India's cooperatives form a vital cog in the wheel of domestic growth. And the Central government knows it

At the heart of the Centre's plans to build a $5 trillion economy lies a widespread network of grassroots financial centres. Here's what it plans to do with it

India is looking to boost the economic potential of its large number of cooperatives spread across the country with reforms that can quicken the country’s Gross Domestic Product (GDP) expansion to reach a targeted $5 trillion by 2025, according to recent government announcements, reflecting the broad goal of the cooperative sector reforms as articulated by the various ministers in the course of the past several months.

At the heart of the Gross Domestic Product (GDP) expansion lies a little-known network of nearly 60,000 rural grassroots financial centres, of which only 36,000 currently run profitable businesses.

At the heart of this push lies a little-known network of nearly 60,000 rural grassroots financial centres, of which only 36,000 currently run profitable businesses. They have been in existence for decades, some since the time of India's Independence. The Modi government wants to transform these entities, known as primary-level cooperative societies or PACS, to overcome the challenges of unemployment and spur business opportunities.

In one of its latest moves on May 31, the Union cabinet approved a new grain-storage programme worth ₹1 lakh crore. The programme will be driven by farm cooperatives, such as PACS, which are village or district-level last-mile institutions that deliver agricultural credit to millions of farmers. Anurag Thakur, the information and broadcasting minister called it the “world’s largest grain storage plan”. But this is just one among a raft of reforms.

Cooperatives are collectives jointly owned by participating members who share profits and losses, such as rural businesses or banks. The popular milk brand Amul, for instance, is a cooperative and so is India’s largest fertilizer maker, Indian Farmers Fertiliser Cooperative or IFFCO.

Government’s initiatives to boost growth of cooperatives

In July 2021, the Centre created a ministry for cooperation, helmed by Union home minister Amit Shah, carving it out of the farm ministry. The Centre has since rolled out several changes to digitise and expand a sector that plays a key role in the rural economy. At the time, Shah had said the cooperative sector was "going to make the largest contribution to Prime Minister Narendra Modi's dream of making India a $5 trillion economy".

Under the Constitution's Seventh Schedule, which divides responsibilities between the Centre and states, state governments have jurisdiction over cooperatives. However, the Centre has control over policy-making for cooperatives that operate in more than one state, known as multi-state cooperatives.

In September 2022, Shah had written to states, urging them for their views on a set of federally drafted model byelaws governing the sector. Separately, the Centre has formed a 47-member panel headed by former Union minister Suresh Prabhakar Prabhu to formulate a national policy on cooperatives.

Shah has, on several occasions, said the Centre would not interfere or dilute states’ jurisdiction over cooperatives as it is prohibited under the country’s constitutional scheme. However, he said that the cooperative sector needed to be in lockstep with a national goal.

In a recent Centre-state meeting cooperation and Shah said the Centre will come out with a national policy that can “guide states” to align their policies on cooperatives with a broader all-India blueprint.

Origins of Indian cooperatives

The origins of India’s cooperatives lie in the Cooperative Credit Societies Act enacted by the colonial British government in 1904. The country’s first Prime Minister Jawaharlal Nehru brought cooperatives under the purview of five-year plans.

Nehru sought policies to see an India “convulsing with the cooperative movement”. This bore fruit, such as the “white revolution” in milk output. Some cooperative businesses became household names, such as Lijjat Papad, a maker of crisp flatbreads. India also has 1,531 urban cooperative banks and 97,006 rural ones. Overall, now, the country has nearly 800,000 cooperatives with a total membership base of about 290 million individuals, including banks, sugar mills and businesses.

Cooperative banks in hot water

Yet, the full business potential still remains untapped. For instance, a large number of PACS became unviable over the years. Cooperative banks have repeatedly run into trouble with their balance sheets, prompting the Reserve Bank of India (RBI) to clamp down on them. Many were found to cook their books and are often controlled by influential local politicians.

On March 23, for instance, the RBI imposed a ₹5,000 cap on withdrawals by customers of the Tamil Nadu-based Musiri Urban Co-operative Bank, restrictions imposed on the lender after its financial situation became precarious.

“The last national policy on cooperatives was framed during (former prime minister) Vajpayee’s time. A new policy was imperative because the economy has changed greatly,” said Sakshi Abrol, a policy manager at the Nation First Policy Research Centre.

The mandate given to the Suresh Prabhu committee to form a new national policy revolves around widening the scope of businesses for cooperatives, such as lending for consumption and medical loans, against collateral such as bonds and commodities, as well as a range of financial services.

A key issue is that farmers' shares in cooperatives are often too small, which results in poor payouts. According to a research note accompanying a January 2023 study by the National Council of Applied Economic Research (NCAER), small farmers sell a major chunk of their produce to private traders, which “prevents them from reaping the profits of their produce even during a bumper harvest. Their small quantity transactions translate into meagre cooperative shares and weak bargaining power in the market.”

The Modi government’s push for a new cooperative policy, which hinges on states aligning their goals with national objectives, could face a pushback from Opposition-ruled states, since cooperatives, other than multi-state ones, fall squarely in their domain.

“Since the administration of cooperatives has traditionally fallen under the purview of the respective state governments, the establishment of a central ministry to oversee their functioning may also have certain political repercussions and revive the national debate on collaborative federalism,” wrote Saurabh Bandyopadhyay, fellow; and Anupma Mehta, an editor at NCAER in a policy note.

“There’s a lot of scepticism around cooperatives, especially in Maharashtra, which is associated with politics and power. The advantages of a revamp would be that we should learn from earlier mistakes and bring transparency. That is the key,” said policy analyst Sakshi Abrol.