and the first linkage by

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VYSYA bank was made in Mudugooli village. Thus, in India, MYRADA (NGO) and VYSYA Bank also
tried the group lending methodology before the launch of the SHG-Bank linkage programme
by NABARD. Lending through SHGs emerged as an alternate credit delivery model suitable both
to the poor as well as to the financial institutions.

Policy Support for Micro Finance in India


Year

Policy Support

1991- RBI Circular to Commercial Banks

Pilot Project on SHG-Bank Linkage 500 SHGs


MYRADA

1992 NABARD Circular

Operational Guidelines to Banks for


implementation of SHG Bank Linkage
Program

1993 NABARD Circular to


Registrars of Cooperatives

Linkage Programme extended to Cooperatives banks

1994 NABARD Circular

Clarified the legal position Sec 11 (2) of the


Companies Act only 20 members

1996 Kalia Committee

SHG under priority sectorSHG lending under


service area planLead Bank to include SHG
under area credit planService area norms for
SHGs relaxedTraining to branch managers on
SHGSHG linkage to be added in corporate
plan and training curriculumAssistance to
SHGs with default membersRBI to review the
SHG lending by banks

1997

Prohibits blocking of groups savings in


groups SB accounts by banks as collateral

1999

Task force on supportive policy and


regulatory framework for MF by NABARD

2000

Refinance support at the rate of 80% to banks


for financing MFIS

SRD II (N) 6

7. Micro Credit
Micro credit is the provision of credit services extended to low income people for
consumption as well as self-employment projects, generating income allowing them to care
for themselves and their families.

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Micro-credit vs. Micro finance
While micro credit refers to the provision of credit services only, micro finance refers to
micro savings, micro credit, micro insurance and other financial services.

Scope of Micro Finance


*

Social intermediation

Financial intermediation

Social Intermediation
*

Situational analysis of area

Prioritisation of credit needs

Mobilisation of clients

Conscientisation process

Group discussion

Capacity building for self-management

Peer pressure

Functional and non formal education

Financial Intermediation
*

Savings services

Credit access

Micro insurance

Micro leasing

Payment and remittance

Transfer services

SRD II (N) 6

Features of Micro Credit


*

Small savings at frequent intervals

Savings first credit next

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*

Intra group appraisal system

Prioritization of credit

Small size of loan

Shorter repayment period

Focus on women

Market rate of interest

Less risk to bank

No physical collateral

Why Micro Finance?


Following are the main objectives:
*

Poverty Reduction

Empowerment - social

Enterprise Development livelihood enterprises and growth oriented enterprises

Asset Building income yielding assets / productive assets

8. Approaches to Micro Finance


Minimalist approach Vs. Integrated approach
An NGO or MFI, of course, is intended to provide financial services. However, on its flip
side are non-financial services as a means of improving the ability of the clients to utilize the
financial resources. According to the minimalists, there is a single missing piece for enterprise
growth that is lack of short term credit. On the other hand, the integrated approach of holistic
school looks at it from client angle and provide for a combination of financial and social
intermediation practices, enterprise development and social services a sort of single window
approach provided either by NGOs or by Government.

SRD II (N) 6

9. Community Based Thrift and Credit Groups in India


Despite the tremendous expansion of the institutional credit delivery system over the
years and introduction of priority sector lending, specifically devised for weaker sections, formal
credit institutions are still neither attuned nor willing to deal with the section of the society
requiring small loans and having no collateral security to offer. Being economically vulnerable,

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they often fall into the debt trap by getting into the clutches of exploitative moneylenders.
Some of the major causes lie in the difficulties in dealing effectively and economically with a
large number of small borrowers who require credit frequently and in small quantities, and
limitations imposed by the legal framework on their operations, and also due to the bank
perceptions of the risks and credit worthiness of these borrowers.

SRD II (N) 6

The formal credit system suffers from several weaknesses like:


*

Cumbersome lending procedure,

Wrong identification of beneficiaries and activities,

Inadequate supervision,

Non-availability of infrastructural facilities,

Apathy of bank staff,

Inconvenient repayment schedule,

Large scale misutilisation and default of loan.

The target oriented approach has compromised with the quality of the programme.

Banks systems and procedures were rigid and unable to cater to the needs of the poor.

As requirements of rural poor are very small amounts, the banks practically were not able to
lend to the poor

Banks lending formalities are time consuming and the transaction cost of the lending is
very high

Unrealistic target orientation of the banks

Disbursement is delayed defeating the very purpose of credit

Credit programmes were launched without studying the felt needs of the poor

Political announcements were made to attract the vote bank, e.g., loan waivers

Politicization of cooperative structure and its dual control

Lack of provision of backward and forward linkages in rural areas

Poor follow up by the branches and ineffective supervision

Poor repayment of loans and rising overdue accounts

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An analysis of the credit needs of the poor reveal that they require small but regular
and urgent loans for consumption, whereas their options were restricted to programmes
designed and approved by the government which do not cater to their needs. The banks cannot
lend small frequent amounts nor can they entertain loans for consumption even though it is
obvious that the larger number of loans from banks is used for consumption purpose only.
Moreover, the banks insist on standardised cost and estimates, often on the grounds of feasibility.
The unit cost amount, in many projects is larger than what the people require and in some
cases they are inadequate. For example, when farmer in one area where the water table is high
need approximately Rs.3000/- to sink on open well, the bank provides the standard rate of
Rs.9000/-. A woman running a petty shop needs Rs.200/- as working capital but she is granted
a dairy loan of Rs.6000/-. People use the extra amount for consumption, which in turn makes
the repayment difficult. Therefore, the size of the loan should be tuned to micro situation.
In several cases, the schedule of recovery does not conform to actual trend in returns
from the assets. For example, it is well known that in summer the milk yield falls or after 4 or 5
months after calving, the milk yield declines. Yet under milch animal loan, the recovery instalment
required by the bank remains constant instead of adjusting to the actual trend in milk yield.
Moreover, in several cases, due to lack of skills and non-availability of infrastructural facilities a
viable project becomes unmanageable.
Thus, despite considerable attention paid, both in terms of institutional development
and expansion of resource base, rural credit system in India suffers from several weaknesses.
The alternative is the recourse to the village moneylenders whose time honoured credit delivery
system is prompt and timely at low cost but exploitative with higher rate of interest. The
moneylender thrives where the institutional credit agencies fear to tread. Hence, there is need
to revitalise the rural financial institution in order to impart efficiency and effectiveness.
The poor recovery of loan, high intermediary cost, burden of subsidised interest rate
and write offs appear to have affected the flow of credit and weakened the rural credit delivery
system. What matters to the poorest strata of the rural population, viz., small farmers, marginal
farmers, agricultural labourers and rural artisans, is the timely availability of credit and present
system does not ensure it adequately. Hence, improving the outreach of the banking system
and deepening rural credit through innovative credit delivery approach becomes necessary.
One such innovative approach is the formation of Thrift and Credit groups also called as SHGs
in the credit delivery system.

SHGs in the Area of Credit Dispensation

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A Self Help Group is a small economically homogeneous and cohesive group of rural
poor voluntarily coming together
*

to save small amounts of money regularly,

to mutually agree to contribute to a common cause,

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*

to meet their emergency needs on mutual help basis,

to have collective decision making,

to solve conflicts through collective leadership, and

to provide collateral-free loans with terms and conditions decided by the group (NABARD
1999).

Features of SHG Credit


*

The SHGs depend mostly on local resources generated from its members.

Savings first, no credit without savings. Saving should be linking with credit.

Participation of members should be as partners and not as clients

Joint liability as substitute for physical collateral

Peer group principle for social homogeneity

Self-determination in participation (The programme should be run by the people themselves


through their active and directive involvement in all operational matters and the policies
governing them).

SHGs should be based on commercial approach with sound financial principles.

Group strategy should be encouraged for transaction in savings and credit.

Dealings in the credit should be based on mutual trust and confidence.

SHGs should promote Credit plus approach, i.e., credit dispensation should be supported
by other services, like training for upgradation of skills, problem solving by mutual discussion,
periodic counselling on economic matters

The procedures of the credit system should be simple, flexible, cost effective and responsive
to the needs of local conditions

Emphasis should be on minimum transaction cost

SRD II (N) 6

Important Steps for Formation of SHG


*

survey of the socio-economic status of the people in the area;

short listing the villages and identifying the poor;

generate awareness of the problems they face;

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*

dissemination of information about principal purpose and the procedures of setting up a


SHG for saving and credit through group leaders in the villages;

opinion leaders should spread the concepts of thrift, group savings and credit to their friends,
relatives and other people;

formation of homogenous and socially viable groups, emphasising mutual assistance;

Membership should be between 15 and 20 for each group. Ages of all members should
preferably be between 18 and 60 years; and

Continuous supervision/guidance by NGOs.

Advantages of Self Help Groups


*

SHGs generate group spirit

A feeling of self-confidence and mental strength will develop among the members, as people
are directly involved in the credit programmes.

Group will be more articulate than the individual members and, as a result, the needs of the
group members will be projected more effectively.

Peer group pressure will maintain repayment discipline and check the malpractices and
misuse of funds.

Group formation will facilitate better flow of credit with joint liability of group members.

Group monitoring will promote proper utilisation of credit.

The culture of self-discipline and self-regulation will prevail.

SHGs inculcate among the members sound habits of thrift savings and banking.

They empower the group members, especially women, by making them the decision makers.

SRD II (N) 6

Ground Rules for Group Composition


*

A group should not have more than 20 members.

Each group would have a group leader by unanimous consent who would take responsibility
of managing the groups and credit portfolio.

Age of the members should be between 18 and 60 years;

Members should generally be below the poverty line as described by the group;

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*

All the members should participate actively in the decision making;

Members should have the will to improve and develop;

Members should be able to write their names and not be satisfied with putting their thumb
impression;

Group should develop their own rules and regulations.

Meeting
*

Group should have regular weekly meetings in the respective villages.

Meetings should be held at a fixed time.

Meetings should be held at a common place.

Attendance should be over 75 percent

Savings and Loan Management


*

Group should have regular (weekly) savings and raise capital on their own.

Common funds must not remain unused but revolve regularly.

There should be good interaction while selecting beneficiaries and granting loans.

Credit should not be extended to defaulters unless the case is carefully analysed.

Loan should be given to the needy members.

Groups should recover loans on a weekly/monthly basis and accounting to schedules


decided by the group.

Repayments should be made only in the group meeting.

A promissory note or guarantor is required for large loans

SRD II (N) 6

Bank Transactions and Documentation


*

Remittance of money should be done by members on a rotational basis and the


challan(prescribed format) should be shown to the members at the next meeting.

Books should be updated at the meeting or on the day following the meeting.

Even though unregistered, it is better to have some broad Rules and Regulations for internal
working of group to incorporate its objective, rights and obligation of members and office

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bearers, procedures for holding meetings and taking decisions, keeping accounts, etc. The
Rules should be signed by all the members forming the Group.
*

Membership fee could be prescribed at a nominal amount of say Rs.10 for regular members
who will take loans and Rs.2 for associate members who will join the group for keeping
deposit and assisting in developmental activities.

Proceedings of Meetings
A brief account of the discussion during the meeting should be recorded in a
proceedings register. The following important items should be discussed at every meeting of
the group.
*

Loan sanctions, disbursement, recovery, defaults.

Collection of thrift and resources.

Investment of idle fund.

Misutilisation or improper use of funds.

Action on features pointed out in audit report.

Development activities, refinement in operational procedures.

Federation of Groups
In due course micro level groups should have a block level Cluster Committee of SHGs
for a village or a Group of villages which could thereafter be federated into a district level
federation. The Cluster Committee and Federation may undertake common services and also
act as an institutional mechanism to take over gradually functions presently performed by the
NGOs. Some of the main activities of Cluster Committee and Federation will be as follows:
Collective problem solving.

Collective management of certain community services.

Creating a platform for sharing of experience, by holding monthly or quarterly meeting of


group leaders at cluster level for comparing the working of groups in respect of recoveries,
loans, use of idle funds, etc.

Collective knowledge building.

Collective resource mobilisation from other institutions.

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*

Inter-group assistance (both financial and other, especially in identifying and strengthening
the weaker groups).

Arranging for writing of accounts books, audit of groups, if necessary by recovering the
costs from the group at say 15 per cent to 20 per cent of the gross interest income of the
year of the group.

Solving of inter-group disputes.(Gupta 1993)

10. Linkage Programme as a Rational Alternative in Rural Financial System


The Bank-SHG linkage programme recognises the existence and the presence of both
the formal and non-formal sector in the rural financial system. The programme draws lessons
from the experience of both and combines them for a more effective strategy of financial services
to weaker sections. The existing set-up of the rural financial structure constitutes valuable
resources, which should be resuscitated to contribute dynamically by combining both the
approaches.
The link between SHGs and banks is expected to result in specific advantages to banks,
like externalisation of a part of the work items of the credit cycle-assessment of credit needs,
appraisal, disbursal, supervision and repayment, reduction in the formal paperwork, etc.

NABARD and Strategy to Aid SHGs


The concept evolved by the rural poor to help themselves has led to an innovative
experiment. NABARD formulated a supplemental credit strategy and introduced in 1992 a Pilot
Project for linking banks with SHGs by providing 100 percent refinance to banks against their
lending to SHGs. It has also issued detailed guidelines on financing the banks to enable them
to establish linkage with SHGs. Since then, NABARD has been actively associating itself with the
reputed voluntary credit groups for dovetailing their programmes with the SHG concepts
envisioned under the pilot project.

Advantages of linkage Approach


The linkage between banks and SHGs, with the NGOs as facilitator, financial
intermediaries, as a mechanism for channelling credit to the poor on a sustainable basis, offers
a number of potential advantages.

SRD II (N) 6

Advantages to Banks
*

Reduction in transaction cost by way of externalisation of a part of the credit cycle (appraisal,
disbursal, supervision and repayment).

Mobilization of small savings

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*

Assured and timely repayment leading to faster recycling of funds.

An opportunity for expansion of business and coverage of poor clientele.

Purpose of Loan under SHG-Bank Linkage Schedule


Loan may be granted by the SHGs both for consumption purpose and production
purpose. The group will discuss and decide about the purpose for which loans are being given
to the individual members by the SHG. The bank does not decide the purpose for which the
SHGs give loans to its members.

Collateral Security
RBI/NABARD rules stipulate that no collateral security should be taken from SHGs. The
bank cannot hold the Savings Bank account balance of the SHGs as a security, as this will prevent
the SHG from lending form its internal savings.

Rate of Interest
The RBI has allowed the banks freedom to decide on the interest rates to be charged
from the SHGs. The rate of interest to be charged by the group to its members should be left to
the group. This is usually 2 to 3 rupees per hundred rupees of loan.

Documents to be submitted by the SHGs:


1.

Inter se agreement to be executed by all the members of the SHGs. This is an agreement of
the members with the bank authorising a minimum of three members to operate the group
account with the bank.

2.

Application to be submitted by SHGs to bank branch, while applying for loan assistance.
This includes details of purpose for which the SHG gives loan to the members.

3.

Articles of agreement for use by the bank while financing SHGs. This contains the duly
stamped agreement between the banks and the SHG wherein both the parties agree to
abide by the terms and conditions.

SRD II (N) 6

Role of NGOs
*

Facilitate deepening of their developmental efforts.

Synergy in operating social Programmes with economic Programmes.

Increase the outreach to the poor through credit plus approach.

By the end of 1996 nearly two thousand groups were linked all over the country. In
1996 the RBI constituted a working group under the chairmanship of S.K. Kalia to study the

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pilot project and make recommendations for follow up. Based on the recommendations of the
working group, the SHG programme has been made a regular programme under the priority
sector lending of banks.

Linkage Programme
The banker is expected to provide credit in bulk directly to the group, which may be
informal or formal (i.e., registered). The group, in turn, would undertake on-lending to the
members. The quantum of credit given to the group should be in proportion to the savings
mobilised by the group. The proportion of savings to loan could vary from 1:1 to 1:4 depending
on the assessment of the SHGs by the bank.
In case of SHGs where the local bank branch does not have adequate confidence in
lending to them or in case where SHGs for various reasons are not willing to be linked directly
with the bank, the bank may finance such SHGs through the Voluntary Agencies (VA) or the Self
Help Promoting Institution (SHPI) that has promoted the SHG. In such cases, bulk financing of
Voluntary Organisations could be considered.
Where bulk financing to VAs/SHPIs is resorted to, the concerned bank branch should
closely observe the working of SHGs by attending their meetings and in other ways so that the
branch may develop the necessary confidence in the SHG and link up with it directly at the end
of the bulk financing arrangement with Voluntary Agency.
In case some members of SHGs required large loans than that could be covered under
the savings related loaning, the SHG could appraise the requirement and recommend the
proposal to the bank for direct lending by the bank to the concerned member. In such cases,
the SHG should be willing to accept the responsibility for proper credit utilisation and repayment
by the member and for monitoring the same. In some cases, the SHGs might apply to the bank
for creating common service facilities or for certain group activities. The lending in such cases
to the individual members of the SHGs or to the SHG for common activities would be subject
to the usual terms and conditions of lending adopted by banks and refinance facilities will also
be on usual terms.
The purposes for which the group will lend to the members should be left to the common
wisdom of the group.
The SHG would be free to decide on the interest to be charged to its members provided
the rate of interest is not excessive. Usually, the SHGs have been observed to charge rates of
interest between 24 to 36 per cent. These rates are also purpose dependent.

Security

SRD II (N) 6

The SHGs would not be in a position to offer any collateral security other than the group
savings. Keeping in view the spirit and objectives of the pilot projects the documentation

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needs may be kept at the minimum and simple. The participating banks will get 100 per cent
refinance facilities from NABARD.

Selection of NGOs for Collaboration


An NGO selected should meet the following criteria:
*

it should have a good track record

A proper system of book-keeping and audited balance sheets for last 3 years.

Basic financial management capability

Approach of promoting and working with groups of people belonging to weaker sections.

The role of NGO has to change continuously according to the growth of the SHG. At
different times the NGO will play different roles. In this process the NGO has to shed down old
roles and take new ones. The old roles which are shed down by NGOs are taken over by the SHG
and banks. The NGO will change its role from promoter cum facilitator to coach and finally to
enabler. The SHG moves from a state of an observer to owner and manager of the process.

Credit Linkage Models


*

Model I SHGs Formed and financed by Banks (Direct Model )

Model II SHGs formed by NGOs or other agencies but financed by Banks (Indirect Model,
NGO Acting as Social Intermediary)

Model III SHGs formed by NGOs (Indirect Model, Acting as Financial Intermediary)

SHG Bank Linkage Model Advantages and Limitations


Model

Advantages

Limitations
*

In spite of wider acceptability


of the model, majority of field
level bankers are yet to be
sensitized and do not view it
as banking mandate.

* The whole system is localised

In many places, it is skill


difficult to open a savings
account.

* SHGs and local NGOs learn to deal with an *


accessible bank branch and vice versa.

Absence of NGOs in many


areas.

SRD II (N) 6

Model I * Each partner institution plays a role best


suited to it. Banks lend. NGOs organise
poor into SHGs and SHGs manage small
group finance in their own interest.

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Model II

* It further reduces the transaction cost


and risk cost of the banks as the banks
lend a larger sum to an , which guarantee
repayment.

* NGOs are not traditionally


equipped to work as financial
intermediaries.

* Easier for the poor to deal with an


institution which they know and trust.

* Calls for substantial


investment in capacity
building of NGOs.

* Easy to be adopted by stakeholders.

* Adds one more intermediary


structure.
* Wide scale adoption not
possible.

Model III * Exposes bankers to social realities


first hand.

* Wide scale application may


not be feasible because of
other priorities of bankers.

* Possible solution where NGOs are


not present.

11. Ten Pillars of Linkage Programme


1)

Participative financial services management is more efficient and respective

2)

Poor can save and are bankable

3)

The capacities of the banking system can match the expectations of the poor.

4)

Poor need credit support as well as savings and other services

5)

Small cohesive group of poor with outside support can effectively manage and supervise
micro credit.

6)

Collective wisdom of the group and peer pressure are more effective securities than the
collaterals

7)

SHG is a pre micro enterprise stage for majority of the rural poor.

8)

SHG as client facilitates wider outreach

9)

Lower transaction cost including risk costs.

SRD II (N) 6

10)

Empowerment of poor especially women could be one of the major outcomes (NABARD
Annual Report 1998-99).

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Role of NABARD in promoting Micro Finance operations

The vision of NABARD is to facilitate sustained access to financial services for the
unreached poor in rural areas through various Micro Finance innovations in a cost effective
and sustained manner.

12. Keywords
Self Management, Bank Linkage, Voluntary Agencies, Non-Government Organisations,
Self Help Promoting Institution

13. Summing up

SRD II (N) 6

This Unit discussed the about the community based micro finance systems, micro finance
demand services in the community, and evolution of micro finance and policy in India. It also
tried to explain the difference between micro credit and micro finance. The Unit discussed the
approaches to micro finance and explained the community based thrift and credit groups in
India, the SHGs. It further analysed the difference between SHGs and cooperatives and banks. It
described the functioning of SHGs and their federating into larger groups. This unit also looked
into the linkages of SHGs with NGOs and the role of NABARD in the promotion of micro finance
operations.

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14. Know your Progress
1.

Define Micro Finance

2.

Distinguish Micro Finance from Micro credit

3.

Explain the salient features of Micro Credit

4.

Name four countries implementing Micro Finance

5.

Explain the policy support for Micro Finance in India

6.

Name the NGO with which NABARD implemented Pilot project on SHG

7.

Distinguish social Intermediation from Financial Intermediation

8.

Explain the Ten Pillars of SHG Bank Linkage Programme

9.

What are documents to be summated by SHG why applying for the loan?

10.

Explain the role of NABARD in promoting Micro Finance

11.

Explain the merits and Limitations of SHG Bank Linkage Programme

SRD II (N) 6

15. Further Reading/References


1.

Lalitha, N. (2002). Self Help Groups in Rural Development. New Delhi: Dominant Publishers
and Distributors.

2.

Lalitha, N. (2008). Readings in Micro Finance. New Delhi: Dominant Publishers and Distributors.

3.

Lalitha, N. (2007). Glimpses of Self Help Groups. New Delhi: Dominant Publishers and
Distributors.

4.

Ledgerwood, Joanna. (1998). Micro Finance Handbook - An institutional and Financial


Perspective. Washington D.C.: The World Bank.

5.

Mahajan, Vijay. (2005). From micro credit to livelihood finance, Economic and Political Weekly,
Vol. XL. No: 41, October 2005, p.4418.

6.

Marguerite, S. Robinson. (2001). The Micro finance revolution Sustainable finance for the
poor. Washington and New York: The World Bank and Open Society Institute.

7.

Meyer, Richard L. and Geetha Natarajan (2000). Rural Financial Markets in Asia: Policies,
Paradigms and Performance. New York: Asian Developmental Bank. Oxford Development
Press.

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8.

NABARD, Annual Report, (2008-09).

9.

Puhazhendi V and K.C. Badatya. (2002). SHG Bank Linkage Programme for Rural Poor- An
Impact Assessment. NABARD.

16. Model Answers


Micro Finance refers to provision of thrift, providing credit, and other services and products
in a very small level in rural and semi urban areas, mainly for enabling them to raise income
level and improve their living standards.

2.

Micro credit refers only to providing of credit at small level, whereas Micro Finance includes
service provided relating to savings, credit, insurance and other financial services.

The Pillars of SHG Bank Linkage Programme are: poor can save, poor need credit support
along with other services, cohesive group of poor, collective wisdom and lower transaction
cost.

SRD II (N) 6

1.

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SRD II (N) 6

BLOCK - 4 : CONFLICTS AND CONFLICT MANAGEMENT

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BLOCK 4 : CONFLICTS AND CONFLICT MANAGEMENT


Introduction
Conflicts are imminent in all rural development programmes and therefore, it is essential
to understand their types, causes, resolution mechanisms and the role of community and
peoples organisations in minimising, if not eliminating, the conflicts. This Block elucidates in
detail the way conflicts arise, institutional mechanisms to resolve them and to increase the
ways to enhance social inclusion in development process by minimising conflict in rural societies.
This Block has the following four Units which cover different aspects dealing with conflicts and
conflict management:
Unit - 1 : Types of Conflict : This Unit begins with the definition of conflict and discusses
about the conflicts in general. It talks about different types of conflicts that one comes across
in the process of project formulation and implementation. Apart from this, this Unit discusses
about the conflicts that arise over resource management. This Unit provides an overview of
different conflicts and the way to analyse them.
Unit - 2 : Causes of Conflict : This Unit offers a conceptual discussion with regard to the
understanding of conflicts, pathways to conflict, causes and consequences of conflicts. This
discussion would help in understanding and analysing conflicts among different stakeholders
in rural development.
Unit - 3 : Conflict Resolution : This Unit discusses in detail the management and process
of resolution of conflict, understanding and analysing conflicts, severity of conflicts, background
of groups/ stakeholders in conflict, sources and nature of conflicts, differential perception of
stakeholders, institutional mechanisms and other methods to resolve conflicts, and different
styles of conflict resolution. This Unit offers a good background to development professionals
to build in mechanisms of conflict resolution into development programmes for ensuring
sustainability of the programmes.

SRD II (N) 6

Unit - 4 : Peoples Organisation in Conflict Management : This last Unit discusses


customary forms of conflict management and it is contrasted with the contemporary systems
of conflict management. It also provides illustrative case studies to highlight the way peoples
organisations play a constructive role in conflict/ dispute resolution in development initiatives,
thereby ensuring sustainability of the development programmes.

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UNIT - 1 : TYPES OF CONFLICT


Structure
1.

Introduction

2.

Objective

3.

Conflicts in General

4.

Types of Conflict in the Implementation of a Project

5.

Types of Conflicts over Resource Management

6.

Keywords

7.

Summing up

8.

Know your Progress

9.

Further Reading/References

SRD II (N) 6

10.

Model Answers

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1. Introduction
Conflict is a broad generic term, which includes a whole range of situations, events, and
phenomena that occur at different stages of a project cycle where different stakeholders
disagree in principle and practice, or are obliged to take an adversarial position. It is a
disagreement between two individuals or institutions or groups. Conflict refers to disagreements,
public complaints, and protests involving arguments, physical assault, violence and lawsuits.
Feelings of unfairness and injustice, suspicion, anger, emotion, and mistrust lead to conflict
(Martinelli and Almeida 1998). Conflict occurs because of difference in values, beliefs and
interests, ambiguity over responsibility and authority, poor communication, and unwillingness
to respond to social, political, cultural, technological, economic and social changes (Walker and
Daniels 1997). In a conflict situation each party attempts to destroy, injure, thwart, influence or
control the behaviour of another party (Sidaway, 1996)1.
While discussing culture and conflict, Avruch differentiates between conflict and dispute
and points out: Conflict refers to a very general state of affairs in a relationship or to some basic
incompatibility in the very structure of relationship. Dispute refers to a particular, episodic
manifestation of a conflict. A dispute is the social activation, the coming into visibility, of a
conflict. It occurs when at least one party goes public with the conflict - brings it to the attention
of others in the group or community - or decides to act on it (1996:242). Simon Roberts very
rightly states that, Disputes, both within groups and between them, are found everywhere in
human society. But beyond that generalization social theorists differ profoundly over their nature
and significance (1979: 45).

SRD II (N) 6

When we look at conflicts in a rural context, they can be conflicts of interests, claims,
rights and duties, access and claim over resources, etc. In any kind of development projects
many stakeholders will have to be involved who may have conflicting interests. It is a truism
that unless all stakeholders collaborate with each other, it is very difficult to achieve the desired
result of any programme undertaken for the benefit of the stakeholders in rural areas, especially
the poor and the disadvantaged. The fact that many stakeholders will be working in one area
with varied interests, it is very likely that it will create conflict among them as well as disturb
the sustainability of the programme in the long run. Hence, while focusing on the role of
stakeholders in rural development it is essential to look into the potential areas of conflict and
the nature of conflict that is likely to emerge. Since the sources and causes of conflict are multiple,
we need to have an understanding of the type of conflicts before examining the causes and
consequences of conflict and their resolution.
1

Cited in Upreti, 2002. Management of Social and Natural Resource Conflict in Nepal: Realities and alternatives,
Adroit Publisher, New Delhi : 60.

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2. Objective
This Unit will give provide an understanding about the types of conflicts that are
noticeable in rural India under different situations.

3. Conflicts in General
Structural functionalist considered conflict as an aberration and viewed conflict as
dysfunctional and pathological. Coser countered this and argued that conflicts between and
within groups are parts of social life. He viewed social conflict as a struggle over the values
and claims to scarce status, power and resources in which the aims of the opponents are to
neutralise, injure, or eliminate their rivals (1956: 8). Based on the relational nature, conflict and
competition appear correlated processes. However, these two differ from each other in the sense
that competition is organised it has rules and regulations whose observance is supervised;
conflict is not so organised. In fact, conflict may start when a sense of shared rules of the game
is missing or begins to be flouted (Jayaram and Saberwal 1996: 5).
It is important to note that the sources of conflict are very diverse and so is the variety
of conflicts. Jayaram and Saberwal rightly point out that, The variety of sources from which
conflict originates and the variety of courses the conflict takes are virtually infinite; yet we may
try to bring some order to that diversity, and thereby advance our understanding of our conflicts
(1996: 498-9).
Coser (1956) makes a distinction between realistic and non-realistic conflicts, the former
being a means toward a specific end and the latter being an end in itself. The realistic conflicts
arise when specific demands and estimation of gains of participants in a relationship are
frustrated. The non-realistic conflict is a result of the need for release of tensions or pent-up
feelings. A realistic conflict also may involve some non-realistic aspects. As Jayaram and Saberwal
observed, While realistic conflicts can be seen as flowing from conflicting claims to scarce status,
power and resources, and from adherence to contending values and codes, non-realistic conflicts
can be seen as rooted in the rigidity of social and/or personality structure (1996: 15).
When the question of conflict comes to our mind we always take it in a negative form.
However, conflict has both positive as well as negative connotations. Conflict theorists argue
that conflict is central to social systems and are important in ushering social change. Conflict
also is essential to bring persons or groups together who are opposed to each other. In a way, it
is a factor of integration. It also defines boundaries of conflicting parties. These boundaries can
be dynamic and might alter as the conflicting situations alter. In a sense, conflict has multiple
functions and roles that are essential in any given society or societies.

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Conflicts are classified into three types based on the perception about the opponent,
the resolve of the conflicting groups and the rational content of the contexts by Rapaport (1960).
They are fights, games and debates. In case of fight, the opponent is regarded as an unwanted
and, therefore, the resolve is to hurt him/her. Hence, in a fight rationality will be missing. On the
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other hand, in case of game and debate the opponent is regarded as essential but the resolve
will be to outwit or convince him/her. Thus, in case of both game and debates rationality becomes
important. Conflicting relations may also involve dominance and subordination relationships.
These sometimes might lead to protest, revolt, rebellion or resistance by the underdogs.
Simon Roberts aptly pointed out that Certain types of conflict may also be inherent in
the very manner in which a society is organised. For instance, in some tribal societies succession
to the position of headman is restricted to a particular matrilineage in matriarchal societies or
patrilineage in patriarchal societies of a village and not necessarily from the same family. In
such a situation, most influential men of the dominant lineage compete for political leadership
and hence, engage in bitter quarrels. When one among them becomes a leader, some of his
competitors might move away and establish new villages elsewhere. This will usher in relative
period of calmness until the next succession. Some conflicts can emerge due to the
malfunctioning of the existing institutions and thus, conflict can be an opportunity for
innovation and progress (Roberts 1979: 46-47).
Simon Roberts (ibid: 49) categorises disputes (read conflicts) in two different ways: 1)
contrasting disputes between groups and disputes within a group: inter-group conflict and
intra-group conflict; 2) an opposition between disputes arising out of broken rules and those
having their origin in competition over scarce and valued resources. While the former deals
with people or groups involved in a conflicting relationship, the latter refers to the violation of
norms and to gain control over valued resources.

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Jayaram and Saberwal in their discussion on conflicts observe two overlapping continua:
(1) the nature and scale of the aggregates involved in the conflict: it may involve two persons at
one end, and large aggregates such as two religious communities or states at the other; and (2)
the magnitude of consequences of conflict for the society and country: its significance may be
structural, having wide ramifications, at one end, or, at the other, the significance and implications
may be confined to the persons or groups immediately involved (ibid: 22). They have posited
different types of conflicts on the continua scale wherein at one end of the scale we notice
innumerable inter-personal conflicts in everyday life; and at the other end of the continua one
can notice communal conflicts. In between these two one can notice a range of conflicts: limited
intra-group conflicts above the inter-personal conflicts; a variety of inter-group conflicts
involving primordial aggregates, such as conflicts between castes, sub-castes, tribes, within
religious sub-groups and sub-sects, etc.; and a host of recurrent conflicts relating to the economic
arena, both industrial and agrarian and political conflicts (ibid: 23-25).
Some scholars generally view conflicts as two types: productive and counterproductive.
While it is advisable to encourage productive conflicts, the counterproductive always is
discouraged. In this context, Roberts makes a very valid observation while discussing about
disputes or conflicts. According to him, Despite the universal occurrence of disputes, some see
them as predominantly destructive in character, indicating a breakdown of normal relations
and providing a sign that something is wrong in the society where they occur. Others have

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denied this pathological quality seeing disputes as an integral and inevitable part of life in any
community. Those who have stressed the normality and inevitability of disputes have also paid
more attention to their constructive attributes than their negative ones (1979: 45).
While the above discussion broadly highlights different ways of classifying conflicts/
disputes, we need to focus our attention on conflicts in rural areas with special focus on
developmental initiatives wherein one may encounter different types of conflicts among the
stakeholders. An understanding of these types of conflicts will be of immense value for the
project implementing agencies of the development programmes, non-governmental
organisations, planners and policy makers, academics as well as a host of others interested in
the uplift of the poor and disadvantaged sections in rural areas.

Rural Conflicts
Conflicts arise based on certain situation and reasons. They could be related to resources
as Tania (2003) illustrates in case of Indonesia. Tania classifies conflicts into two types: vertical
conflicts and horizontal conflicts.
i)

Vertical conflicts: This kind of conflict pits rural people against the State or State sponsored
corporations.

ii)

Horizontal conflicts: It pits one social, ethnic or religious group against another.

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Conflicts are noticed among various stakeholders in rural areas and they are important
to be taken note of in analysing conflicts in rural areas. These conflicts can transform from one
type into another, thus leading to bigger conflicts, if not redressed in time. These types of conflicts
noticeable among different stakeholders are:
i)

Inter-personal Conflict: These kinds of conflicts are found between individuals having differing
goals or values and are common among the rural populace in India. The longevity of this
kind of conflicts depends on the causes of conflict. In traditional societies, the village head,
Village Council and the village community used to resolve such conflicts in the past. These
conflict resolving mechanisms are largely affected by the new institutions that were
introduced during colonial and post-colonial periods. However, they still continue to function
in some tribal and rural societies in India.

ii)

Intra-group Conflict: This occurs within a group or community regarding sharing of resources,
power, goods, etc. In the past, there were institutional mechanisms to address such conflicts
and these were largely ingrained into the local cultures. Today, we find large scale
development projects that usually lead to conflicts both within as well as between groups.
For instance, conflicts arise among members of water users association with regard to water
sharing.

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Inter-group Conflict: This kind of conflict occurs between two or more teams or groups or
villages. Conflict relating to lands, boundaries of lands, sharing of water and other resources,
etc., always give rise to conflicts between groups or contending parties. Conflicts within
villages between groups might turn into factional disputes that most often influence even
the local political power structures. These can also expand into conflicts between villages or
even into a regional conflict.

iv)

Intra-stakeholders conflict: These kinds of conflicts occur among different stakeholders. As


all the stakeholders are not uniform and as their interests vary, it is difficult to make all of
them agree on one point. For instance in the case of Water Users Associations, farmers
belonging to different classes or castes fight with each other for water sharing. Large farmers
do not allow water to marginal farmers. Then marginal farmers break the structure of large
farmers and enter in to conflict. Even in the case of R & R projects, PAPs who are displaced by
the same project constitute sub groups and fight for their own group interest.

v)

Inter-organizational/ Inter-stakeholders Conflict: This kind of conflict is very common in case


of all developmental projects. As the project starts taking its shape the stakeholders start
demanding larger amounts of allocation of resources and opportunities. The Project
Implementing Agency (PIA), the most powerful stakeholder in any large scale development
project, like hydro-electric project or irrigation project or starting of an industry, would want
to finish the project soon. However, the primary stakeholders, the project affected populations
(PAPs) look for better resettlement or rehabilitation and demand better compensation for
their lost resources, properties or personal belongings, and livelihood. These differences in
interest among stakeholders lead to inter-stakeholders conflict, where, for instance, the PIA
starts blaming the PAPs for delaying the completion of works and consequently hampering
national interest. The PAPs blame the PIA for not considering their demands. Similarly,
acquisition of forest lands for rehabilitation and resettlement (R & R) are usually opposed by
the Ministry of Environment and Forests and the NGOs/researchers who pursue the objective
of increasing the national forest cover, or of regeneration of degraded forest. They argue
that revenue lands, or other private lands should be acquired for R & R and not forest lands,
which is essential for maintaining ecological balance. Thus, it becomes clear that interstakeholder conflicts require a good understanding of the land use patterns, land scarcity,
laws and policies regarding specific types of land use, etc.

vi)

Intrinsic conflict: Historically it is seen that, every case involving involuntary land acquisition
and displacement carries an unavoidable germ of injustice and conflict. The reality of
development projects is that, purely in terms of its costs, and benefits, a disproportionately
large share of benefits goes to the winners and conversely a disproportionately large share
of the direct and indirect costs of socio-environmental burden are borne by the losers. The
lands acquired for mines, thermal power plants, Special Economic Zones (SEZs), etc., are
excellent examples of the intrinsic conflict. The benefits of the projects have rarely gone to
the communities that were displaced, while the high tension wires emanating from the
thermal power plants nonchalantly pass over hundreds of villages blanketed in darkness.

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iii)

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Similarly an irrigation project creates losers in submergence areas of the reservoirs and the
farmers in the command areas suddenly gain when the canals start operating. Such a divide
is intrinsic to major projects.
vii)

Material conflicts: Material Conflicts of Interest (MCOI) arise from situations in which a
stakeholder would be directly and materially advantaged, financially or economically, based
upon the outcome of a programme or scheme. These kinds of conflicts arise among the
stakeholders in relation to benefit sharing with regard to money, equipment, competence
and organizational structure, etc., in development projects. For instance, if a leader in a village
or a region corners different material benefits and thereby denying the same to the other
aspiring stakeholders would lead to material conflicts. These, in turn, can lead to other types
of conflicts.

viii)

Emotional conflicts: This type of conflict deal with individual existence and mutual relations.
They can lead to disruption in organisational relationships and breaking up of individual
relationships leading to interpersonal conflicts and intergroup conflicts.

ix)

Varied interests/objectives: Conflicts arise when different people have different interests and
objectives. If a rural development programme has to be successful, stakeholders with varied
interests and objectives have to be brought together, lest it might end up in furthering
conflicts among the stakeholders.

x)

Generation-gap Conflicts: These conflicts relate to conflicts arising out of practice of past,
present and future values. This kind of conflict arises between old and young generations,
and they can be prominently seen when some development initiatives disturb the old
tradition in the villages. For instance, adult franchise has brought in a conflict between the
traditional leaders and those who challenge their authority, as can be seen in case of
traditional and statutory Panchayats.

xi)

Relationship Conflicts : Relationship conflicts occur because of the presence of strong


negative emotions, misperceptions or stereotypes, poor communication or
miscommunication, or repetitive negative behaviours. This kind of conflict occurs in a group
while a close ally goes against his/her friend. Relationship problems often fuel disputes and
lead to an unnecessary conflict.

xii)

Data Conflicts : Data conflicts occur when people lack information necessary to make wise
decisions or misinformed, disagree on which data is relevant, interpret information differently,
or have competing assessment procedures. Some data conflicts may be unnecessary since
they are caused by poor communication between the people in conflict. It is observed in
some projects that the key persons do not share all the information with other group
members and if some group members are misinformed by any source, they end up in
conflicting situations.

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xiii)

Interest Conflicts : This is one of the most important types of conflict found in any society.
This kind of conflict arises over incompatibility of interests, as related to money, physical
resources, time, etc. Interest conflicts can wreck the organisation as well as the relationship
between different groups in a society.

xiv)

Structural Conflicts : Structural conflicts are caused by forces external to the people in dispute.
Limited physical resources or authority, geographic constraints (distance or proximity), time
(too little or too much), organizational changes, and so forth can make structural conflict
seem like a crisis.

xv)

Value Conflicts : Value conflicts are caused by perceived or actual incompatible belief systems.
Values are beliefs that give meaning to the lives of a people. Values explain what is good or
bad, right or wrong, just or unjust. Differing values need not cause conflict. People can
live together in harmony with different value systems. Value disputes arise only when people
attempt to force one set of values on others or lay claim to exclusive value systems that do
not allow for divergent beliefs. Religious conflicts in contemporary Indian villages are a major
example for it.

4. Types of Conflict in the Implementation of a Project


Interdependence Conflicts: A persons job depends on someone elses co-operation, output
or input. For example, maintenance of structures in a watershed requires cooperation of
different stakeholders and if anyone or a few of them do not perform their duty properly it
can affect the functioning of the entire project. This, in turn, can cause conflicts among
different stakeholders and ultimately lead to failure of the programme itself.

II)

Differences in Style: People have different styles in their functioning and operation and
these affect the operation of a project. For example, one person may just want to get the
work done quickly (task oriented), while another is more concerned about having it done in
a particular way by including other people in the project. These differences in style of doing
job create conflict.

III)

Differences in Background/Gender: Conflicts can arise between people because of


differences based on class, ethnicity, gender, education and other aspects. Conflict over
political difference is very common in rural India. It is observed in most of the projects that
men do not allow women to speak or participate in meetings or in decision making as they
believe that it is contrary to their social norms. Similarly, disadvantaged sections are prevented
from participation in projects and in the political process in rural areas by the dominant
elite. These kinds of perceptions, in particular, create conflicts in the rural society.

IV)

Differences in Leadership Style: Frequent changes in leadership also cause disruption in


the continuity of a programme and its effective functioning. For instance, employees who
change from one supervisor to another can become confused, as one leader may be more

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I)

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open and inclusive while another may be more directive and rigid. Sometimes, this can lead
to groupism and in case of rural polity to factionalism.
V)

Differences in Personality : This type of conflict is often fuelled by emotion and perceptions
about somebody elses motives and character. For example, a team leader jumps on someone
for being late because he perceives the team member as being lazy and inconsiderate. The
team member sees the team leader as out to get him.

VI)

Conflict over policy changes : If all of sudden a new policy is introduced in the place of an
existing policy it can lead to conflict. For instance, a conflict relating to policy issues emerged
when the Government of India brought in Provisional Extension of Panchayats in Schedule
Areas (PESA) and also simultaneously brought in Wildlife Protection Act, National Wildlife
Parks, etc. These policies have caused lot of unrest among the tribal communities in Schedule
V Areas.

5. Types of Conflicts over Resource Management


Natural resource management (NRM) has taken a major place in contemporary rural
development scenario. Many stakeholders are involved in its management. However, it is
observed that many conflicts emerge over NRM due to varied interests and ideological
differences. For instance, tribal communities who are dependent on forest or other natural
resources or wealth are interested in preserving them, as it helps them in sustaining their
livelihood. On the contrary, others may be interested in exploiting these resources for their selfaggrandisement.
When an area is declared as Reserve Forest Area, there is scope for three types of conflicts
between the objectives of the said declaration and consumption of natural resources. They
are;
a.

Full length conflict between the proposed developmental objectives for that area and the
present contemplated objectives.

b.

Limited level conflict between the regional objectives and the fresh plan.

c.

Conflicts that may arise in other areas due to reserve forest areas.

The first category of conflicts is irresolvable. For instance, if the primary area objective
is agricultural development, the fresh proposal for reserve forest area totally forbids the same.
Rather than inviting new conflicts by poking into such conflicts, it is prudent to avoid such
situations.

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The second category of conflicts is amenable to some extent for a resolution. For instance,
when new roads are to be proposed laid through reserve forest areas, conflict can be resolved
through alternative ways.

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The third category of conflicts is mainly related to neighbouring human habitations.
Animals, birds, insects of Reserve Forest area may turn out to be harmful to people and cattle of
the surrounding areas.
The main problems with Reserve Forest Areas are the vast area reserved for the purpose
and prohibition of others into the area. At times, activities conducted in the surroundings of
Reserve Forest Area also cause conflicts. For example, pollution caused by industries in the
surroundings may adversely affect the environment of the Reserve Forest Area.
Similarly, there are several conflicts over consumption of water resources between the
head and tail reach command areas. Conflicts also arise over the threat of flood of vast areas of
land in connection with construction of large scale irrigation projects. When there is no
unanimity over ways and means of utilisation of resources, conflicts take place.
Incidents of forced migration are likely to present a continued and growing challenge,
because the causes of population displacement appear unlikely to diminish in the foreseeable
future. The displaced communities have developed certain conflicts with the host communities
relating to resource sharing. When all of sudden pressure on stipulated resources increases the
host communities fight to throw the invaders out, thus leading to conflict.

6. Keywords
Conflict, disagreement, disputes

7. Summing up
The above discussion gives an idea about conflict and different types of conflict. In the
context of rural development different stakeholders enter into various conflicts depending on
the context and points of view. Some conflicts are productive for the society while the others
are not. Whether it is a case of general rural development or natural resource management or
project implementation, the conflicts arise depending on the interests of stakeholders.

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8. Know your Progress


1.

What is the difference between conflict and dispute?

2.

Define conflict.

3.

Why do conflicts occur?

4.

How are the conflicts perceived by different scholars?

5.

Discuss the basis of classification of conflict by different scholars.

6.

How difference in leadership creates conflict?

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7.

What are the different rural conflicts?

8.

What kinds of conflicts are encountered in the implementation of development projects?

9.

Discuss the various types of conflicts that emerge in the case of natural resource
management.

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9. Further Readings/References
1.

Avruch, K. (1996), Conflict resolution, Encyclopaedia of Cultural Anthropology, Vol. 1, New


York: Henry Holt.

2.

Avruch, K. (2000), Culture and Conflict Resolution. Washington, DC: United States Institute of
Peace.

3.

Coser, Lewis A, 1956. Social Conflict, Free Press, Glencoe

4.

Humphreys, M. (2005), Natural Resources, Conflict, and Conflict Resolution: Uncovering the
Mechanisms. The Journal of Conflict Resolution, Vol. 49, No. 4, pp. 508-537.

5.

Jayaram, N and Satish Saberwal (Eds.) (1996). Social Conflict. Delhi: Oxford University Press.

6.

Martinelli D.P, Almelda A.P. (1998), Negotiation, management, and systems thinking, Systemic
Practice and Action Research, Vol.11: 319-334.

7.

Roberts, Simon (1979). Order and Dispute: An Introduction to Legal Anthropology.


Harmondsworth, Middlesex, England: Penguin Books Ltd.

8.

Singh, S.K. (2005), Self Governance for Tribals, Vol. 2 & 3, (eds), NIRD Publication, Hyderabad.

9.

Tania, L. (2003), Situating Resource Struggle, Concept for Empirical Analysis, Economic and
Political Weekly, Vol. XXXVIII (48): 5120-5128.

10.

Upreti, Bishnu Raj (2004), Resource Conflicts and Conflict Resolution in Nepal, Mountain
Research and Development, Vol. 24, No. 1, pp. 60-66.

11.

Walker G.B, Daniels S.E. (1997), Foundations of natural resource conflict: Conflict theory and
public policy. In B Solberg and S Miina (Eds.) Conflict Management and Public Participation
in Land Management. EFI [European Forest Institute], Proceedings 14. Joensuu, Finland: EFI,
pp 13-36.

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10. Model Answers
Conflict refers to basic incompatibility in the relationship.

3.

Conflict occurs when factors like deviation from shared rule of games between parties and
participants in a relationship are frustrated.

8.

In the development projects, conflicts occur due to the interdependence of persons, whose
cooperation is required very much for the project, different styles of functioning and work,
frequent change in the leadership, and also policy.

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2.

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UNIT - 2 : CAUSES AND CONSEQUENCES OF CONFLICT


Structure
1.

Introduction

2.

Objective

3.

Understanding Conflicts

4.

Causes of Conflict

5.

Consequences of Conflict

6.

Keywords

7.

Summing up

8.

Know your Progress

9.

Further Reading/References

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10.

Model Answers

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1. Introduction
Conflict is inevitable in everyones life, whether it is productive or counter-productive.
Social conflict may be defined as a struggle over values and claims to status, power and resources
in which the aim of the conflicting parties is not only to gain the desired values but also to
neutralize, injure, or eliminate their rivals (Coser, 1956: 8). It means perceived divergence of
interest or a belief that current aspirations of parties cannot be achieved simultaneously.
According to Jayawardane (cited in Reddy, 1986: 53), conflict is a mode of interaction between
two or more persons in which the parties concerned attempt to control each others behaviour.
We can say that conflict occurs when two related parties, individuals, groups, communities,
nations or States find themselves divided by perceived incompatible interests or goals or in
competition for control of scarce resources.

2. Objective
The objective of the Unit is to familiarise the reader with the causes and consequences
of conflict that arise at different stages in day to day life of rural society and in the
implementation of rural development programmes. After going through this unit one will be
able to understand the various causes of conflict and their consequences.

3. Understanding Conflicts

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Conflicts, as Jayaram and Saberwal (1979: 500) suggest, are good for salience to social
identities, and oppositions, and to the corresponding social boundaries. Conflict can be cathartic
letting off steam, releasing aggressive feelings and clearing the air, even if the relief be
temporary. Conflict can be a means of communication: putting up resistance is a means of telling
the other party how serious an issue is for oneself. Going on strike is one way to force an issue
on to the days agenda. Joining conflict may enable one to secure changes in prevailing social
arrangements. We should notice that the relationship may operate in the reverse direction too:
strong social identities, release of aggressive feelings, hostile communication, and certain kinds
of changes can lead to conflict as well. Thus, causes of conflicts and their consequences are
dependent on different factors and an understanding of them can be helpful in evolving
mechanisms to regulate them and also to mitigate them.
Conflict theorists emphasise the importance of interest over norms and values, and the
way in which the pursuit of interests generate various types of conflicts as normal aspects of
social life rather than abnormal or dysfunctional occurrence. The emergence of conflict is evident
when there is development intervention in a community with multiple norms and values. In
the context of natural resources use, conflict of interest arises between the users and non-users.
Differential access to resources is an often cited source of conflict among users (Stanbury, Pamela
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and Lynott, 1992). Resource conflict occurs when two or more competing users exist for the
same resource. Baviskar (2003) argues that the conflict generated by multiple groups, as they
lay claim for natural resources, is at centre stage in cultural politics.
It is important to note that conflicts too have a life cycle. They originate in some point,
grow big and come to an end. It is observed that, ongoing conflicts can grow by feeding on
themselves Most conflicts get restrained, however, before these have done too much damage:
modulating processes work in nearly every society. Yet their working is not inevitable: conflicts
in a society may get out of control, so much so that a general breakdown of orderly social
processes followsand the society loses control over its own fortunes (Jayaram and Saberwal,
1996: 499).
It is observed that, The course of social conflicts, as of other human enterprises, hinges
crucially on how the actors in them define, or interpret, the (changing) situation, on what
meaning they attribute to events, actions and reactions, and to the others intentions Once
conflict takes off, the combatants may engage in mobilizing their resources consciously. These
may cover manpower, symbols, status, wealth, skills, weaponry, and much else; their ultimate
limits may be set only by the combatants ingenuity. How wide a range of resources gets
assembled for a particular encounter depends on the combatants standing, their skills, their
past experience, the general quality of their judgement, and their judgement about the stakes
in a particular episode (Jayaram and Saberwal, 1996:19). It is important to note that the intergroup conflicts are due to Conflicts over symbols, use of public space/amenities, temple honours,
social status, privileges, concessions and like are the staple for such conflicts (Jayaram and
Social construction of resource
Saberwal, 1996: 23).
use Cultural variables conflict

Local var
Physical

Pathways to Conflict
Political

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Pathways to different types of conflict are determined by actors perceptions of conflict


situations, rather than simple causal linkages between contributory factors and outcomes
(Dokken, 2001; Timura, 2001). The following diagram indicates the pathways of conflict.
Productive and Unproductive
forms of Conflict

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4. Causes of Conflict
Conflicts primarily arise due to dynamics in access to resources and power; decline in
the access to resources; deficiency owing to decline in resources; on value basis or insecurity
feeling; contradictions in Government policies or communication gaps; etc. Understanding of
history, culture and duration of conflict would be necessary for identifying causes of conflict.
Failure to meet social, political and economic needs, scarcity of resources, corruption, bad
governance, poverty and inequality have provided fertile ground for emerging social and
resource conflicts (Upreti, 2002). Contradictions and inconsistencies in the application of formal
legal procedures and customary practices, diversity in local norms and beliefs, and management
differences also contribute to conflict (Oli, 1998). Pervasive corruption, abuse of authority,
discretionary and arbitrary exercise of power, illegal forms of pressure, lack of transparency,
and deviation from public duties are additional contributing factors (Upreti, 2002).

Misunderstanding among the Stakeholders


In a typical situation, a project authority conceives a development project, say, a dam or
power plant at a particular location and declares its intention. At this stage they declare only a
rough estimation regarding the land required and the possibility of human displacement. Once
this is announced in press it raises number of doubts in the minds of different stakeholders.
The losers raise many questions based on limited information available to them. These
apprehensions may be based on inadequate or irrelevant information or it may get distorted
due to misinterpretation by media. These kinds of misunderstanding that arise due to various
factors sometimes create conflict among stakeholders.

Frustration leads to conflict


In any social system, an atmosphere of frustration prevails when one of several
interdependent components perceive another as impeding attainment of its goals or its effective
performance. Among the institutions and agencies comprising any given channel of distribution,
we can postulate a state of conflict if channel members cause frustration. Because of the obvious
reliance within channels, conflict is undoubtedly pervasive.

Lack of Adjustment between modern and Traditional methods


Studies by different scholars show that the imposition of laws of the State, which are
incompatible with the traditions and customary practices/laws of the people, lead to unrest,
and conflict among them and between them and others (Guha, 1989).

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Disequilibrium of demand and resource flows


Talcott Parson, a structural functionalist, states that smooth functioning of systems
depends on maintaining equilibrium both in total flow of demands and resources between the
various systems polity, economy, status and culture that make social system. Any disturbance

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that severely impairs the equilibrium of demand and resource flows in a society leaves that
society in a state of disequilibrium or dysfunction in which it is unstable or prone to revolution
(Cited in Reddy, 1986: 56).

Individual Interests and Conflict


Interest conflicts are caused by competition over perceived incompatible needs. Conflicts
of interest result when one or more of the parties believe that in order to satisfy his or her
needs, the needs and interests of an opponent must be sacrificed. Interest-based conflicts may
occur over substantive issues (such as money, physical resources, time, etc.), procedural issues
(the way the dispute is to be resolved), and psychological issues (perceptions of trust, fairness,
desire for participation, respect, etc.).

Competition and Non-Cooperation


It is also true that resource use competition is accompanied by governance failure,
leading to what will here be described as unproductive conflicts. This is where conflict leads to
non-cooperative outcomes, often entailing the kind of aggregate dysfunction characterised in
the tragedy of the commons in which the majority would have wished for a better outcome
(e.g. Hardin, 1968).

Conflicts due to Population Increase and Climate Change


The global human population is likely to increase by around two and a half billion people
over the next 50 years (UNFPA, 2003). Refugee movements are generally the result of conflict
but can also be a cause of conflict. In the same time-frame, global climate change will further
impact on agricultural productivity, greater populations will be exposed to flood and drought,
and even the viability of some island societies will be threatened (IPCC, 2001; Barnett, 2003;
DFlD, 2003). Furthermore, these current and potential causes of migration (forced) are predicted
to impact most on developing countries: most recent armed conflicts have been located within
and between developing countries (Gleditsch et al., 2002; Stewart, 2002); 90% of population
growth is expected to occur in developing countries (UNFPA, 2003); and climate change is
expected to have the most detrimental impacts in developing countries (DFlD, 2003; Pelling,
2003). Some scholars have also proposed that conflict is most likely to occur in areas where
various dimensions of poverty undermine the capability to adapt in more strategic and
productive ways (Homer-Dixon, 1999; Goldstone, 2001).

Socio-Cultural aspects and Social Conflict

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Social conflicts and inter-household conflicts were the most frequently reported form
of conflict in rural areas. They were related to transactions, marriage and sexual offences, ethnic
identity, assault and theft, and external development intervention. In the transaction-related
conflicts, lending, borrowing and repayment were the most frequent. Discrimination against
wage labourers by landlords and fictitious documents were the other common sources of

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conflict. Theft, fights and property damage were also frequent sources of conflict in rural areas.
Partition of parental property, disputes over religious invasion, and accusing women of witchhunts were also common. Polygamy, child marriage, inter-caste marriage, trafficking in girls,
prostitution, sexual abuse (harassment, rape and molestation), character defamation, separation,
alimony, pregnancy and abortion, paternity and divorce were other frequently reported issues
in rural India. Forms of ethnic and caste-related discrimination became major sources of conflict,
especially since the political changes of the 1990s.

Developmental Intervention
External development interventions lead to conflicts because of bureaucratic,
technocratic, and top-down nature of their planning and implementation, and also due to
political interventions. Misuse of financial resources and kickbacks, abuse of authority, and
nepotism were the most frequently reported problems. Professional troublemakers and power
brokers manipulate development interventions for financial and political gain by exploiting
their socio-political network, legal knowledge, and access to information.

Breakdown of Social Relations


It is observed from various studies that the conflicts among the stakeholders are not
purely confined to a particular development project itself but are related to social relations.
These problems of social relations symbolically get reflected in different development related
programmes or for in any village activity. For instance, personal disputes between two persons
can lead to conflict over participation in village programmes, resource sharing, etc.

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Resource Conflicts
Conflicts related to natural resources are referred to here as resource conflicts. Conflicts
over land, water, common property, including forests are quite prevalent in rural and tribal areas.
Boundary and demarcation change in ownership rights, theft of crops, tenancy rights and tenant
eviction, location of development infrastructure, and obstruction of existing paths were the
most frequently reported land conflicts. Other major sources of land conflicts were related to
public land encroachment and control, biased land quality assessment by surveyors, redemption,
fraudulent sale, partition, order of succession, and gifts of parental landholdings. Forest resources
were the most contentious issue, given their multiple uses. The same forests are used by traders
to collect medicinal herbs and other non-timber forest products, by local communities to collect
wood for house construction and fuel, and by local elites for political and economic gain lead
to severe conflicts among users and within the community. Forest conflicts were related to
ownership, identification of users, access to forest products, payment of royalties, illegal
collection of non-timber forest products by outsiders, hunting and poaching of wild animals,
and collection of medicinal plants by commercial traders in high-altitude forests managed and
used by communities. Forest encroachment by non-users, unauthorised collection of firewood,
use of trees to build bridges and cremate the dead, and competition for leadership of forest

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user groups (FUGs) were also frequently reported. Local politicians use FUGs as a platform for
political gain. Conflict between the Federation of Forest Users and the Forest Department
became severe when the government took over some of the authority and responsibility granted
by the Forest Act to the users of community forests.
Major water conflicts were related to source disputes, sharing of drinking water and
water for irrigation, and payment of compensation for damage caused by the construction of
water-related projects. Other frequently reported conflicts were related to non-compliance with
maintenance of irrigation and drinking water systems, the ambiguous roles and responsibilities
of water users committees, and uneven treatment of different water users by government
technicians and officials. Use of the same communal land by community members for different
purposes such as grazing, collection of fuel wood, and alignment of irrigation canals instigated
several community conflicts. Water disputes were more frequent, especially in the dry season
when different people use water for different purposes, such as drinking, irrigation, and water
turbines. The multifunctional nature of water was one of the principal on-going sources of
conflict.

Poverty and Inequality


Goldstone (2001) finds that poverty and inequality are the strongest influencing factors
that serve to increase the likelihood of a conflict becoming unproductive. Kahl (1998) proposes
that the ambitions of a state elite amount to a critical intervening variable, such as the elite
instrumentalise resource scarcity, deliberately engineer violent outcomes that advance their
parochial interests, etc. Stewart suggests that histories of conflict can be the most powerful
variable because mobilising people by calling on group memories is more effective if there is a
history of conflict (2002: 344).

Displacement and conflicts


It is widely noticed that resettlement of displaced population creates conflicting
situation with native population. Population increase, especially when it occurs so rapidly, places
additional stresses on local resources. For example, it is rare for refugees to be provided with
construction materials or fuel for cooking, and these resources will often by necessity be
collected from local environments. There has also been a tendency to perceive refugees as having
an impact beyond their numbers. The local communities who feel that the intrusion of refuges
will create problem for their livelihood enter into disputed situations.

Competition leads to Conflict

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Competition for resources can be mapped onto existing perceptions of inequality,


resulting in a hardening of group identities and providing a catalyst for hostility towards outgroups. Whether, and to what extent, such a society-nature dynamic occurs is dependent on a
range of intervening variables that determine whether resource use conflict develops along

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productive or unproductive pathways. Where unproductive inter group conflicts occur, they
tend to manifest themselves as conflicts over ethnicity, class and other existing social fault lines.

Relative Deprivation
Relative deprivation creates conflict among the stakeholders. It creates mostly intrastakeholder conflicts. If some members or some communities in any society feel that they are
deprived from a particular development works or benefits of a scheme they react against such
activity which sometimes lead to conflicting situations. Where these conditions exist, quite
insignificant differences can be instrumentalized, fuelling hostility towards out-groups.
The societal conditions that increase the intensity of expectation without increasing
capabilities increase the intensity of discontent. Gurr (1970) argued that greater the intensity
of discontent the more likely is violence. According to him, many of the attitudes and societal
conditions that facilitate political violence may be present and relatively unchanging in a society
over a long period, but they become relevant or operative in the genesis of violence only when
relative deprivation increases in scope and intensity. This relative deprivation leads to frustration,
which induces anger. The anger induced by frustration, however, is a motivating force that
disposes men to aggression. If frustration is sufficiently prolonged or sharply felt, aggression is
quite likely and conflicts sure to occur.

Evolution of Multiple leadership and institutions


It was observed that after the intervention of different developmental projects, the
traditional village chief has lost his importance in villages. In the traditional society, the village
chief used to take all the decisions in consultation with elder members of the village. All the
villagers used to respect him. After the introduction of statutory Panchayats, Self-Help Groups
(SHGs), youth associations, and other village committees, many leaders have evolved. The
traditional village chief who used to play a central role has lost his power in most of the cases.
The evolution of different institutions and leaders create competition among different leaders
to capture power in development projects. This kind of competition among different leaders
has disturbed the social capital and village solidarity. This has further created a situation that
led to factionalism among the villagers, which is used for personal gain and to capture power
by the leaders. This competition among different leaders has become an impediment in the
functioning of the projects. This actually goes against the thesis held by Putnam (1993) and
Gulati et al. (2005:224), who argued that the presence of different social organisations like
cooperatives, official village Panchayats, traditional caste Panchayats and other credit societies
add to the stock of social capital in a society.

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Decline of traditional cultures


In the past, the villagers used to celebrate many festivals when their economy was
completely dependent on nature. They used to depend on nature for their livelihoods. Their
strong belief in nature, gods and goddesses compelled them to observe different rituals and
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conservation practices. The villagers used to get together most of the times to decide the date
and time of ritual observances. The frequency of meetings was due to strong social capital
among the villagers. In fact, if people are used to interacting in common neighbourhood, temple,
or other social sphere, the cooperation for economic opportunities may even free ride on these
other institutions (Mearns, 1996). The marginal cost of getting together would be less, if people
are getting together for other social reasons. Enforcing rules was easier, if people want to protect
their reputation and goodwill with others because their behaviour in economic activities is
linked with other activities (Gulati, et. al, 2005: 223). Frequent interactions also facilitate
coordination and communication.
Today it is observed that due to development of irrigation, availability of other alternative
livelihoods and due to political interferences, the traditional mode of relations among the
villagers is disturbed. Their worldview has also changed and individualism has developed. Even
though they are observing most of the festivals, which they used to observe earlier, the same
spirit is not seen. Owing to development of irrigation, the farmers have resorted to multiple
cropping. They are now quite busy in their work and now they rarely attend the meetings called
for village rituals. These losses of opportunities of interactions among farmers have not only
disturbed the traditional social capital among the farmers but also complicated the process of
dissemination of information, which was easier earlier due to frequent interaction among
farmers for various reasons. At the same time, the development of individualism has disturbed
the trust among villagers which created path for conflict.

Politicisation of Development
Local level political interference led to the questioning of legitimacy of the leaders of
development project. Affiliation of local leaders with political parties has led to conflicts among
villagers. Politics of appeasement shown by the local leaders to their respective parties have
deprived the others the fruits of development. These attitudes have increased conflict among
villagers.

Incompatibility of Interests

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As it is rightly mentioned by sociologists belonging to the group of incompatibility of


interests, the Potentiality of conflict is an essential corollary of social structure (Jayawardane
cited in Reddy, 1986:53). They argued that the integration of separate groups in a wider structure
lead to competition for status, power and resources. The closer the integration the more
competing interests jostle with each other. Coleman (Cited in Reddy, 1986:53) claims that such
differences in values and interests are sometimes created by new system of participation, which
becomes a potential basis of conflicting response and sets the stage for precipitating incidents.
Huntingtons argument is that, social change invariably brings into existence different social
forces characterized by conflicting interests, thereby escalating the level of conflict in the society
undergoing change (Cited in Reddy, 1986: 54).

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Also, such changes tend to undermine the traditional institutions that we had in the
past that were adequate to the task of managing conflict.

Lack of Transparency and Corruption


Devolution of power to community members has been made with one of the objectives
to check corruption and to maintain transparency. But, if the nominated/elected leaders of the
project or village are involved in corruption they will lose the faith of the other co-stakeholders,
leading to conflicting situation.

Dominance of landlords and higher caste farmers


The main motto of development projects is to decentralize power among villagers,
irrespective of class and caste. If the big landholders, higher caste farmers and politicians
influence the decisions in their favour by violating the laid down rules and regulations, it will
create conflict among members. This sort of capture of power by the rural elite nullifies the
objectives of rural development.

Interdependence
Where there is interdependence among the individuals in respect to a task, the chance
for an individual to act independently is much less and a need for inter-cooperation grows. This
leads to difference in opinions and later to conflicts. For instance, the decision of the managing
committee is essential in respect of works and relevant expenditure in Vana Samrakshan Samithi
(VSS). In this context, an arbitrary decision by the VSS president, without consulting other
Managing Committee members, would give way to conflict. Even when the Managing
Committee members are consulted, a conflict can be anticipated if the ideology varies among
its members.

Lack of clarity in roles


Lack of clarity in regard to responsibilities of the stakeholders results in conflicts. For
instance, when more than one stakeholder is involved in a programme there should be clarity
in responsibilities as to who should do what. There should be clarity as to what sort of
cooperation is required to be extended by the line Departments and the NGOs to the primary
stakeholders. Absence of such clarity will create confusion, which may lead to conflicts.

Organisational difference

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When there is division of work among the individuals belonging to different


organisations, there is scope for conflicts to arise owing to differences in organisational
perspectives and objectives.

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Power dynamics- Hierarchy
Access to material or resources is related to variations in power. Even marginal differences
in power erupt into show of strengths. If the gaps in official levels are wider, conflicts are subdued.
However, such tentatively buried conflicts would explode on any day. When no one is willing to
compromise, even minor conflicts would take recourse to power dynamics. In the process, those
who are in superior power might compel all the others to accept what they propose for the
resolution of conflicts.

Communication gap
Factors like distance, language and inhibition to share the information with others might
result in communication gaps. Though addressing differences in understanding is not an
extraordinary task, they are the origin for many conflicts. It is proposed that if we can develop a
better understanding of how a range of variables can contribute to the ways in which resource
use conflicts are perceived and acted upon locally, we will be in a better position to identify
responses that might help to provide the conditions under which competition for scarce
resources is resolved peacefully. When a person tries to communicate a matter through a letter
or personally to another person, he could be able to communicate only to the extent he
understood or for that matter there may be a gap between what he understood and what he
communicates. Thus, there is scope for communication gaps to give rise for conflicts.
Communication gaps happen due to inability of the individuals to understand properly the
communication of the others or to pass on the same communication to others correctly. A
message may be understood by different people in different ways. A proper understanding of
the communication and message can avoid many a conflict.

Ideological Differences
All the stakeholders involved in a developmental project will not be having the same
ideology, even among the primary stakeholders. While taking a decision these ideological
differences create a major problem leading to conflict.

Disagreements over the use and control of natural resources


Conflicts involving governments, their agencies, private sector and local communities
generally arise because of disagreements over the use and control over natural resources. These
conflicts, if not managed, can cause severe environmental degradation, threaten livelihoods
and disrupt social harmony.

5. Consequences of Conflict

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Our focus here is on the consequences of conflicts that arise among the stakeholders in
rural development. These consequences may have diverse impacts. Conflicts do not always
produce negative consequences but may bring in positive impact also. The outcome is

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dependent on the nature of the conflicts. Some conflicts bring in a constructive development
for a society. Some individual and groups enter into a conflict for the betterment of the society.
The negative implications vary depending on the severity of conflict. In some cases if the conflict
is properly and timely addressed, losses to that society can be minimised. If a conflict is ignored
it may adversely affect the communities involved in the conflict.

Economic Consequences
Conflict also has economic consequences. It can lead to unemployment and loss of
income owing to disruption of economic activity, destruction of infrastructure, uncertainty,
increased cost of undertaking business, and capital flight. The development of hostile relations
disturbs the progress of development projects and would indirectly affect rural employment.
The loss of employment sometimes may create a situation for forced migration.

Damage to Infrastructure and Economy


Attacks on the source of resources, irrigation infrastructures, community halls, rural roads,
and other community materials by conflicting parties bring lots of loss to the nation. Due to
this, the local rural livelihood system will be affected.

Disturbed Communication
The major direct impact of the conflict so far as most ordinary individuals and
households are concerned has been a widespread reduction in physical mobility and travel as
a result of a sense of personal insecurity. The inter area and inter village conflicts disrupt the
travel and transport throughout the conflict-affected areas. It may have a serious effect on
livelihoods for some.

Impacts on food and livelihood security


The conflict, either inter- or intra-stakeholder, brings certain loss to livelihood securities.
The damage of individual crop or resources by conflicting parties brings loss to that particular
individual. If conflict arises among the stakeholders it creates a doubt over implementation of
the project, which disturbs the livelihood system of the whole community.

Local governance structures

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If the conflicts keep continue among the stakeholders it disturbs the local administrative
structures. It also disturbs the local governance structure. If the villagers keep on fighting with
each other it will disturb the functioning of local community level development organisations.

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Disruption of Social Capital
If the conflicts persist among the villagers or stakeholders it will disturb the social capital
among the villagers. It will develop a situation where everybody will have a suspension on
others. It will disturb the trust among villagers and other line departments.

Upsetting of local traditional culture


If the conflict continues among the stakeholders it will disturb the local culture and it
generates factionalism and groups among the villagers or local communities. The elders may
lose their importance in the villages. It will disturb the celebration of local festivals and other
functions that enhance social harmony.

Loss of Property
Conflicts bring a loss to both individual as well as community property. If the conflicts
continue, both the conflicting parties will try to damage the property of the other.

Injury to Health
Conflicting stakeholders may enter into fighting. Due to these, both the hostile groups
not only try to damage respective properties but also cause certain injury to individuals and
their health.

6. Keywords
Social process, non-cooperation, livelihood, social capital, local governance

7. Summing up
In this Unit , we have identified the various causes of conflict. While discussing on causes
of conflict emphasis was laid particularly on rural development aspects. Further, it highlighted
the consequences of conflicts.

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8. Know your Progress


1.

How do conflicts occur?

2.

What are the causes of conflict?

3.

What is the life cycle of a conflict?

4.

How communication gap creates conflict?

5.

Discuss the link between culture and conflict?

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6.

Describe different consequences of conflict.

7.

What are the economic consequences of conflict?

8.

Discuss the individual consequences of conflict?

9.

Describe the link between conflict and natural resource management.

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9. Further Reading/References
1.

Baviskar, A. 2003. For a Cultural Politics of Natural Resources, Economic and political weekly,
Vol. XXXVIII (48): 5051-5056.

2.

Coser, Lewis. 1956. The functions of social conflict. New York: Free Press.

3.

Dokken, Karin. 2001. Environment, Security and Regionalism in the Asia-Pacific: Is


Environmental Security a Useful Concept? Pacific Review 14(4): 509-530.

4.

Goldstone, Jack A. 2001. Demography, Environment, and Security, in Paul Diehl & Nils Petter
Gleditsch, eds, Environmental Conflict. Oxford: Westview (84-108).

5.

Gulati, A and et.al. (2005). Institutional Reform in Indian Irrigation, Sage Publication, New
Delhi.

6.

Jayaram, N and Satish Saberwal (Eds.) 1996. Social Conflict. Delhi: Oxford University Press.

7.

Kahl, Colin H. 1998. Population Growth, Environmental Degradation, and State-sponsored


Violence: The Case of Kenya, 1991-93, International Security 23(2): 80-119.

8.

Mearns, R. 1996. Community, Collective Action and Common Grazing: The Case of PostSocialist Mongolia, Journal of Developmental Studies, Vol-32 (3):297-339.

9.

Putnam, R.D. (1993). The Prosperous Community, The American Prospect, Vol.4 (3), March 21.

10.

Reddy, G.N. (1986). Rural Dynamics and Development, Chug publication, Allahabad.

11.

Singh, S.K. (ed.) (2005). Self Governance for Tribals, Vol. 2 & 3. Hyderabad: NIRD.

12.

Stanbury, Pamela and Janna Lynott. (1992). Irrigation Management and Conflict Resolution,
www.indiana.edu/~iascp/abstracts/610html.

13.

Stewart, Frances. 2002. Root Causes of Violent Conflict in Developing Countries, British
Medical Journal 324 (7333): 342-345

14.

Timura, Christopher T. 2001. Environmental Conflict and the Social Life of Environmental
Security Discourse, Anthropological Quarterly 4(3): 104-113.

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10. Model Answers


2.

The causes for conflict are misunderstanding among various stakeholders, frustration among
the participants, unwilling to adjust, unmatched needs and resources, individual interests
and competition / non-cooperation.

4.

Communication gap leads to conflict because of distance, and language used in sharing
information might lead to conflict. The difference in understanding the message also causes
conflict through misunderstanding the situation.

7.

The economic consequences of conflict include damage of infrastructure facilities,


disturbance in communication and also affecting food and livelihood security

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UNIT - 3 : CONFLICT RESOLUTION


Structure
Introduction

2.

Objective

3.

Process of Conflict Resolution

4.

Keywords

5.

Summing up

6.

Know your Progress

7.

Further Reading/References

8.

Model Answers

SRD II (N) 6

1.

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1. Introduction
Managing conflicts in rural development is emerging as one of the key capabilities
required for sustainable development in todays era of liberaliSation and globalisation. Various
development projects that provide livelihoods for millions of rural poor around the world are
increasingly becoming a challenging task. The conflict between governments, their agencies,
the private sector and local communities as well as within the communities arises generally
because of disagreement over the use and control over projects. These conflicts, if not managed,
can cause environmental degradation, threaten livelihoods and disrupt social harmony across
the globe. Managing such conflicts will require extensive use of conflict analysis and resolution
techniques at various levels by different stakeholders. Government and non-governmental
organisations require people with skills in conflict resolution and ability to handle conflicts in
peaceful and constructive manner.
As Jayaram and Saberwal (1996: 508-9) observed, The more complex societies commonly
institute specialiSed mechanisms for regulating conflict: this may be called the
institutionalization of conflict. Once the reality of conflict is socially accepted, its content and
form may be legitimized, codes to regulate its methods, weapons and techniques formulated,
and for pursuing the dispute established Issues would be joined in such settings less
destructively, ordinarily, than in the case of disputes settled through force of arms. Yet it must
always be remembered that these public mechanisms are human artefacts, instituted historically
to cope with particular kinds of contingencies. the mere existence of such mechanisms does
not ensure their effectiveness. Rigidly structured societies my resist the open processing of
conflicts even though institutions for the purpose are available, and even in loosely structured
societies the regulative institutions may not be effective, or may have lost their credibility.

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If we analyse the history of conflict resolution we will find that the extensive use of
courts in recent times has raised the issues of incredible growth in cost of litigation and delays
that contribute to those costs. Moreover, legal judgments often do not offer long-term workable
solutions that are fair, or that resolve the underlying causes for the conflict. These factors have
forced individuals and organisations to search for alternative methods to resolve conflicts. There
cannot be one method that can be efficient, equitable and administratively practicable in all
types of conflicts. Since formal methods of dispute resolution are not appropriate in every
situation these methods need to be complemented with the alternate methods of dispute
resolution. Such alternative systems would also require services of process experts. Even in
present day community driven development emphasis is laid on involvement of community
members in conflict resolution. Therefore, ability to resolve conflict is becoming a critical and
valuable skill for professionals working in the field of rural development.

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2. Objective
The objective of this Unit is to familiarise the student with the process of conflict
resolution in rural development. After going through this unit one will be able to understand
the importance of conflict resolution; various stages of conflict resolution; and various methods
of conflict resolution.

3. Process of Conflict Resolution


There are two aspects of conflict handling. The first is Conflict Management, which has
emerged with a much broader approach. The second is the more conventional Conflict
Resolution method. While conflict resolution methods concentrate on using techniques after
the occurrence of a conflict, conflict management assumes a more proactive role in preventing
conflicts by fostering productive communication and collaboration among diverse interests,
addressing the underlying causes of conflicts, developing trust and understanding and using
participatory and collaborative planning for undertaking complex tasks.
The conflict management process does not begin with the identification of a particular
conflict. It fits in the planning stage of a project or programme of development anticipating
possible conflict in the use rights of stakeholders defined in terms of time frame, space and
magnitude. Thus, it is an on-going process in which the stakeholders constantly work to create
the conditions that discourage dysfunctional conflict and encourage conflict resolution
processes that facilitate win-win outcomes. In a more technical sense, conflict management
refers to a broad array of tools used to anticipate, prevent and react to conflicts. However, it is
not possible to come up with win-win outcomes all the time. In order to succeed trade off and
compromise would be necessary. Even then, in some cases, if a party is convinced that the
collaborative efforts will not yield anything better than what it can gain through unilateral
action, it will not go for any collaborative action.
While dealing with conflicting situation, the dealing authority has to go through the
following stages:

SRD II (N) 6

a.

a.

Analysing Conflict: Understanding conflict, parties, sources and circumstances.

b.

Selection of approach: Whether traditional or judiciary or alternative approach?

c.

Methods: Which method is to be opted? Can more than one method be adopted?

Analysing Conflict

Prior to selecting the conflict resolution approaches, it is essential to collect relevant


information relating to that conflict. The information so collected shall be relevant to the
following three aspects:

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i.

Areas of conflict

ii.

Understanding the conflict

iii.

i.

Review of circumstances of conflict

Areas of conflict

Before analysing the process of conflict resolution, it is necessary to understand or


anticipate the areas of possible conflict in the implementation of rural development
programmes. The areas of conflict may arise, for instance:

ii.

1.

When community based organisations (CBOs) feel that they are neglected while taking
decisions pertaining to rural development.

2.

When sub-committees formed under rural development programmes may remain nonfunctioning/ non-performing units.

3.

When CBOs and NGOs may not be working in synchrony with the line departments.

4.

When the strategic partnership among the stakeholders is not properly formed.

5.

When proper sharing of accountability of funding is not done among the stakeholders.

6.

When the CBOs/ NGOs lack professional expertise.

7.

When there is no proper allocation of duties and obligations among the stakeholders.

Understanding the conflict

In order to understand the process of conflict resolution, it is necessary to understand


the degree of severity of conflict. The pattern of interaction among four elements, namely, (i)
number and composition of stakeholders, (ii) nature of the resource and its use, (iii) differential
perceptions of stakeholders, and (iv) institutional mechanisms were described as critical for
understanding the nature of conflict. Sufficient information on these four elements and
understanding of their linkages are necessary in order to define the nature of conflict, which, in
turn, would help in judging varying degrees of severity of conflicts at a given point of time in a
specific area.

Severity of Conflict (increasing intensity/ levels of conflict)

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In order to resolve the conflict it is necessary to understand the severity of conflict. If a


conflict creates more loss to a particular society it needs to be given priority. The understanding
of severity will help us in resolving the disputes.

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Frequency and Periodicity of Conflict
Periodicity was considered important for prioritisation. Conflicts that take place round
the year need to be given priority over seasonal conflicts. Understanding of this will help in
finding out the appropriate methods of conflict resolution.

Social Background of Conflicting Groups


Conflicts rooted in social inequity might originate due to differences in caste, class,
gender religion, etc., should be given priority. Inequity in access to resource and absence of
tenure security should also be considered. Socio-economic status and varying levels of power
in terms of varying access to resources should also be kept in mind. A powerful group can
sustain a conflict for a longer period of time, whereas a poorer group that lacked support systems
to sustain a vigorous campaign would withdraw from the conflict.

Number and Composition of conflicting Stakeholders


It was observed that conflicts between and among stakeholders over rural development
projects would be more severe than intra-community conflict. Priority should be given to
conflicts affecting poor, tribal, women, and other vulnerable sections of the society. Number of
primary and secondary stakeholders adversely affected directly or indirectly by the conflict
should also be kept in mind during prioritisation. While discussing on composition of the
stakeholders involved in the conflict the following aspects should be kept on mind:
*

Social dimension (caste, ethnicity, gender, age, etc.)

Economic dimension (rich, poor, etc.)

Political dimension (powerful, powerless, etc.)

Source of Conflict
Conflict is a feature of all human societies and, potentially, an aspect of all social
relationships. How we conceptualise the root causes of conflict will determine to a large degree
the kinds of conflict resolution practices we favour, or even think possible. Before finding out
the resolution mechanism it is essential to know the source and context of conflict. In order to
identify the causes of conflict it is necessary to understand the history, nature and duration of
conflict.

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Nature of the Source of Conflict


While emphasising on source of conflict it is necessary to understand the nature of the
source of conflict. It may be resource based, culture based, development based or any other. It
would not be proper to make inter sectoral comparisons of conflicts. For instance, the conflicts
of forests cannot be compared with the conflicts of water. However, region specific ranking of

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resources could be developed. For example, conflict over water in Saurashtra (a water scarce
region) was more important than conflict over other natural resources. The level of demand
and supply, availability of substitutes or alternatives would determine the scarcity of resource,
which, in turn, would determine the level of conflict. Conflicts usually occur when the resources
become scarce. This situation may also lead to formation of an alliance for managing a joint
production process that tends to reduce the severity of conflicts over contestable resources.
Further, abundance of resource may lead to end of collaboration or conversely very little
collaboration.

Extent of Impact
While resolving the conflicts priority should be given on the extent of impact of conflict
on a particular society and a particular environment.

Differential Perceptions of the Stakeholders


The interaction among stakeholders and between stakeholders and development
projects would be based on a set of perceptions, which would vary because of the wide
differences in culture, values, knowledge, power, influence, etc. For instance, the perception of a
person who works closely with forests for livelihood about forest use is likely to be different
from a person who has studied forestry science. It may not necessarily be the truth, but each of
them has his/her respective validity. The perceptions with respect to stakes and functioning of
institutions determine the position that stakeholders would take in a conflicting situation.
Therefore, perception of different stakeholders should be properly understood to resolve the
conflict.

Importance of Stakeholders in Development Projects


While resolving conflict in a development project, stress should be laid on the
significance of various stakeholders involved in that specific development project. Some of the
stakeholders for whom the projects are not so beneficial may create problem in the
implementation of the projects. In such cases, efforts should be made to neutralise them.

Institutional Mechanism

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Institution was defined as a set of norms, values, rules and regulations that constrain
human activity and shape the pattern of interaction among stakeholders and between
stakeholders and natural resources. Understanding of both structural and cognitive dimensions
of the institutions is important to analyse the functioning of the institutions. It is widely accepted
that the functioning of institutions would primarily shape the perceptions of the stakeholders.
Issues such as equity and difference in socio-economic status influence institutions causing
aberrations in their working and giving rise to caste/class and other conflicts.

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iii. Review of circumstances and conditions of conflict and conflict resolution
Opportunity for Mutual Gain
It should be reviewed whether there is opportunity for mutual gain. An atmosphere
should be created where there will be an opportunity of mutual gain. The key to success of
conflict resolution is the probability that the contending parties will be better off through
cooperative action. If one or both believe that they can achieve a better outcome through
unilateral action, they will not be willing to participate in the process. What need to be analysed
is What are the gains or losses for different parties to the conflict? What are the suggested
alternatives?

Opportunity for Participation


For successful conflict resolution, all interested parties must have the opportunity to
participate in the process. Exclusion of an interested party is not only unfair but also risky for
the reason that such party may obstruct the implementation of the outcome by legal or extralegal means.

Identification of Interests
In working towards consensus, it is important to identify interests of the conflicting
parties rather than their positions. Conflicting parties often engage in positional bargaining
without listening to the interests of the other parties. This creates confrontation and a barrier
to consensus. It is essential to know whether the conflicting parties have unanimity of opinion
over the origin of the conflict, if not what are the differences of opinion; what is the level of the
conflict; and what is the relief sought for by the each of the parties.

Developing Options
An important part of a conflict resolution process is the neutral development of possible
solutions and options. An impartial third party can be a great asset to the process as it can put
forward ideas and suggestions from a neutral perspective.

Carrying out an Agreement


Not only must the issue be capable of resolution through participatory process but the
parties themselves must also be capable of entering into and carrying out an agreement. It
depends on whether the parties are positive or obstinate, and whether a final resolution is
necessary at all.

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a.

Selection of approach

In a broad frame conflict management approach is divided into two types. One is no
intervention, that is, by not doing anything; and the second is with intervention, that is, doing
something. The second one is divided into two types. One is reducing the intensity of conflict,
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that is a temporary solution, and the other one is resolving the conflict, that is, a solution for
long term.
In general there are three types of approaches to conflict resolution, viz., traditional,
judiciary and alternative approaches. The pros and cons of the respective approaches are
mentioned below :
Approach
Traditional

Judiciary

Positive features

Negative features

* Peoples involvement

Not legitimate, according to law

* Unanimous approval

Usually ethnic based/ sectarian

* Peoples empowerment

Monitoring mechanism is not fool proof

* Legal justice delivery system

Expensive

* Technical inputs provided

Ethnic practices are not taken into


cognisance

* Lawful decisions

Ground realities are generally ignored

* Interests of all parties given


due importance

Not conducive to all sorts of conflicts

* Traditional approaches
are included

Legal binding may not be feasible

* Lot of flexibility

People who are well versed with ethnic


concerns are required

* Decisiveness
Alternative
methods

* Competence
* Information dissemination
c.

Methods of Conflict Resolution

SRD II (N) 6

There are no particular techniques, both formal and informal, to manage conflicts,
although the techniques are based on intuition, logic and commutation arts. The following are
the most commonly known methods of conflict resolution :

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Litigation
Short of coercion and physical violence, the ultimate formal mechanism for conflict
resolution is taking recourse to the legal system of the country. In a legal proceeding, the parties
to a dispute are heard by a court of law that decides upon the case on the basis of existing laws
in force in the country. In many instances, this is the only way to resolve a conflict, but, in other
cases, it may not be possible. Many conflicts involve the use of common resources over which
no party has a clearly superior legal claim; legal rules prevent parties from bringing an action
to court if they do not have some right that has been directly infringed.

Negotiation
If the conflict is found to have emerged due to perception and belief and, by extension,
differing interpretation of these, it will be better to initiate the possibilities of talking or
negotiation. Negotiation is considered as the best method for conflict resolution. Negotiation
is a process where the parties to the dispute meet to reach a mutually acceptable solution.
There is no facilitation or mediation by a third party, each party represents its own interest.
Large disputes over public policy are increasingly being settled using processes based on
mediation and negotiation. In negotiation, the two parties become interlocutors. They engage
in an extended conversation about their dispute.
In any conflict when the conflicting parties come for negotiation they compromise their
interests in most of the cases. The following hypothetical case of conflict between X and Y
clearly illustrates the major possibilities of gains over losses involved in negotiation.

Two Parties Engaged in Negotiation


X
Win

Loss

Win

W-W

W-L

Loss

L-W

L-L

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Facilitation
It is a process in which an unbiased individual participates in the design and conduct of
problem-solving meetings to help the parties jointly diagnose, create and implement jointly
owned solutions. This process is often used in situations involving multiple parties, issues and
stakeholders. Facilitators create the atmosphere where everybody is able to speak freely but
they are not expected to volunteer their own ideas or participate actively in moving the parties
towards agreement.

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Mediation
Mediation is a process of settling conflict in which an outside party oversees the
negotiation between the two disputing parties. The parties choose an acceptable mediator to
guide them in designing a process and reaching an agreement on mutually acceptable solutions.
The mediator tries to create a safe atmosphere for parties to share information, address
underlying problems. It is more formal than facilitation and parties often share the costs of
mediation.

Arbitration
Arbitration is usually used as a less formal alternative to litigation. It is a process in which
a neutral outside party or a panel meets with the parties in a dispute, hears presentations from
each side and makes an award. Such a decision may or may not be binding according to
agreements reached between the parties prior to formal commencement of hearings. The parties
choose the arbitrator through consensus and may set the rules that govern the process.
Arbitration is often used in the business world and in cases where parties desire a quick solution
to their problems. There are certain steps involved in arbitration procedure, which are as given
below:
*

Identification and construction of disputes

Making an arrangement between contending parties to resolve the dispute through an


arbitrator

Choosing an arbitrator on mutual agreement

Process of presenting evidence and arguments

Studying of evidence

Acceptance of the award as binding by the contending parties.

Consensus Building among Stakeholders

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Anticipating the forms of future conflict is an important element of conflict resolution


itself. In the context of resource management, where disputes arise from time to time, it is useful
to create a space where stakeholders can regularly meet and communicate with each other
regarding interests, needs and positions. While there are no uniform methodologies for
undertaking the process, the important thing is to create an enabling environment whereby
the stakeholders are able to actively participate in the policy dialogues and subsequent planning
and design process.

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Preparatory Stakeholder Meetings
This is a simple instrument, which can be initiated by any of the stakeholders. However,
to make the meetings meaningful and productive, it is advisable that there should be proactive
initiatives and calls for meetings on a regular basis. This procedure is preferable to a reactive
response, i.e., calling ad-hoc meetings when a conflict arises. A prior intimation to all the
stakeholders should be given for raising questions, which would help in building up confidence.

Public Hearing
This is a more formal instrument for negotiation. For this a Public Announcement and
intimation is given through mass media in the regional languages. It attains importance due to
the presence of the District Collector, chief functionaries of the Project Implementing Agency
(PIA), representatives of the press and media, local revenue authority and elected representatives
(e.g., Talathi, village level worker, members of the gram Panchayat, representatives of the State
Legislative Assembly, etc.) and finally a substantial number of people representing different
stakeholders. Detailed presentations, discussions, and question answer sessions, preferably under
the chairmanship of the District Collector are organised.

Authoritative Command
Here an authority imposes its own decision on conflicting parties. While resolving the
conflict the authority may take the decision quickly, and sometimes the decision may not be a
popular one.
Conflict resolution always depends on which sense of conflict we begin with. If we find
conflict emerged due to perceived incompatible interests or goals or in competition for control
of scarce resources it suggests three strategies for conflict resolution. First, if conflict is an
attribute of the social relationship between the parties, then one or both of the parties can
sever (or exit) the relationship and end the conflict. Second, if the conflict arises from the parties
perceptions or beliefs that they are incompatible or that resources are scarce, then if it can be
demonstrated that the perceptions or beliefs are false, then the correction of misperception
can end the conflict. Finally, because not all social relationships are easily served, and not all
perceptions of incompatibility or scarcity are demonstrably wrong, the parties can move to
resolve their conflict by engaging in the kind of contention that Coser1 describes: a struggle
wherein one party seeks to dominate the other and thereby control scarce resources.

Thomas and Kilmanns Styles of Conflict Resolution

SRD II (N) 6

In the 1970s Kenneth Thomas and Ralph Kilmann identified five main styles of dealing
with conflict. They argued that people typically have a preferred different style of conflict
1.

Coser, Lewis. 1956. The functions of social conflict. New York : Free Press.

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resolution in different situations. The Thomas-Kilmann Conflict Mode Instrument (TKI) helps
one to identify which style one tends towards when conflict arises.
Competitive: People who tend towards a competitive style take a firm stand, and know
what they want. They usually operate from a position of power, drawn from things like position,
rank, expertise, or persuasive ability. This style is used at the time of emergency when a decision
needs to be made fast. It is used when the decision is unpopular; or when defending against
someone who is trying to exploit the situation for one self. However, it can leave people feeling
bruised, unsatisfied and resentful when used in less urgent situations.
Collaborative: People tending towards a collaborative style try to meet the needs of all
people involved. These people can be highly assertive but, unlike the competitor, they cooperate
effectively and acknowledge that everyone is important. This style is useful when needs of all
are brought together. Here a variety of viewpoints are heard to get the best solution.
Compromising: People who prefer a compromising style try to find a solution that will
at least partially satisfy everyone. Everyone is expected to give up something and the
compromiser also expects to relinquish something. Compromise is useful when the cost of
conflict is higher than the cost of losing ground, when equal strength opponents are at a
standstill.
Accommodating: This style indicates a willingness to meet the needs of others at the
expense of ones own needs. The accommodator often knows when to give in to others, but can
be persuaded to surrender a position even when it is not warranted. This person is not assertive
but is highly cooperative. Accommodation is appropriate when the issues matter more to the
other party, when peace is more valuable than winning, or when one wants to be in a position
to collect on this favour he bequeathed.
Avoiding: People tending towards this style seek to evade the conflict entirely. This style
is typified by delegating controversial decisions, accepting default decisions, and not wanting
to hurt anyones feelings. It can be appropriate when victory is impossible, when the controversy
is trivial, or when someone else is in a better position to solve the problem. However, in many
situations this is a weak and ineffective approach to take.

Social and Cultural Mechanisms of conflict Management in Traditional Societies

SRD II (N) 6

In a few tribal and rural communities conflict is channelled into its ritual processes in
order to institutionalise protest and dissent as part of the public expression, and also to control
the deviance (Turner, 1957 and 1969; Roberts, 1979: 59-61). Thus, there is some space provided
for the weak to express their disapproval of the behaviour and misdeeds of the leaders or elite
in the communities. This process is likened to the drama or theatre or films (cinema) in the
modern context as part of anti-structural liminal spaces (Turner, 1969). During the process of
ritual or drama or cinema the anti-structural expressions are taken as indicators of disapproval
of the deeds of the elite or even deviant sections, thereby providing scope for rectification and
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avoiding of conflict situations. Apart from this, the other methods of control of disputes adopted
by the traditional societies are through shaming, fear of supernatural agencies, ordeals,
settlement-oriented talking, ostracism, etc. (Roberts, 1979: 61-79).

Interest-Based Relational Approach of Conflict Resolution


The second theory is commonly referred to as the Interest-Based Relational (IBR)
Approach. This conflict resolution strategy respects individual differences while helping people
avoid becoming too entrenched in a fixed position. In resolving conflict using this approach,
one need to follow the following rules:
*

Make sure that good relationships are the first priority: As far as possible, make sure that
you treat the other calmly and that you try to build mutual respect. Do your best to be
courteous to one-another and remain constructive under pressure;

Keep people and problems separate: Recognize that in many cases the other person is not
just being difficult real and valid differences can lie behind conflictive positions. By
separating the problem from the person, real issues can be debated without damaging
working relationships;

Pay attention to the interests that are being presented: By listening carefully one will most
likely understand why a person is adopting his or her position;

Listen first, talk second: To solve a problem effectively one has to understand the other
persons position before defending ones own position. Hence, the best thing to do is to
listen first;

Set out the Facts: Agree and establish the objective and observable elements that will
have an impact on the decision; and

Explore options together: Be open to the idea that a third position may exist, and that one
can get to this idea jointly.

By following these rules, one can often keep contentious discussions positive and
constructive. This helps to prevent the antagonism and dislike which so-often causes conflict
to spin out of control.

4. Keywords
Managing conflicts, conflict mechanism, negotiation

SRD II (N) 6

5. Summing up
In this Unit, we have identified the areas of conflict, which arise due to development
initiatives. This has emphasised on various methods of conflict resolutions. While describing

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various aspects of conflict resolution it has discussed about the methods adopted by the persons
or authority involved for resolving conflicts.

6. Know your Progress


1.

What are the different types of conflict resolution?

2.

Discuss the nature and source of conflict.

3.

What different aspects need to be taken care of before selecting any conflict resolution
approach?5

4.

Discuss the nature of the source of conflict.

5.

Describe the circumstances and conditions of conflict and conflict resolution.

6.

What are the different methods of conflict resolution? Discuss.

7.

How is consensus building undertaken among stakeholders?

8.

What is Negotiation? State the relevance of it.

9.

Explain Thomas and Kilmanns styles of Conflict Resolution.

10.

What is Conflict Mechanism?

11.

Write a note on Institutional mechanism and conflict resolution.

SRD II (N) 6

7. Further Reading/ References


1.

Avruch, K. 2000. Culture and conflict resolution. Washington, DC: United States Institute of
Peace.

2.

IGNOU. 2001. Role of Participation in Sustainable Development, MRR 02, IGNOU, New Delhi.

3.

Jayaram, N and Satish Saberwal (Eds.) (1996). Social Conflict. Delhi: Oxford University Press.

4.

Roberts, Simon. 1979. Order and Dispute: An Introduction to Legal Anthropology.

5.

Singh, R. K & Vinay K. Sinha. 2003. Analysing Conflicts in Natural Resource Management,
IIFM, Bhopal & World Bank Institute, Washington, DC, USA.

6.

Turner, Victor. 1957. Schism and Continuity. Manchester: Manchester Press.

7.

Turner, Victor. 1969. The Ritual Process. Chicago: Aldine.

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8.

UNDP. 2008. Conflict Resolution and Negotiation Skills for Integrated Water Resources
Management. Pretoria, South Africa: International Network for Capacity Building in Integrated
Water Resources Management.

8. Model Answers
Different methods of conflict resolution include litigation, negotiation, facilitation, mediation
and also arbitration.

8.

Negotiation is a process where the parties to the dispute meet to reach a mutually acceptable
solution.

10.

It includes five main styles of dealing with conflict. They are competitive, collaborative,
compromising, accommodating, and avoiding.

SRD II (N) 6

6.

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UNIT - 4 : PEOPLE'S ORGANISATIONS IN CONFLICT MANAGEMENT


Structure
1.

Introduction

2.

Objective

3.

People's Organisation and Conflict Resolution

4.

Customary Form of Conflict Management

5.

Peoples Organisation and Contemporary System of Conflict Management

6.

Keywords

7.

Summing up

8.

Know your Progress

9.

Further Reading/References

SRD II (N) 6

10.

Model Answers

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1. Introduction
Disputes or conflicts arise due to many reasons and in many traditional societies there
were institutional arrangements, including community organisations, to dissipate conflicts
among its members or groups, or between members or groups from different communities.
Interestingly, the structures of dispute resolution organisations and processes among many
tribal and rural communities are strikingly similar. Importantly, peoples organisations are
evolved to contain as well as to mitigate conflicting situation. These organisations are backed
by both religious and secular authority to enforce the judgements (Siva Prasad, 2005: 131). While
conflict in traditional societies is autochthonous, the socio-cultural and economic changes that
have swept across the country and the introduction of major development initiatives have
introduced many conflicts into tribal and rural societies. These have also adversely affected the
development process. It is also amply demonstrated that the imposition of laws of the State
that are incompatible with the traditions and customary laws of the local communities lead to
unrest and conflict among and between the communities as well as the outsiders (Raghavaiah,
1979; Singh, 1984; Guha, 1989; Siva Prasad, 2005). Given this situation, there are concerted efforts
by the government as well as the NGOs to evolve peoples organisations or to revive traditional
dispute resolution structures, wherever possible, to reduce rural tensions or conflicts in order
to accelerate the process of rural development. There is a greater emphasis today on peoples
involvement in decision making, implementation and management of development projects.

SRD II (N) 6

As noted by Siva Prasad (2005: 129), Disputes and conflicts are part and parcel of any
society or culture. Societies, which have organic unity, always have mechanisms to resolve the
disputes/ conflicts. In most of the traditional tribal/ rural societies these dispute resolution
mechanisms are usually institutionalised. The purpose of the institutionalised mechanism is to
control deviance and to maintain norms in a society. These are equivalent to modern day law
courts. It is also pertinent note that Disputes arise when people violate the norms or when
there is a shift in the lifestyle, which leads to a conflict between the traditional and modern
value systems.
The resolution of armed conflict through mediation, followed by programmes of
reconciliation and reconstruction, has long been the building blocks of peace-building. More
recently, emphasis has been placed on the promotion of strategies for conflict prevention,
targeted at the local level, both in post-conflict and pre-conflict situations. Good governance,
democratic involvement and strengthening of civil society are common local conflict prevention
strategies. The ongoing debate to define sustainable development suggests that conflicts over
the utilisation of renewable natural resources can be avoided or reduced through greater
stakeholder participation during project planning and management (World Bank, 1995; UNCED,

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1992; Winterbottom, 1992) 1. However, in present day, development projects have laid emphasis
on community organisations or peoples organisations to solve their disputes among themselves
through the involvement of the stakeholders.

2. Objective
The objective of this Unit is to provide an idea on both traditional and modern means
of conflict resolution wherein the dispute or conflict resolutions are made through peoples
organisations. After going through this unit one will get an idea on how peoples organisation
plays a major role in dispute resolution and their utility in the case of resolution of conflicts
due to rural development projects.

3. Peoples Organisation and Conflict Resolution


If we look into the rural development aspects we will find that the peoples organizations
are involved in the case of conflict resolution, whether it is a traditional society or contemporary
society. However, the mode of resolution and the involvement of people in resolution process
are different in both the cases. While in traditional society an informal organisation was playing
a major role in resolving those disputes, in the contemporary contexts it became more formal.

4. Customary Form of Conflict Management


While the use of multi-stakeholder consensus-building to rural development disputes
is still largely experimental in most developed nations, customary forms of consensus-building
have a long history in many developing countries particularly in rural areas. Customary
approaches to consensus-building primarily target family, labour and civil disputes. Examples
include: the Barangay Justice System in the Philippines; Sri Lankas village level mediation panels;
the Lok Adalats (Peoples Courts) and Nyaya Panchayats in India; and the Taha system of the
Maoris in New Zealand (Moore, 1996)2.

SRD II (N) 6

The conflicts over development projects were not that much prevalent in the traditional
society. It does not mean that there was no conflict at all relating to development. But in
comparison to conflicts over other matters, it was very less. Even though conflicts were there,
they were basically confined to the village boundary and that to within the community. The
intra-village and inter-community conflicts were very less. The existing social customs, values
and social capital used to keep away the villagers from intra-village conflicts. Even though,
sometimes, intra-community and intra-village conflict arose, it used to be resolved by traditional
village Council. In some cases they used to obey the decisions of the Village Chiefs. The frequency
and intensity of conflicts were very less. The reasons for conflicts were not diverse. In most of
1

Cited in Warner Michael, 2000, Conflict Management in Community-Based Natural Resource Projects: Experiences
from Fiji and Papua New Guinea, Working Paper 135, ODI, UK, PP:10.

Cited in Warner Michael, 2000, Conflict Management in Community-Based Natural Resource Projects: Experiences
from Fiji and Papua New Guinea, Working Paper 135, ODI, UK, PP:19

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the cases, they were related to the resource sharing. The economy was subsistence in nature.
There was no competition among the landholders and among the villagers to access natural
resources like, fuel materials, wood lots, minor forest products, etc. Their dependence on rain
water and forest has compelled them to manage the water and forest together. They had an
efficient system of resource management.
The traditional village Council was playing a vibrant role in managing the developmental
activities and common property resources in the villages. In the traditional rural communities,
for instance, if any conflict relating to irrigation arose, the farmers in that outlet used to resolve
among themselves. If they failed to solve the disputes by themselves, they used to take this
issue to the Village Chief. Unless and until the farmers take the issue to the Village Chief, he did
not interfere in this aspect. The traditional village Council takes up the issue when it is referred
to the Village Chief. In case the dispute cannot be resolved at the village level, it used to be
referred to the next level of appeal, i.e., either the higher level of the community organisations
or Statutory Panchayat. In some tribal and caste communities there are higher levels of appeal
if one is not satisfied with the justice rendered by the local organisation. Even after this, if they
are not able to resolve the problem they approach the Police and law courts. All the villagers,
irrespective of caste and community, used to abide by the traditional community councils
(variedly known as Jaat Panchayat, Kula Panchayat, etc.) order (Siva Prasad, 2005).

SRD II (N) 6

In traditional society there was a well-established system for dispute resolution. Duties
were assigned in the hands of various members at various levels. In the past the complainant
had to approach the Village Chief, who, in turn, used to instruct the Barika (messenger) to inform
the villagers regarding the place and time of meeting. The Barika used to pass the information
to all the villagers by beating a drum. All the elder members of the village used to gather at the
stipulated place. Though the presence of women in the meeting was not prohibited, their
presence was very less due to domestic assignment and cultural restriction. Even though they
were there, their voices were not taken into consideration. Only in some cases the women were
heard as witnesses. Most of the time, they used to prompt their husbands to raise the issues. In
the assembly the villagers were free to cross examine the complainants. Their systems of conflict
resolution were based on thick moral order (Haimendorf, 1967). Traditional village Council
involved most of the villagers while arriving at any judgment. It is a sort of democratic
organisation wherein participation of members is ensured by practice (Siva Prasad, 2005).
The Village Chief did not take the decision according to his wish but he and other elders
used to analyse the dispute in front of the entire village assembly and used to cross-examine
the witness, if any. In a conflict resolution when a person involved in the conflict referred to any
witnesses, the Village Chief cross-examined the witnesses from many aspects and also used to
ask him or her whether anyone else was there to depose. Accordingly, the village elders and
others in the assembly also used to ask in between some questions relating to the dispute.
Questions generally asked used to be the time of crime, on what purpose he or she was there,
what he or she saw, what did they say, who committed the mistake first, etc., (Siva Prasad, 2005).

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Depending on the complexity of the case, the traditional village Council used to conduct
the meeting twice or thrice to resolve the dispute. After a lot of discussion and examination of
witnesses, the Village Chief used to identify the real culprit(s) and after that, they used to arrive
at a decision. The Village Chief used to deliver the judgement and tell the culprit to pay the
compensation amount to the other party involved in the dispute. Penalties usually were in the
form of compensation only. They used to charge the compensation in the form of labour, money,
feast or some bottles of local liquor. Penalty was always based on the economic condition of
the culprit of offence. Usually it is a negotiated justice and the ultimate aim of the conflict or
dispute resolution is to restore harmony and to re-incorporate the deviant into the mainstream
of the community life after undergoing the process of punishment. If the judgments passed by
the village Councils were flouted, the extreme form of punishment imposed on the defaulting
party would be excommunication. Fine amount depended on the nature of crime committed
by a person. Sometimes some extra fine used to be collected from the culprit for the village
fund. Even it was observed that for calling the Panchayat, money or paddy used to be collected
from both the parties and this money was used to celebrate village festivals or on village
development (Siva Prasad, 2005).
The following case study of conflict between two members of Pani Panchayat, Jada Sabar
and Divakar, before the irrigation project began in a tribal village in Orissa (Mishra, 2008),
illustrates the functioning of the traditional Council.

SRD II (N) 6

Fifty five year old Jada Sabar and 60-year-old Divakar Sahu, both members of Pani
Panchayat in Perupanga village of Rayagada district, Orissa, India, got into a conflict in the year
1983. This conflict was of an intra-village and inter-community in nature. While Jada Sabar
belongs to Saura (tribal) community, Divakar is a Brahmin farmer. Both of them possess land
near Pahad bandha (tank named after the mountain). While Divakar is a large farmer having
more than five acres of land, Jada is a marginal farmer having less than one acre of land. Jada
has his land just behind Divakars. While Jada has his land in the tail region of the tank, Divakar
has his land in the head reach. The land of Jada is located near Pahad bandha and his entire
economy is based on that land only. Significantly, that year there was scanty rain fall and the
water in Pahad bandha was insufficient to irrigate the lands of all farmers. Taking into account
the situation, even the Gomango (village Head, a tribal) had appealed to all the farmers to share
the existing water equally. As there is no karanali (canal) system, the water has to pass through
Divakars land to reach Jadas land. Jada had appealed to Divakar to release some water to his
land, but the later did not listen to him because Divakar was worried about his own crop. Divakar
also did not heed to the request of the co-farmers as well. When Jada reported this matter to
Gomango, he arranged a meeting in the village for finding a solution through consultation
with other elders. In the meeting, Gomango listened to both the parties and also the witnesses
from both sides. The Gomango, after consultation with the elders and listening to the witnesses,
arrived at a conclusion that Divakar was guilty of not releasing water to Jadas land. As a penalty,
the Gomango imposed a fine on Divakar in the form of one bag of paddy to be paid to Jada,
and offer wine to villagers present in the meeting. Divakar had no option but to oblige to the
decision of Gomango.
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RURAL SOCIETY AND SUSTAINABLE DEVELOPMENT


The above case indicates that the traditional Village Chief had power to decide, judge
and regulate the matter pertaining to the village, which he derived from the village organisation.
He commanded respect; he was obeyed; and also his views and decisions were valued. In several
cases, the Chiefs could impose fine, could punish a subject who was guilty in order to maintain
social order.
In cases where the dispute or conflict involved the village head or his family members,
the village council or the elders take the help of the head of another village who is related to
the members of the village. Similarly, if the conflict involves dispute between two villages or
communities, heads and elders from both the villages as well as communities engage themselves
in resolving the disputes. Sometimes, they may also involve the heads and elders of the other
villages too in resolving the inter-village conflicts.
The important lessons that we learn from the dispute resolution process observable
among the traditional societies, especially the tribal, is that they value harmony, restoration
and wholeness (integration) (Siva Prasad, 2005: 144). The main thrust of the traditional dispute
resolution through the village or community organisations is the reincorporation of the
convicted party into the community. The major functions of the traditional village councils are
settlement of disputes among individuals, families, and even between villages; administration
of justice; maintenance of peace and security in the village; and promotion of general welfare
(Siva Prasad, 2005: 131).
Peoples organisations of conflict resolution in traditional societies have similar processes
of recruitment into the positions of the organisation. In many cases, the person who established
the village or settlement became the headman and those other clansmen who moved along
with him became members of the council. Their heirs usually succeeded these positions and
their patri-kin replaced them in case of absence of any heirs. The councils always contained a
messenger, priest (ritual specialist) and other elders. In case the villagers or the elders find the
eldest son of a headman is not found suitable they recruit one of his other sons who they find
suitable to the position of headman to succeed him. In case they do not find anyone suitable,
they can elect someone from the community or patri-kin of the headman (Siva Prasad, 2005).
Thus, there are well laid institutional mechanisms for their continuity and functioning. However,
with the kind of changes that have taken place over the years in the post-independence period
these traditional institutions in many cases are in conflict with the statutory bodies. Further,
the development programmes have introduced new elements into rural and tribal areas that
have been challenging these traditional institutions and leadership.

SRD II (N) 6

5. Peoples Organisation and Contemporary System of Conflict


Management
Customary forms of consensus-building fail when new development pressures generate
conflicts, which overwhelm the capability of these mechanisms to cope up with the new
situations. In such circumstances the conflicting parties themselves may try to alter the

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customary approach or develop completely new dispute management mechanisms.
Intervention of different development projects and the craving for power by the new elite, or
even by some of the traditional elite, made the situation worse. Added to this, the bureaucratic
approach adopted by the implementing agencies of development programmes made the rural
society more complex. However, the evolution of Community Based Organizations (CBOs) or
the peoples organisation like Vana Samrakshana Samiti (VSS), Water Users Associations (WUAs),
Self-Help Groups (SHGs), etc., are helping the people in resolving the conflicts and avoiding
conflict situations.
In the contemporary rural development process peoples organisations are playing a
major role. The major thrust of those organisations is to bring back that traditional approach of
development and make the process more participatory and inclusive. Unlike the traditional
organisations, these new organisations are more formal. These organisations adopted specific
structure and some principles based on equity and equality. They are more inclusive in dealing
with any conflicting situations and development activities. Resolving conflicts amongst
themselves has become a basic feature for these peoples organizations. Peoples organizations
adopt different approaches based on the sources of conflict and the conflicting groups. However,
peoples organisations involved in rural development may come into conflict with some of the
stakeholders, like the cynics of peoples organisation, non-members, neighbouring villagers,
other people dependent on the same resources, Panchayat, NGO(s), Line Departments,
Government policies, and vested interests classes.

Factors/Issues of conflict in peoples organisation


Conflicts also arise in the modern context due to the factors like the local political
situation, conflicts over sharing of political power; chronic dissenters in the peoples organisation,
denial of membership in peoples organisation, nepotism, and disagreement over leadership;
denial of benefits of development programmes, deficiency of awareness about the programmes
and policies of the government, lack of coordination between the functionaries of the peoples
organisation, line departments and other stakeholders; issues relating to resource sharing,
distributions of benefits or profits, and resource protection.

Conflict over Power

SRD II (N) 6

Unlike the traditional organisations, present day peoples organisations are based on
democratic process of elections to the positions of power. This usually generates conflicts in
the peoples organisation. Unlike in the past, the growth of individualism has encouraged the
members to compete for power. The competition among members for the post of president/
secretary or other positions creates conflicting situation. If the peoples organisation lacks a
skilled, committed and honest leader conflicts become endemic.

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Resource Protection and Allocation
The establishment of peoples organisation brought a congenial environment for
protection of resources. No threat could be expected for the resources from the members of
peoples organisation and the members could prevent the harm caused by the outsiders to a
large extent. However, certain factors may lead to conflicts. For instance, if a portion of a resource
has been allotted to the members of an organisation for eking out livelihood and if that resource
is also used by some of the stakeholders of the surrounding villages, it could lead to conflict
between the members of the local peoples organisation and the neighbouring villages who
also draw benefits from the same resource. Similarly, in case of Community Forest Management
(CFM) when VSS members prevent smuggling activities carried out beyond their jurisdiction,
conflicts may happen between the VSS members and some of the unscrupulous forest
department personnel. Apart from this, if the resources are not properly allocated or distributed
among community members it may lead to conflicting situation.

Distribution of profits
If the benefits are not properly distributed among all members it creates conflict among
the villagers. For instance, it is observed that in VSSs if the profits collected from non-timber
forest produces (NTFPs) are not properly distributed it leads to conflicting situation. In VSS
based villages it is observed that once timber produce becomes profitable, it may trigger
individual interest in them and pave way for politics to creep in. In cases where VSSs are formed
in small villages, those who are vested with political power and have a say in the village may
create problems. Conflicts may arise during distribution of profits in such VSSs. As Panchayats
are vested with statutory rights in the Scheduled Areas, conflicts may arise between VSS and
Panchayat.

Transparency
Conflicts will definitely arise when there is no transparency in management of peoples
organisation. Not informing all the transactions pertaining to conductance of affairs of the
organisation by the Managing Committee Members to the General Body Members and not
giving an opportunity for registering difference of opinions are some of the instances of lack of
transparency.

Coordination between Chairperson and other Executive Members

SRD II (N) 6

If the coordination between chairman and the other Executive Members are not
maintained properly it leads to conflicting situation. If this happens, it will be detrimental to
the organic unity of the organisation. Varied interests, diverse community and class/ status
backgrounds of the members could be the potential sources of conflict and they need to be
carefully handled.

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Process of Conflict Resolution
If any conflict arises among the members in a peoples organisation, the members try to
solve it within themselves at their level. If they fail to resolve among themselves or if they find
the conflict more complicated, they refer it to the Chairman or President of the organisation for
its amicable resolution. For example, one of the major objectives of Water Users Association is
that the farmers in the command area will have to resolve the disputes among themselves. The
case discussed below illustrates the problems of noncompliance of norms of Water Users
Association and the conflicts that they might lead to among the farmers and the role of WUA in
bringing a rapprochement between the contending parties (Mishra, 2008).

SRD II (N) 6

During 2004, a conflict occurred between Santosh Panda and Sarat Aika of Singpur village
of Rayagada district in Orissa. Both of them possess land in the same outlet in Perupanga-Minor.
While Santoshs land is situated in the head reach of the canal, Sarats land is in tail reach. Santosh
is a large farmer and he has ten acres of land. Sarat is a marginal farmer having less than one
acre of land. Rains stopped after the month of October by which time the transplanting works
were over. Later, when the crops were in the ripening stage the farmers had water scarcity.
However, there was sufficient water in the dam as well as in the canal. Even though some water
was there in the canal, it could not reach the field of Sarat due to improper maintenance of
canal. Since the farmers were not following a uniform crop pattern as the rule suggests, the
crops of farmers were at different stages. While some went for 90 days crop, the others went for
120 days crop. Even though farmers had interest to go for the same crop, due to some technical
problems they could not do so. Due to this crop disharmony, the tail and middle reach farmers
usually suffer most of the times. The farmers, whose crops were not ripe, were struggling to get
some water to protect their crops. By that time, Santosh did not have any problem as his crops
were already ready for harvest and he did not require any water (He was cultivating Konark
paddy variety, which ripens in 90 days). He was trying to keep his land dry as it will be easier for
him to harvest the crop. But Sarat whose land is situated in tail reach due to uncertainty of
water he grew Ankur paddy, which ripens in 110 days. Sarat approached Santosh to allow some
water to his land. But his request was not heeded by Santosh as his crop will be affected. Even
Sarat requested the office bearers of Pani Panchayat and also some irrigation officials but none
of them came to his rescue. But Sarat needed some water to save his crop and one night when
everybody returned from the fields to their home Sarats wife cut the field boundary of Santosh
and opened the outlet. The next day morning when Santosh went to his field he found that the
outlet of the Minor was open and at the same time the boundary of his field adjoining Sarats
land was broken. Santosh rushed to Sarats home and met Sarat on the way and shouted at him.
Though Sarat told him that he was not aware of it, Santosh did not listen to him and beat Sarat.
Sarat had complained about it to irrigation officials and the President and Secretary of the Pani
Panchayat. Since no action was initiated, after consulting his friends Sarat filed a case in
Padmapur Police station. Later, Pani Panchayat Chairman intervened and convinced Sarat to
withdraw the case and Sarat relented as he is a marginal farmer and cannot take his fight to its
logical conclusion.

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RURAL SOCIETY AND SUSTAINABLE DEVELOPMENT


6. Keywords
Village Chief, village assembly, culprits

7. Summing up
In this Unit, we have identified the role of peoples organisation in conflict resolution. It
has tried to explore the relevance of peoples organisation not only in the present day community
driven development but also in the case of traditional system of conflict management. In this
Unit while discussing the process of conflict resolution it has used some of the case studies
from field to illustrate the nature of conflicts and their resolution by the peoples organisation,
whether traditional or modern.

8. Know your Progress


1.

What is the difference between the traditional and modern peoples organisation?

2.

What are the sources of conflicts in traditional society?

3.

Describe the process of conflict resolution in traditional society?

4.

What is the role of Village Chief in conflict resolution in traditional societies?

5.

What is the purpose of institutionalisation of dispute resolution mechanism in a society?

6.

How are the different functionaries in traditional and modern peoples organisations
recruited?

7.

If the conflict involves the leaders of the peoples organisation, how are they handled in
traditional societies?

8.

State the factors/ issues leading to conflicts in peoples organisation.

9.

Discuss how the profit distribution leads to Conflict in peoples organisation.

10.

How are the disputes related to development projects resolved in contemporary rural
society?

11.

What happens if anyone is not dissatisfied with the solutions offered by the local peoples
organisation in any dispute?

SRD II (N) 6

9. Further Reading/References
1.

Guha, Ramachandra. 1989. Unquiet Woods. New Delhi: Oxford University Press.

2.

Haimendorf, Christoph Von Furer. 1967. Morals and Merit: A Study of Values and Social Control
in South Asian Societies. London: Weidenfeld and Nicolson.

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3.

Mishra, Niharranjan. 2008. Participatory Water Management and Sustainable Tribal Livelihood:
A Case Study of Southern Orissa. Unpublished Ph. D Thesis, Department of Anthropology,
University of Hyderabad, Hyderabad.

4.

Mostart, E. n.d. Conflict and Cooperation in the Management of International Freshwater


Resources: A Global Review. (UNESCO-IHP#19 available from www.unesco.org/water/wwap/
pccp).

5.

Raghavaiah, V. 1979. Background of Tribal Struggles in India. In A.R. Desai (Ed.) Peasant
Struggles in India. New Delhi: Oxford University Press.

6.

Singh, KS. 1984. Tribal Ethnography, Customary Law and Change. New Delhi: Concept
Publishing Company.

7.

Singh, R. K. and Vinay K. Sinha. 2002. Analysing conflicts in natural resource management,
Proceedings of the Workshop, June 3-5, 2002, Bhopal, India, Indian Institute of Forest
Management, Bhopal, India & World Bank Institute Washington, DC, USA

8.

Siva Prasad, R. 2005. Customary Modes of dispute Resolution in Schedule V Areas of Andhra
Pradesh, Madhya Pradesh and Orissa. In S.K. Singh (Ed.). Self-Governance for Tribals, Volume
2, Dispute Resolution, Tribal Customs and Forest Laws. Hyderabad: NIRD.

9.

UNDP. 2008. Conflict Resolution and Negotiation Skills for Integrated Water Resources
Management, International Network for Capacity Building in Integrated Water Resources
Management, Pretoria, South Africa.

10.

http://www.odi.org.uk/resources/download/2026.pdf

SRD II (N) 6

10. Model Answers


1.

In traditional society informal organisation plays a major role in resolving the disputes, while
in the contemporary contexts it is more formal.

4.

Village Chief does not take decisions as per his wishes, but he analyses the situation with
elders in the village Assembly and takes decisions. If the case is complex, more than once
the meetings are held on the issue. His job is to name the culprit(s) and deliver judgement.

SRD-506 : STAKEHOLDERS IN RURAL DEVELOPMENT

251

PREFACE
Development is a complex process and needs the participation of not only different
stakeholders but also the support and convergence of different players like the government line
departments, non-governmental organisations (NGOs), private/corporate bodies, cooperatives,
financial institutions, farmers organisations, etc. In a sense, it involves a concerted and coordinated
effort to achieve inclusive development for poverty mitigation. Sustainability of rural development
relies on many of these aspects and active participation of the targeted population in the entire
process.
Rural development is multi-dimensional. It is not only multi-stakeholder management but
also requires multi-partnership participation. A good understanding of stakeholder analysis,
partnership analysis, analysis of rural organisations and institutions becomes very important for
understanding as well as managing the process of rural development.
Professionals who are involved in rural development management need to have a good
understanding of various aspects that are dealt with in this Course. This Course is organised into
four Blocks dealing with distinct aspects that have a bearing on multi-tasking of sustainable rural
development. The details of the contents of each Block are given hereunder:
Block 1 - Rural Development and Its Stakeholders : There are four Units in this Block and these
provide a good understanding of stakeholder analysis, partnerships in development, protection of
stakeholders interests and farmers organisations.
Block 2 - Cooperatives and Other Formal and Informal Organisations : This Block contains
four Units and they deal with in detail about the cooperative movement, different types of
cooperatives and their structural and functional aspects.
Block 3 - Credit and Microfinance : The Units that comprise of this Block are three and they explain
different aspects of institutional finance and microfinance, including community based
microfinance.
Block 4 - Conflicts and Conflict Management : This Block consists of four Units which deal with
different types of conflict, their causes and consequences, their resolution, and the role of peoples
organisation in its management.

R. SIVA PRASAD
Course Editor

Post Graduate Diploma Programme in


Sustainable Rural Development
( A Distance Mode Programme of NIRD and UoH)

SRD 506 : STAKEHOLDERS IN RURAL DEVELOPMENT

Course Editor
R. SIVA PRASAD

NATIONAL INSTITUTE OF RURAL DEVELOPMENT


Hyderabad

Programme Coordinators
S. M. ILYAS
E. HARIBABU

UNIVERSITY OF HYDERABAD
Hyderabad

PROGRAMME ADVISORY COMMITTEE


*

Prof. Syed E. Hasnain


Vice Chancellor, University of Hyderabad

Shri B.K.Sinha, IAS


Secretary, Ministry of Rural Development & Former Director General, NIRD

Shri Mathew C. Kunnumkal, IAS


Director General, NIRD

Shri K.N. Kumar, IAS


Deputy Director General, NIRD

Dr. M.V.Rao, IAS


Registrar, NIRD

Prof. E. Hari Babu,


Professor, Department of Sociology, University of Hyderabad

Dr. S. Jeelani,
Director, Centre for Distance Education, University of Hyderabad

Prof. Abdul Mateen,


Former Director, CSSEIP, Maulana Azad National Urdu University

Dr. S.K. Soam,


Principal Scientist, National Academy of Agricultural Research Management

Dr. C. Ghanta,
Director, Centre for Social Empowerment, B.R. Ambedkar Open University

Ms. K. Padmaja,
Adjunct Faculty, The Livelihood School

Shri G. Muralidhar,
Chairman, Akshara Network

Dr. C.S. Singhal,


Professor and Head, Distance Education Cell, NIRD

Dr. S.M. Ilyas,


Project Director, Distance Education Cell, NIRD

Production Coordination : Dr. B. Chakravarty and Dr. Vasanthi Rajendran, CMRD


Assistance

: P. Meenakshi

National Institute of Rural Development and University of Hyderabad


August, 2010

Published by :

National Institute of Rural Development


Rajendranagar, Hyderabad - 500 030.
Telefax : 24008473
E-mail : ciec@nird.gov.in
Website : www.nird.org.in

Printed at :

Vaishnavi Laser Graphics, Hyderabad. Ph. : 040 - 27552178

CONTRIBUTORS

1.

Dr. R. VENKATA RAVI (Block 1, Unit 1,2)

2.

Dr. S. VIJAYAKUMAR (Block 1, Unit 2)

3.

Mr. D SUNDER RAJ (Block 1, Unit 3)

4.

Dr. NIHARRANJAN MISHRA (Block 1, Unit 4), (Block 4, Unit-1,2,3,4)

5.

Prof (Dr.) N. NARAYANASAMI (Block 2, Unit 1,2,3,4)

6.

Dr. S. MANIVEL (Block 2, Unit 1,2,4)

7.

Dr. K. RAVICHANDRAN (Block 2, Unit 3)

8.

Prof (Dr.) N. LALITHA (Block 3, Unit 1,2,3)

9.

Prof (Dr.) R. SIVA PRASAD (Block 4, Unit 1,2,3,4)

CONTENTS

Block-1 : Rural Development and its Stakeholders

...

Unit 1: Stakeholders: Definition and Analysis

...

Unit - 2: Partnerships

...

19

Unit 3: Stakeholders Interests: RTI Act and Consumer Rights Act

...

40

Unit 4: Farmer Organisations

...

54

...

70

Unit 1: Cooperative Movement: History and Present Status

...

72

Unit 2: Agriculture Cooperatives

...

89

Unit 3: Consumer Cooperatives

... 103

Unit 4: Structural and Functional Issues in Cooperation

... 117

Block -2 : Cooperatives and Other Formal and Informal Organisations

Block - 3 : Credit and Micro Finance

... 136

Unit 1: Institutional Finance

... 138

Unit 2: Micro Finance Institutions

... 158

Unit 3: Community-based Micro Finance System

... 174

Block - 4 : Conflicts and Conflict Management

... 197

Unit 1: Types of Conflict

... 199

Unit 2: Causes and Consequences of Conflict

... 211

Unit 3: Conflict Resolution

... 226

Unit 4: Role of People's Organisation

... 241

Post Graduate Diploma In Sustainable Rural Development


Course

SRD 506 : Stakeholders in Rural Development


ASSIGNMENT
Note : Answer any five questions, preferably one from each Block.
Each question carries four marks
Total Length of assignment (5 questions) should be about 1000-1500 words

Total Marks : 20

BLOCK 1 : RURAL DEVELOPMENT AND ITS STAKEHOLDERS


Unit 1 : Stakeholders: Definition and Analysis
Assignments
1.

Analyse any development programme with the help of the Stakeholder Analysis Matrix.
Stakeholder

Direction of
Influence by the
proposed action

Primary

Positive

Main interest of the


stakeholder in the
proposed action

How they can


Impact
control the
proposed action

What can be
done further

Negative
Secondary

Positive
Negative

Key

Positive
Negative

2.

Provide a plan for stakeholder analysis for SHGs and discuss its application.

3.

Prepare a methodological outline for stakeholder analysis for any rural development programme.

Unit 2 : Partnerships
Assignments
1.

Analyse any public-private partnership programme in India and comment.

2.

Take any people-private partnership programme in your region and provide a critical analysis.

3.

Discuss the role of private-private or public-public partnership in economic development of rural


areas.

Unit 3 : Stakeholders Interest : Right to Information Act and Consumer Protection Act
Assignments
1.

Discuss how RTI is useful in improving the lives of people with case illustrations.

2.

Write a commentary on the CPA with suitable illustrations.

3.

Critically analyse RTI and CPA with case studies.

Unit 4 : Farmer Organisations


Assignments
1.

Discuss any farmers organisation from your State or region and point out its achievements

2.

Do you think that farmer organisations can help in bringing our policy changes? Illustrate your
answer with examples.

3.

Can the participation of farmer organisations help in sustainable agricultural and economic growth?
Discuss.

BLOCK 2 : COOPERATIVES AND OTHER FORMAL AND INFORMAL ORGANISATIONS


Unit 1: Cooperative Movement: History and Present Status
Assignments
1.

Critically examine the recent principles of cooperation.

2.

Cooperatives are more than business organizations. They give more importance to values Discuss

3.

History of Indian Cooperative movement.

Unit 2 : Agricultural Cooperatives


Assignments
1.

Cooperative credit societies play a significant role in the promotion of agricultural sector Discuss

2.

Visit a Primary Agricultural Credit Society in a nearby locality and write about its constitution,
objectives and functions.

3.

Why do the agricultural cooperatives present a poor picture despite their numerical strength and
government back-up?

Unit 3 : Consumer Cooperatives


Assignments
1)

Consumer Cooperatives play a significant role in holding the price line of essential commodities.
Substantiate

2)

Why should the consumer cooperatives apply all modern management tools and techniques?

3)

Visit a consumer stores in your area and discuss with the officials on the structural issues and
interrelationship between different units in the federal structure.

Unit 4 : Structural and Functional Issues in Cooperation


Assignments
1.

Describe the various structural and functional issues in the field of cooperation.

2.

Make a visit to a cooperative organization and a privately owned organization in the same industry
and write down the differences.

3.

Do we call those associations following the principles of cooperation as cooperatives? Substantiate


your answer.

BLOCK 3 : CREDIT AND MICRO FINANCE


Unit 1 : Institutional Finance
Assignments
1.

Loan waiver policy of the government has affected Repayment of loan Elucidate statement.

2.

Trace the history of Institutional credit and the paradigm shifts in its strategies and approaches

3.

Role of commercial banks in Rural Development.

Unit 2 : Micro Finance Institutions (MFIs)


Assignments
1.

Challenge faced by Micro Finance Institutions in India

2.

Governance of Micro Finance Institutions

3.

Financial support of Micro Finance Institutions

Unit 3 : Community Based Micro Finance System


Assignments
1.

Critically examine the SHG Bank Linkage models commenting on their advantages and limitations.

2.

Can Microfinance lead to Empowerment of women? Discuss with examples.

3.

Can Microfinance alleviate Poverty? Discuss this statement based on field level data.

BLOCK 4 : CONFLICT AND CONFLICT MANAGEMENT


Unit 1 : Types of Conflict
Assignments
1.

Take any village and discuss different types of conflicts among different stakeholders and discuss
how they are impeding development in the village.

2.

Write a critical essay on the way conflicts are perceived by conflict theorists, Marxists, and structuralfunctionalists.

3.

How do you think the knowledge of typology of conflicts help in sustainable rural development?
Discuss with illustrations.

Unit 2 : Causes and Consequences of Conflict


Assignments
1.

Analyse the causes of conflict in the implementation of any development programme in a village in
your area.

2.

Write a critical essay on the consequences of conflict in rural development.

3.

How do you think an understanding of the causes and consequences of conflicts helps in planning
and participation of stakeholders in rural development programmes?

Unit 3 : Conflict Resolution


Assignments
1.

Take a village where there are institutional mechanisms to redress conflicts and analyse in detail
the process adopted in the resolution of conflicts.

2.

Write a critical essay on the role of CBOs, NGOs and formal organisational structures in resolution of
conflicts in rural development.

3.

How do you think conflict resolution can accentuate sustainable rural development? Write a critical
essay.

Unit 4 : People's Organisation in Conflict Management


Assignments
1.

Find out any peoples organisation in your area and describe its role in resolving disputes among
different stakeholders involved in a conflict. Give a detailed case study describing the process of
conflict resolution and the lessons learnt.

2.

Discuss the organisational structure of a peoples organisation in your area and its working in detail,
including its leadership.

3.

Write a review paper on how one can ensure effective functioning of peoples organisations in rural
development. What measures do you suggest in this regard and why?