Federalism and cooperatives

SC verdict has brought clarity in regulation of co-operatives

In a landmark judgment with implications for the federal structure of the country, the Supreme Court this week struck down certain provisions of the Constitution (97th Amendment) Act, 2011, which had added Part IX(B) to the Constitution of India. The subject of the 97th Amendment to the Constitution was the management and oversight of cooperative societies. The court determined that, because Parliament had passed the 97th Amendment without sending it to the states to be ratified by at least half the state legislatures, and because co-operative societies were part of the State List of the Constitution, the 97th Amendment violated the basic structure of the Constitution. In doing so, the Supreme Court partly upheld an earlier decision by the Gujarat High Court that said Parliament had overstepped its powers. The Supreme Court did not uphold the Gujarat High Court’s decision in its entirety, noting that multi-state co-operatives might be considered a fit domain for parliamentary legislation.

The Supreme Court is the ultimate check on the powers of the Union government, particularly in matters pertaining to the balance of power between the Union and the states. The judgment on this occasion noted that in India this balance of power is tilted towards the Union but that nevertheless Parliament certainly cannot make laws on subjects that have been constitutionally reserved for states without shifting them to the Concurrent List or the Union List (except in cases of national interest, under Article 249). That shift would, of course, need to be ratified by half the Assemblies. On this occasion, the specific requirements of the 97th Amendment may well have been of value to the broader Indian economy. The cooperative sector has long been poorly managed by state governments. Even so, although the Union government’s motives might have been benign — and, as the Union’s lawyers argued, states did not object to the Supreme Court and some actually made similar laws of their own — that still does not permit the Union government to make laws on state subjects. Permitting such an action would undermine the entire federal structure of the country.

The Union government will now have to revisit the management and regulation of cooperative societies while respecting the Supreme Court’s judgment. Recently, senior Maharashtra politician Sharad Pawar, who is closely associated with the cooperative sector, had written to the prime minister, arguing against the September 2020 amendments to the Banking Regulation Act, 1949, which strengthened the Reserve Bank of India’s (RBI’s) powers to regulate cooperative banks. One-third of the urban cooperative banks are in Maharashtra. These regulatory changes will now have to be re-examined in the light of the judgment on the 97th Amendment. It may be necessary to do the full task of properly obtaining ratification from the states for an amendment. It is vital that the RBI continue to be able to treat cooperative banks as fully regulated participants in the financial sector. Otherwise they have the power to create systemic crises, given that their poor governance builds up many bad loans and that they are chronically under-capitalised. It is also necessary for consumer protection. Some recent panics about cooperative banks have made it clear that many depositors do not see a difference between cooperative banks and scheduled commercial banks and believe their savings are as protected by law and regulation in one as in the other. The Supreme Court’s order may have made it harder to ensure cooperative banks are properly regulated, but that simply means the Union government must find a way to do so in keeping with constitutional principles.