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Indian Economy

Cooperative Movement in India

  • 26 Jul 2021
  • 16 min read

Cooperatives in India

  • Definition:
    • The International Cooperative Alliance (ICA) defines a Cooperative as “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.”
  • Constitutional Provisions:
    • The Constitution (97th Amendment) Act, 2011 added a new Part IXB right after Part IXA (Municipals) regarding the cooperatives working in India.
      • The word “cooperatives” was added after “unions and associations” in Article 19(1)(c) under Part III of the Constitution.
        • This enables all the citizens to form cooperatives by giving it the status of fundamental right of citizens.
      • A new Article 43B was added in the Directive Principles of State Policy (Part IV) regarding the “promotion of cooperative societies”.
    • SC Ruling:
      • In July, 2021, the Supreme Court struck down certain provisions of the 97th Amendment Act, 2011.
        • It gave a major boost for federalism as the amendment shrank the exclusive authority of States over its co-operative societies.
      • Part IX B dictates the terms for running co-operative societies.
        • As per the SC, Part IX B (Articles 243ZH to 243ZT) has “significantly and substantially impacted” State legislatures’exclusive legislative power” over its co-operative sector.
        • Also, the provisions in the 97th Amendment were passed by Parliament without getting them ratified by State legislatures as required by the Constitution.
        • The SC held that states have exclusive power to legislate on topics reserved exclusively to them (cooperatives are a part of State list).
          • The 97th Constitutional Amendment required ratification by at least one-half of the state legislatures as per Article 368(2).
          • Since the ratification was not done in the case of the 97th amendment, it was liable to strike it down.
          • It upheld the validity of the provisions of Part IX B which are related to Multi State Cooperative Societies (MSCS).
          • It said that in case of MSCS with objects not confined to one state, the legislative power would be that of the Union of India.

Genesis of Cooperative Movement in India

  • Causes of the Movement: The Cooperative Movement in India was born out of the distress and turmoil that prevailed in the last quarter of the 19th century.
    • The Industrial Revolution had given a death blow to village industries and driven people to agriculture, the only avenue of employment and livelihood.
    • The consequent sub-division and fragmentation of holdings had made agriculture an uneconomic proposition.
    • Other factors such as the rigidity of land revenue collection, uncertainty of rainfall and consequently lesser crop production compelled the farmers to approach the money-lenders.
      • The money lenders advanced money either by purchasing the crop at a throwaway price or by charging very high rates of interest.
    • All these factors emphasised the need for the provision of cheap credit through an alternative agency.
  • Informal Cooperatives in India: Even before formal cooperative structures came into being through the passing of a law, the practice of the concept of cooperation and cooperative activities were prevalent in several parts of India.
    • Some of them were named as Devarai or Vanarai, Chit Funds, Kuries, Bhishies, Phads.
      • In the Madras Presidency were organised ‘Nidhis’ or Mutual-Loan Associations.
      • In the Punjab, a society on cooperative lines was started in 1891 for controlling the common land of the village for the benefit of the co-sharers.
    • All these efforts were purely voluntary and strictly non-official.
    • The first official step was taken when Sir William Wedderburn made, after the Deccan riots, the proposal for the establishment of agricultural banks as a remedy against rural indebtedness.

Cooperative Movement in Pre-Independence Era

Initial Stage of Cooperative Movement (1904-11)

  • First Cooperative Act in India:
    • The Indian Famine Commission (1901) induced the government to set up a committee under the presidency of Sir Edward Law to report on the introduction of cooperative societies in India.
    • The Committee reported favorably in 1903 and the first Cooperative Credit Societies Act was passed in 1904.
    • Salient Features of the Act:
      • Any ten persons living in the same village or town or belonging to the same class or tribe could form a cooperative credit society.
      • Societies were classified as Rural and Urban depending if the majority of the total membership (80%) was agricultural or non-agricultural.
      • Rural society was not permitted to distribute profits, but in the case of urban societies, profits could be distributed after carrying 25% of the net profits to the Reserve Fund.
    • Drawbacks of the Act:
      • The act provided no legal protection to non-credit societies.
      • It also made no provision for mobilising urban savings for financing agricultural operations.
      • The classification of societies into urban and rural was found to be arbitrary, unscientific, and highly inconvenient.
      • Many provisions of the Act of 1904 became a hindrance to the further spread of the movement.

Modification Stage of Cooperative Movement (1912-1918)

  • The Cooperative Societies Act of 1912:
    • The defects of the 1904 Act were remedied when the Cooperative Societies Act, 1912 was enacted.
    • Salient Features:
      • Any society, credit or otherwise, could be registered which had as its objective, the promotion of the economic interest of its members.
      • A federal society like the Central Bank or union could be registered.
      • No member could have more than 1/5 of the total share capital or hold share exceeding Rs. 1,000 in such a society.
      • The societies were granted exemption from compulsory registration and from the payment of income tax and stamp duties.
  • Maclagan Committee:
    • In 1915, a committee headed by Sir Edward Maclagan, was appointed to study and report whether the cooperative movement was proceeding on economically and financially sound lines.
      • The committee observed that illiteracy and ignorance of the masses, misappropriation of funds, rampant nepotism, inordinate delay in granting loans and viewing the cooperative movement as a Government movement were some of the glaring defects of the cooperative movement.
    • The committee made the following suggestions:
      • All members should be made aware of the cooperative principles.
      • Honesty should be the main criterion for taking a loan.
      • Dealings should be strictly confined to the members only.
      • Applications should be carefully scrutinized before advancing loans and there should be careful follow up for effective utilization of loans.
      • One member-one vote should be strictly followed
    • These recommendations could not be put into practice because of the First World War.

Expansion Stage of the Cooperative Movement (1919-29)

  • Montague-Chelmsford Reforms:
    • Through the Montague- Chelmsford Reforms of 1919, co-operation became a provincial subject which gave further impetus to the movement.
    • Various states passed their own Acts to make the Cooperative Movement a successful one.
    • The membership of the Cooperative societies increased considerably during this period.
  • Economic Depression: The year 1929 witnessed the Great Economic Depression.
    • The prices of the agricultural commodities fell down to a remarkable extent.
    • Unemployment along with other economic crises grew.
    • The agriculturists could not pay back the loans of the societies.
    • Over dues increased unexpectedly and cooperative societies were ruined.

Restructuring Stage of Cooperative Societies (1930-1946)

  • Appointment of Committees:
    • Various committees were appointed in Madras, Bombay, Travancore, Mysore, Gwalior and Punjab for examining the possibilities of restructuring the Cooperative societies.
    • In 1937 the Congress Ministry came to power in many states and revived interest in organising the cooperative movement.
  • Role of World War II:
    • The abnormal conditions created by the Second World War led to far-reaching developments in the Cooperative Movement.
    • Prices of agricultural commodities began to rise, rural farmers got extra economic gains and non- credit societies like marketing, production and consumer societies increased rapidly.
    • The All India Cooperative Planning Committee in 1945 also gave a fillip to the growth of the Cooperative Movement.

Gandhian Socialist Philosophy regarding Cooperatives

  • Cooperation for Socialist Society: Cooperation according to Gandhiji was necessary for creation of a socialistic society and complete decentralization of power.
    • He was of the opinion that cooperation was one of the important means to empower people.
  • Phoenix Settlement: In South Africa, Mahatma Gandhi instituted the 'Phoenix Settlement' as a cooperative in a socialistic pattern.
    • Its objective was to cultivate the three acres of land given to each member and to stop the emergence of a new class of absentee landowners.
  • Tolstoy Farm: He established the Tolstoy Farm as a rehabilitation cooperative settlement for the families affected by the South African freedom struggle during the period.
    • He fully believed in Tolstoy's socialistic philosophy.
  • Cooperatives for Peasantry: On return from South Africa, Gandhiji visited the countryside of India and realized the bankruptcy and distress of Indian peasantry oppressed by excess taxation, rack renting, illegal exaction etc.
    • He observed that the closest cooperation amongst the peasants is an absolute necessity.
    • Any industry based on agricultural produce such as cotton, sugar, oil seed, wheat etc. should be on a cooperative basis so that the producers could secure the best value for their output.

Cooperative Movement After Independence

  • Part of Mixed Economy:
    • After independence, the nation adopted the approach of planned economic development for establishment of a mixed economy consisting of three sectors namely Public, Private and Cooperative Sectors.
    • Cooperatives were visualized to play the role of a balancing factor between public and private sectors.
  • Part of FYPs:
    • After independence, cooperatives became an integral part of Five-Year Plans (FYPs).
    • Pandit Jawaharlal Nehru considered cooperatives as one of the three pillars of Democracy, the other two being the Panchayat and the Schools.
  • National Policy of Cooperatives:
    • In 1958, the National Development Council (NDC) had recommended a national policy on cooperatives and also for training of personnel and setting up of Cooperative Marketing Societies.
    • The Government of India announced a National Policy on Cooperatives in 2002.
  • Establishment of NCDC:
  • Committees Set up for Cooperatives:
    • The Rural Credit Survey Committee in 1954 recommended state participation in cooperatives at all levels.
    • The S.T. Raja Committee was appointed by the Government of India to suggest amendments to the Cooperative Law.
      • The committee prepared a Model Act enabling state participation and appointment of Government nominees on the management of assisted Cooperative Societies.
  • Successful Cooperatives in India:

Issues Faced by the Cooperative Sector

  • Excessive Cooperative Legislations: Cooperatives in India function in different sectors. Cooperatives is a State subject under the Constitution of India and State cooperative laws and their implementation vastly differ.
  • Irresponsibility and Unaccountability: Serious inadequacies in governance including that related to Boards’ roles and responsibilities.
    • The people on the board are not held accountable for many inconveniences.
  • Lack of Recognition: A general lack of recognition of cooperatives as economic institutions both amongst the policy makers and public at large.
    • Inability to attract and retain competent professionals.
  • Lack of Capital Formation: Lack of efforts for capital formation particularly that concern enhancing member equity and member stake.
  • Lack of Awareness: People are not well informed about the objectives of the Movement, rules and regulations of co-operative institutions.


  • Cooperatives have a futuristic role of fostering collectivism and preserving the social capital base of the country.
    • Cooperatives are the best channels to keep the spirit of collectivism and democracy afloat.
  • The presence of a large network of social organizations, like cooperatives, would aid in the generation and utilization of social capital and ‘greater the social capital, greater would be the possibility of development’.
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