Union Cooperation Ministry and the States

Cooperatives is a state subject as per the Constitution. The new ministry’s mandate could not have been described in more vague terms than given in the Union government order

Published: 29th July 2021 12:15 AM  |   Last Updated: 29th July 2021 12:15 AM   |  A+A-

Union Cooperation Ministry

For representational purposes (Express Illustrations/Soumyadip Sinha)

Two recent episodes highlighted yet another challenge that is casting its shadow on the Indian federal framework, this time with respect to states’ rights in promoting and regulating cooperatives. The first was the creation of a separate Ministry of Cooperation at the Centre with Amit Shah as the first cooperation minister of India.

‘Cooperatives’ is a state subject as per Schedule 7 of the Constitution. So far, cooperatives have been under the regulatory control of the Registrar of Cooperatives of different states. There are a few hundred Multi State Cooperatives (MSC) in existence. But the numbers are too small to warrant a separate ministry at the Centre. States were not consulted before a separate ministry was formed. Its mandate could not have been described in more vague terms than given in the Union government order. Further, to achieve synergy, the new ministry should have been assigned to a minister holding a portfolio with strong linkages such as agriculture. What does the Union home ministry have to do with the development of cooperation? It is a task specially assigned to Mr Amit Shah. Many rightly suspect it to be a political move.

Supreme Court verdict: The second episode was the verdict of the Supreme Court annulling parts of the 97th Amendment of the Constitution passed in 2012, limiting the power of the Centre to Multi State Cooperative Societies. Justice Nariman wrote in the majority opinion shared with Justice B R Gavai: “There can be no doubt that our Constitution has been described as quasi-federal in that, so far as legislative powers are concerned, though there is tilt in favour of the Centre vis-a-vis the states given the federal supremacy principle outlined herein above, yet within their own sphere, the states have exclusive power to legislate on topics reserved exclusively to them.” The cooperatives working within a state are the exclusive domain of the state governments.

The new Cooperation Ministry by itself will not be able to undermine the existing cooperative structure, but with the RBI working in tandem, the arsenal can be deadly. It will provide an opportunity for Amit Shah and his new ministry to enter the cooperative sector of states with their parallel Multi State Cooperatives and their branches.

Banking Regulation Act Amendment: In 2020, the Banking Regulation Act was amended to bring Urban Cooperative Banks and State Cooperative Banks under the regulation of the RBI. Though the amendment did not directly affect Primary Agricultural Cooperatives (PACS), the threat of a ban of using the title of ‘bank’ by them hangs like a sword of Damocles above those states that have not yet accepted the Vaidyanathan Commission recommendations yet.

The RBI, armed with the Banking Regulation Amendment, has already given notice to PACS over using the title. Once shorn of the title ‘bank’, they cannot use cheque leaves and collect deposits from the public. Only A Class members can make deposits. The deposits of non-A Class members now come to around `60,000 crore in Kerala. The RBI can also prohibit PACS from having mirror accounts of clients of member PACS, the apex body of the credit cooperative banks or other banks. In short it can undermine the existing cooperative credit structure in states such as Kerala.

The story of Hindu Banks: A recent phenomenon has been the emergence of what has been described as ‘Hindu Banks’, with the slogan Hindu money for Hindus in many states. Actually, they are not banks but NBFIs under the Nidhi Rules of 2014. In Kerala, they claim to have registered 870 such institutions. They have attracted attention due to the virulent communal propaganda.

The cooperatives in Kerala, credit and non-credit, have been dominated by the CPM and Congress. This is one reason for wild allegations made by the BJP such as cooperatives being a conduit for black money, corruption and financing the major political parties. During the demonetisation period, even scuttling the cooperatives by stifling their normal activities was done. Their Hindu Banks are posed as an alternative to the cooperatives. Yet so far, they have made no impact other than the controversy related to a Hindu Bank folding up with the depositor’s money because of embezzlement.

It is not clear at this stage how the new ministry would be linked to the above kind of financial outfits that are spawning in some of the states. They could be converted into branches of multi state banks under the Centre or a Central cooperative financial institution formed to finance them. The modus operandi is not yet clear. This is a major reason for opposition to the new ministry.

Challenges before the cooperatives: There is no doubt that there are major issues related to the way the credit cooperatives are functioning today. From the 1990s, their contribution to institutional credit to agriculture has declined sharply from 60% to 10%. The banking sector has been shying away from agriculture, forcing farmers into the clutches of money lenders and traders. Corruption, poor management and political manipulation have been rampant in the cooperatives. The solution to these problems is not centralisation. One-size-fits-all quick centralised fixes may do more harm than good. We must move in the direction of greater decentralisation with accountability, member democracy and partnership with SHG networks.

This was the vision of Nehru when he said that the formula for village development was the panchayat, public school and local cooperative bank. The PACS still contribute to 20% of the agriculture credit in Kerala. Besides, they undertake services such as providing agricultural inputs and procuring farm output to process and market them. They are institutions that facilitate deployment of local financial savings for local development. Kerala has taken to a decentralised development path to promote production of agricultural and petty production sectors and for providing services. The cooperative sector is to play an especially important role in this strategy. It is for this reason that the state is resisting any reform that seeks to curtail the non-credit activities undertaken by cooperatives. There is a total lack of appreciation of the need for regional autonomy, even if limited, in fashioning development strategy.

T M Thomas Isaac, Former finance minister of Kerala, (


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  • Bichu Muttathara

    The author seems to be unduly worried about the new Central Ministry of Cooperation. The strategy should be “Wait and Watch” instead of outrightly rejecting it. The central government will not be able to interfere with the powers and authority of the state governments as far as the state based societies are concerned. However
    1 month ago reply
  • Raveendranath MN

    Cooperatives are grass-root democratic institutions like panchayats and hence it cannot function without opposition participation. Any attempt to convert them into exclusive preserve of one political party by bringing them under one party's area committees is nothing but autocracy for which communists are renowned for.
    1 month ago reply
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