Decoded: Why newly formed Ministry of Co-operation is raising many eyebrows

Questions abound if the freshly carved out ministry is for political heft or if it's a tool to fan Centre-state feud

In the latest reshuffle of the Narendra Modi government, the carving of a separate Ministry of Co-operation from the Ministry of Agriculture and placing no less than the country’s Home Minister as head of the newly created ministry has generated much curiosity.

Given the financial heft and muscle along with political clout that co-operatives exercise in some states such as Maharashtra, Gujarat, Karnataka, Kerala and also in recent times in Odisha and Madhya Pradesh (for conducting procurement operations on behalf the state and Centre), the move is being read differently by different people.

With almost 0.8 million registered co-operatives across the country, a large number of which are in rural and semi-urban areas and approximately 400 million people directly impacted by the co-operatives any control or power over them open up a huge opportunity for political patronage be it at the state level or Central level.

So how does the state, or for that matter Central government, exercise control over the co-operatives and what are funding sources. The following explainer tries to answer some of those critical questions.

How does a co-operative raise funds or in other words what are the avenues through which a co-operative can raise funds? 

For a newly created co-operative, experts said that initial funding which is also the first source of funding has to come from the members who have joined together to form the co-operative for a common good in the form of share capital.

Can any state or state become part of a co-operative at the formation stage?

Yes, a state or even the Central government if it wants to promote co-operatives in a certain field can become members of such a co-operative and contribute funds in the form of share capital during the formation stage of that co-operative. Thereafter, once the business starts functioning the after once the business starts running co-operatives become eligible for bank financing.

Is it the only way in which a cooperative can get access to finances?

No, there are some loans that are extended by specialised financial bodies such as NCDC or National Co-operative Development Corporation either as term loans, or for meeting working capital needs or for building permanent infrastructure.

In the term-loans and loans given for building permanent infrastructure by NCDC there is a component of grant in them as per a Central government scheme. According to experts, most co-ops opt for term loans as it has a grant component in them which varies between 15-30 per cent depending upon various categories.

These categories include co-operatives in co-operatively developed states such as Maharashtra, Gujarat etc and those in co-operatively less developed states.

The term loan also has some eligibility criteria such as the co-op should be a functional entity, it should have three years’ profits in the balance etc.

What is NCDC?

NCDC, is a Delhi-headquartered specialized statutory corporation under the ministry of agriculture. It has regional offices and chapters in almost all parts of the country.

Is there any other source of funding for co-ops?

Apart from all these, another source of funding for a co-operative is when Centre or state government engage them in various government schemes such as those for promoting food processing, creating storage space or animal husbandry or rural employment etc.

Co-ops get grants in these specialized programmes as well just as other bodies. For example, co-ops can get benefits under the Agriculture Infrastructure Fund (AIF) for creating storage infrastructure just as any other body.

Through this way, the government can extend indirect support to the co-operatives.

Can state governments become guarantor for any loans taken by co-operatives either from banks or from NCDC?

Yes, there are umpteen examples of state governments or even the Centre standing guarantor loans taken by co-ops either from banks or from specialized institutions such as NCDC depending upon its priority. Like in Chhattisgarh, the state’s main procurement agency, Markfed (Chhattisgarh State Co-operative Marketing Federation) borrows around Rs 10,000 crore annually from NCDC and other financial institutions for undertaking procurement operations from farmers. But, the loan availed is much higher than the balance sheet or reserve size of Markfed. In such conditions, the state government stands guarantor for the loans as procurement is a priority for it.  Centre also stands guarantor for loans availed by co-ops like Nafed.

So what is the political angle behind the move to create a new ministry and assign it to the second more powerful man in the Modi government? 

Several observers and critics feel that given the immense ground level political clout and penetration that co-operatives exercise in some states notably Maharashtra, Gujarat, Karnataka and Kerala, having the Union Home Minister at its helm does give it power to exercise control.

Because, so far what is known is that though line ministries will have administrative control over their respective co-operatives like agriculture ministry over Nafed and Animal Husbandry and Fisheries Ministry over Fishcopfed, the broad policy decisions regarding the co-operatives sector as a whole will be framed by the newly formed ministry.

It is here that might bring it under direct confrontation with the states, because states also have a major role to play in the functioning of the co-operatives and their policy framework as per the entry 42 of the State List of Indian Constitution.

What is the 97th amendment in respect of the co-operatives and their control between Centre and the state governments?

The 97th constitutional amendment, which dealt with issues related to effective management and uniformity in laws governing the co-operative societies in the country was passed by Parliament in December 2011 and had come into effect from February 15, 2012, during the previous UPA regime.

It was intended to ensure that things such as registration of co-operatives was made mandatory, indefinite superseding of co-operative boards by the state government was prohibited.

The change in the constitution has amended Article 19(1)(c) to give protection to the co-operatives and inserted Article 43 B and Part IX B, relating to them.

The amendments, according to critics, denuded states of their exclusive powers to enact laws to deal with management of co-operative societies.

On April 22, 2013, the Gujarat High Court struck down certain provisions of the 97th constitutional amendment on technical grounds. According to reports, it held that the Centre cannot enact laws or issue notification with regard to co-operative societies as it is a state subject as the procedure followed for carrying out the amendments was flawed.

The High Court verdict came on a PIL challenging the legality of the 97th constitutional amendment.

The PIL petitioner have contended that as per the provisions of Article 368 of the Constitution, if Parliament intends to amend or delete any of the lists in the seventh schedule, such Amendment shall require to be ratified by the legislature of not less than one half of the states by resolution to the effect passed by those legislatures before the bill making provisions for such amendment is presented to the President for Assent.

Last week, the Supreme Court of India commenced a hearing to examine whether the amendment denuded states of their exclusive power to enact laws to deal with management of co-operative societies.