Cooperatives in the Changing Economy of India

Summary

This Forum of Free Enterprise booklet, prepared by the Cooperative Development Foundation (CDF) of Hyderabad and reprinted from Liberal Times (Vol. VI, No. 1, 1998), argues that the cooperative form of enterprise has been systematically distorted in India by restrictive laws that turn member-driven associations into instruments of state control. The opening sections set out the theory of cooperation — a voluntary association in which members are primarily users (not investors) of services they jointly need, with democratic decision-making and use-based profit sharing — and apply that theory to rural savings, credit, dairy marketing and supply services to show why cooperatives are uniquely suited to economies of small producers and consumers that purely commercial banks and private companies tend to underserve.

The middle of the booklet shifts to a sustained critique of Indian cooperative law. The author argues that most Indian “cooperatives” are state-promoted and state-controlled rather than user-controlled: cooperative Registrars across the country can refuse registration, classify and reclassify societies, amend bylaws, supersede boards, nominate directors, decide staffing, control investments, and even liquidate cooperatives over their members’ objections. The judiciary, citing Daman Singh vs State of Punjab, has held that because cooperatives are “created by statute, they are controlled by statute,” leaving the right of voluntary association largely hollow.

The final third of the booklet narrates the Andhra Pradesh reform of 1995. Faced with a choice between repealing the old cooperative law, adding a chapter for self-reliant cooperatives, or enacting a parallel statute, the state government — backed by floor leaders of every political party — passed the Andhra Pradesh Mutually Aided Cooperative Societies (APMACS) Act, 1995, allowing member-created, member-driven cooperatives free of government share capital and the Registrar’s heavy hand. Over 800 cooperatives were registered under the new law by 1996, when Bihar followed with similar legislation. The booklet closes by linking cooperative reform to the broader economic liberalisation of the late 1990s: if domestic and multinational business are being freed from unnecessary controls, the cooperative sector “groaning under unheard of controls” deserves the same relief, and may have more to offer growth and development than other forms of enterprise.

Key points

• Defines a cooperative as a voluntary association of users (not investors) with democratic decision-making and use-based profit sharing — distinguishing it from share-capital enterprises.

• Shows that purely commercial banks and private companies cannot economically serve small savers, small borrowers, scattered dairy producers, and other dispersed users, leaving cooperatives a structural niche the market does not fill.

• Argues that the moneylender exploits small borrowers (high rates, threatening behaviour, especially toward women, over-collateralisation, lump-sum repayment), and that the banker undercharges but underserves them.

• Catalogues the powers Indian cooperative laws give the Registrar: refuse registration, classify societies, amend bylaws, supersede boards, nominate directors, decide staffing, control investments, liquidate at will.

• Cites Daman Singh vs State of Punjab as the judicial articulation of the position that cooperatives, being statutory creatures, can be controlled by statute without violating freedom of association.

• Describes Andhra Pradesh’s three reform options in 1995 — repeal, special chapter, or parallel law — and explains why a parallel law was chosen so as not to disturb existing state-interest “cooperatives”.

• Reports the unanimous passage of the APMACS Act, 1995, the registration of over 800 mutually aided cooperatives by 1996, and Bihar’s adoption of similar legislation.

• Frames the cooperative reform as a logical extension of the liberalisation freeing domestic and multinational business from controls, and as a corrective to projecting “the market” as a panacea.