COMMENTARY

Cooperative Movements in India

Nilakantha Rath

Tracing the history of cooperative

movements in India, and
stressing their importance for
Indian agriculture, a set of
recommendations are offered
arguing for institutional changes
to promote cooperatives.

Tushaar Shahs Farmer Producer Companies:

Fermenting New Wine for New Bottles (EPW,
20 February 2016) inspired me to recollect my
understanding about the formulations of cooperatives in India during the last 25 years.
Nilakantha Rath (nrath66@yahoo.co.in) is
an honorary fellow at the Indian School of
Political Economy, Pune.
Economic & Political Weekly

EPW

OCTOBER 1, 2016

ollowing the recommendations of

the Reserve Bank of Indias (RBI)
Committee of Direction of the AllIndia Rural Credit Survey, the cooperative movement, both in the field of credit
and agricultural processing, had a new
lease of life. The village credit cooperative membership was confined to farmerslandowners as well as tenants. The
Agricultural Refinance Corporation created by the RBI provided the working
capital for advancing short-term credit
to the cooperative members through the
district (central) cooperative banks.
These cooperative banks were created
by the primary level credit cooperatives
in the villages. Other than this, the
working capital for advancing credit
came from the share capital of the cooperative members. Because the bulk of
the short-term credit came from this
financial body, there were tight regulations about repayment and accommodation for farmer distress.
The system worked well in the initial
years. It was based on the idea that
farmers would deposit their monetary
savings in the credit society, which
would gradually come to depend more
on such savings than on external funds.
But, since these advances were largely
public funds, there was gradual political
pressure to keep the interest rate low.
Farmers with surplus funds, no wonder,
put their savings in banks and in other
forms, and not in these societies as they
were in no position to pay interest on
such deposits at rates competitive with
commercial banks. Consequently, with
the refinance body laying down all

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conditions for the loan operations, the

members did not show much interest in
the decision-making process of the society.
Is it any surprise that by the beginning
of the 21st century the cooperative credit
movement in most states was virtually
dead? It is worth noting that since
the beginning of this millennium, the
National Bank for Agriculture and Rural
Development (NABARD) has even stopped
publishing the annual statistical volumes related to rural cooperative credit,
which it did as a responsibility taken
over from the RBI. If primary cooperative credit has survived in states like
Maharashtra and Gujarat, it is because
the loans are mostly recovered through
the sugar and milk cooperatives through
which the farmer-members of these societies sell their produce.
Success and Failure
The situation is not different with regard
to the processing cooperatives. The initial sugar cooperatives needed large
loans for setting up factories. In Maharashtra, these were provided by the
Industrial Finance Corporation of India
and the state government. The first sugar
cooperative with D R Gadgil as the chairperson, undertook large loans, but repaid
the entire amount with interest, in six
yearsearlier than the 10-year stipulated period, and built a sizeable surplus.
However, this was the exception rather
than the rule. Most societies took loans
from the state government and the repayment has been pending for long periods. The state government became
shareholders, without being producers
of sugar cane, and therefore, did not receive any of the distributed surplus,
turning such share capital into perpetual interest-free loan to the cooperative.
The farmers were happy as without
making any additional contribution to
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COMMENTARY

the share capital, they were able to enjoy

the advantages of such interest-free loan
from the receiving cooperatives.
A member, who in course of time
stopped providing any sugar cane to the
factory, was nevertheless allowed to
vote in the society and become an office
bearer, if elected. The ability to attract
state funds to the cooperative was the
principal qualification of a board member. This was how politicisation of the
cooperatives evolved. No wonder nearly
60% of the sugar cooperatives in Maharashtra are now in a moribund state. If
cooperatives like Amul, registered under
the same law in 1946 in Gujarat, survived
and prospered, it was mainly because
they had their own sensible by-laws
under which they operated. Amul prospered under the able leadership of Tribhuvandas Kishibhai Patel and Verghese
Kurien, till recent times.
Useful Recommendations
The Chaudhary Brahm Prakash Committee of the Planning Commission
made far-reaching recommendations for
the reorganisation of the cooperatives.
No state had considered the recommendations seriously, until in 1995, when the
then Chief Minister of Andhra Pradesh,
N T Rama Rao decided to promulgate
a new cooperative law along the lines
of the recommendations. Subsequently,
many states have passed similar laws
parallel to the old cooperative acts, but
no significant progress has been made in
that direction.
The Cooperative Development Foundation (CDF), a Hyderabad-based nongovernmental organisation (NGO), working to promote womens cooperative
credit societies in villages in Warangal,
took the help of this new law to promote
such societies in three districts around
Warangal. Today, there are some 500
village level cooperative credit societies
in these three districts.
Nearly 80% of these societies are run
by local women. The societies (which
are much bigger than womens self-help
groups) require members to contribute
to the share capital, every year. They are
also encouraged to deposit their savings
in the society, on which the interest is
paid. The interest rate charged on loans
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given to the members and the interest

paid on the saving deposits are decided
by the general body of the members of
the society. These societies are not members of the District Central Co-operative
Bank. But they have their own federal
society in which the member societies
deposit the surplus and borrow money
when required. There are more than 35
such federal societies. The primary societies, some of them with more than 300
members, and more than a crore of rupees worth of annual business, do not
borrow any money from either a commercial bank or from the government or
from any other external agency.
There are similar milk cooperatives,
including the Mulukanoor Womens
Co-operative Dairy, a federal society of
some 100 primary milk producers societies (to which Shah (2016) makes an appreciative reference). If such milk co-operatives have not greatly increased in
number, it is because of the policy of the
subsequent governments in Andhra
Pradesh. They made it obligatory for all
such milk cooperatives, registered under
the 1995 law, to transfer their registration to the older cooperative law. These
societies and the CDF went to court, and
the Supreme Court ruled that the state
government had no right to direct cooperatives to do so. With such hostile attitude of the state government, it is no
wonder that a society, seeking no money
or subsidy from the government, cannot
easily come up.
Some Suggestions
I remember that soon after the new
economic policy was promulgated in
1991, the Karnataka Co-operative Land
Development Bank organised an allIndia conference on the structure of cooperatives under the new policy. Amongst
many participants, both Tushaar Shah
and I were present. In the penultimate
session of the general body before it
broke up in to groups, I wrote out a set of
suggestions which I showed to Shah. He
encouraged me to submit it, and I passed
it on to the chairman. Though the chairman (a senior officer of the International
Labour Organization) was very appreciative, he advised that in view of the
shortage of time, the note should be

discussed in the concerned section relating to the reorganisation of the cooperative structure. But, the concerned sections chairman ruled it out, saying these
were far too basic suggestions to be discussed in the committee.
Subsequently, the note was published
in the Economic Times (Rath 1994). The
basic propositions were as follows:
(i) Membership of a cooperative should
be confined to only those who choose to
use the society for the purpose for which
it is designed.
(ii) Instead of one member one vote, the
voting share of every member should be
his share in the total patronage of the
members (plus his share capital contribution), not in the single previous year
but in a three-year moving average.
(Thus, for example, in a marketing society, the vote share should be the threeyear moving average of his share in the
total amount of the commodity sold
through the society. This recommendation was based on a study of small farmer lift irrigation groups in Gujarat, carried out by the Institute of Rural Management, Anand (IRMA)).
(iii) A member not participating in the
basic activity of the society for three consecutive years should lose his voting right.
(iv) The membership of a person should
be terminated and his share capital
refunded to him, if he ceases to participate in the societys main activity for
five continuous years.
(v) The interest rate paid/charged to
members shall be decided by the general
body of the society very year, and not by
any external authority.
(vi) The society shall be free to decide to
participate in any federal organisation
or to take loans from any external organisation.
(vii) The by-laws of the society shall be
prepared by the society and not be dictated by any outside agency.
(viii) The elections should be held every
year and the office bearers shall be active, that is, participating, members of
the society.
Later, as a result of discussions with
Tushaar Shah and Rama Reddy (of the
CDF), a slightly modified note was prepared and the following points were
added: (i) the primary society should be

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COMMENTARY

free to decide whether there shall be one

member one vote, or vote in proportion
to patronage; (ii) the minimum saving
deposit by a member for a sufficiently long
period, say five years, should be subsequently entitled to a higher rate of interest.
Concluding Remarks
It is unfortunate that the Brahm Prakash
Committee suggestions adopted by some
states, as well as the 1995 Andhra Pradesh
law, were kept parallel to the older cooperative acts in every state. All societies registered under the older acts
should have been required to transfer
their registration to the new act within a
stipulated period, at the end of which
the older laws should have lapsed. The

Economic & Political Weekly

EPW

OCTOBER 1, 2016

older laws have become a legal device to

politicise the cooperative institutions. It
is high time this change is carried out.
During the last six decades, the agricultural situation has undergone serious
change. Today, more than 85% of the
farms in the country are of less than one
hectare in area. Many are only part-time
farmers. The more enterprising and able
farmers can run the cooperatives. In
such a situation, it would be helpful if
landowners are permitted by law to
lease out their lands for cultivation to
other farmers for a limited period, say
five years, subject to renewal at the desire of the owner. The rent should be laid
down legally. This will facilitate better
farming and freer movement of small

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landowners to non-farm works on a trial

basis, to start with.
The cooperative (or the company law
format of it) has a useful role to play in
Indian agriculture, not in the older form
but in the new format as suggested
above or in the form of the Andhra Act
or the NDDB-promoted milk cooperatives. The changing economic environment requires change in the institutional form in order to survive and prosper.
References
Rath, N (1994): Restructuring the Cooperatives,
Economic Times, 13 September.
Shah, Tushaar (2016): Farmers Producer Companies: Fermenting New Wine for New Bottles,
Economic & Political Weekly, Vol 51, No 8,
pp 1520.

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