MODULE II: ORIGIN OF COOPERATIVE MOVEMENT IN INDIA & COOPERATIVE PRINCIPLES
Module II presents an exhaustive academic investigation into three foundational pillars of cooperative jurisprudence and history: 1. Brief History of Cooperative Movement in India: From pre-colonial indigenous institutions (Nidhis, Chit Funds, Phad system) through colonial agrarian distress, Sir Frederick Nicholson's epochal mission ("Find Raiffeisen"), the landmark 1904 and 1912 Acts, Maclagan Committee (1914), Montagu-Chelmsford Reforms (1919), Royal Commission on Agriculture (1928), post-independence All India Rural Credit Survey Committee (Gorwala Report 1954), Vaidyanathan Committee reforms, the 97th Constitutional Amendment Act (2011), to the formation of the Union Ministry of Cooperation (2021); 2. Evolutionary Stages of Cooperative Principles: Rigorous comparative analysis across four historic stages—Rochdale Pioneers (1844), First ICA Reformulation (Paris 1937), Karve Committee Reformulation (Vienna 1966), and the Fourth Stage Manchester Declaration (1995 Statement on the Cooperative Identity comprising 7 modern principles, core values, and ethical tenets); 3. International Cooperative Alliance (ICA): Genesis (1895 London), statutory objectives, consultative role with the United Nations, global membership hierarchy, and four-tier administrative and sectoral governance architecture.
UNIT 2.1: HISTORICAL EVOLUTION OF THE COOPERATIVE MOVEMENT IN INDIA
1. Pre-Colonial Indigenous Mutual Aid Systems
Cooperation in India is not merely an imported European administrative device; its foundational spirit has permeated the subcontinent's socio-economic fabric for millennia. Ancient Sanskrit literature celebrated collective endeavors through institutions such as Gram Sanghas (village republics), Srenis (guilds of artisans and merchants operating under customary bylaws), and Kula (communal clan-based mutual support networks).
In the pre-statutory modern period, traditional mutual credit institutions spontaneously emerged to mitigate localized agrarian crises:
- Nidhis and Chit Funds (Southern India): Mutual loan funds founded in Madras Presidency during the mid-19th century, where members pooled monthly subscriptions to provide low-interest credit and bid-based advances to subscribers, bypassing unorganized moneylenders.
- Phad System (Maharashtra): A sophisticated community-managed irrigation and agricultural cooperative system practiced in Kolhapur and Khandesh, where farmers collectively diverted perennial stream water, shared sugarcane cultivation expenses, and pooled market yields.
- Lana and Gonchi Systems (Northern India): Communal labor and bullock pooling arrangements in Punjab and Rajasthan during seasonal plowing and harvesting cycles, demonstrating organic, unwritten cooperative mutualism.
2. Agrarian Distress, Moneylender Exploitation, and Colonial Impetus
The advent of British colonial land revenue settlements—specifically the Permanent Settlement (Zamindari) in Bengal, the Ryotwari System in Madras and Bombay, and the Mahalwari System in the North-West—fundamentally transformed rural India. Land revenue was made fixed, payable strictly in cash, and rigidly enforced regardless of seasonal monsoons, crop failures, or price depressions.
Peasants were driven into the clutches of village moneylenders (Sahukars, Mahajans, and Banias), who levied exorbitant interest rates ranging between 36 percent and 100 percent per annum. Through compound usury, fraudulent accounting, and land mortgage foreclosures under British civil courts, agriculturalists were systematically dispossessed of their ancestral lands, reducing self-sufficient yeoman cultivators to indebted serfs and landless tenants.
In 1875, agrarian resentment against moneylenders exploded across Pune and Ahmednagar districts of Maharashtra in the historic Deccan Riots. Indebted ryots attacked the residences and shops of Marwari and Gujarati moneylenders, seizing and burning debt bonds, promissory contracts, and court decree records.
The colonial administration responded by enacting the Deccan Agriculturists' Relief Act of 1879, followed by the Land Improvement Loans Act of 1883 (Taccavi long-term loans for wells and land bunding) and the Agriculturists' Loans Act of 1884 (short-term loans for seeds and bullocks). However, these state loans proved hopelessly inadequate, riddled with bureaucratic delays, bribery, and rigid recovery tactics. The colonial state recognized that external administrative relief could not substitute for self-reliant, community-rooted credit institutions.
3. Sir Frederick Nicholson's Report and the Slogan "Find Raiffeisen"
In 1892, the Government of Madras appointed Sir Frederick Augustus Nicholson, an enlightened British civil servant, on special deputation to study agricultural and land banks across Europe—particularly in Germany, Italy, and France—and recommend a viable model for rural credit in India.
Nicholson submitted his magnum opus in two monumental volumes published in 1895 and 1897. His fundamental thesis was that the small peasant economy of India bore an exact structural resemblance to rural Germany prior to F.W. Raiffeisen's reforms. Nicholson condensed the entire solution to India's rural debt misery into two immortal words:
- Mutual Knowledge & Proximity: Credit institutions must operate within a tightly circumscribed local area (single village) so that members possess intimate personal knowledge of each other's character, assets, and repayment capacities.
- Unlimited Liability: Members must assume joint and several unlimited liability to foster collective vigilance, prevent reckless borrowing, and inspire depositor confidence.
- Honorary Management: Administrative overheads must be eliminated by utilizing honorary village leadership, avoiding costly bureaucratic payrolls.
- Capital Formation through Thrift: Credit must not be an act of external charity; it must be accumulated through regular village thrift, small deposits, and retained permanent reserve funds.
Simultaneously in Northern India, H. Dupernex, an Indian Civil Service officer in the United Provinces, published an influential treatise titled "People's Banks for Northern India" (1900), advocating the establishment of urban credit societies modeled on Schulze-Delitzsch and Luzzatti banks. Lord Curzon's administration appointed a committee chaired by Sir Edward Law in 1901 to draft comprehensive legislation, leading directly to the birth of statutory cooperation in India.
4. Co-operative Credit Societies Act, 1904: Features and Inherent Limitations
On March 25, 1904, the Governor-General of India, Lord Curzon, gave assent to the Co-operative Credit Societies Act (Act X of 1904). This historic statute marked the formal, legislative inauguration of the cooperative movement in India.
Salient Features of the 1904 Act:
- Sole Credit Focus: Confined strictly to credit societies; formation of non-credit cooperatives (marketing, farming, consumer) was legally impermissible.
- Rural vs Urban Dichotomy: Classified societies into Rural (where at least 80% of members were agriculturalists) and Urban (where non-agriculturalists formed over 80%).
- Liability Principle: Rural societies were mandatorily based on unlimited liability; urban societies could choose between limited or unlimited liability.
- Statutory Authority: Created the distinct provincial office of the Registrar of Co-operative Societies (RCS), endowed with wide powers of registration, audit, inspection, and dissolution.
- Concessions: Conferred exemptions from stamp duty, registration fees, and income tax on cooperative surpluses.
Deficiencies & Inherent Limitations:
- Neglect of Non-Credit Sectors: Excluded agricultural marketing, irrigation, artisan supply, and consumer retail, ignoring the holistic economic needs of farmers.
- Absence of Federal Intermediaries: Provided no legal framework for central financing agencies (District Central Co-operative Banks) or apex state banks to channel urban surpluses to fund capital-starved rural societies.
- Rigid Classification: The rigid 80% urban-rural dichotomy proved unnatural, creating administrative friction in peri-urban townships.
- Excessive Officialization: Conceived as a state-sponsored initiative, fostering member passivity and dependence on government Registrars rather than grassroots autonomy.
5. Co-operative Societies Act, 1912: A Comprehensive Legislative Overhaul
Recognizing the structural bottlenecks of the 1904 Act, the colonial government enacted the Co-operative Societies Act (Act II of 1912), which completely overhauled the legislative framework:
- Legalization of Non-Credit Cooperatives: Authorized the registration of any society having as its object the promotion of the economic interests of its members in accordance with cooperative principles, thereby sanctioning marketing, purchasing, dairy, farming, weavers', and consumer societies.
- Creation of Multi-Tier Federal Structures: Legally recognized central financing and supervising unions, paving the way for the establishment of Central Co-operative Banks (CCBs) at the district level and Apex State Co-operative Banks (SCBs).
- Modern Liability Classification: Abolished the archaic urban-rural dichotomy, replacing it with a rational distinction based on liability: limited liability for federations and urban societies, and unlimited liability for agricultural credit societies (unless exempted by the local government).
- Reserve Fund Mandates: Mandated that every society must carry at least 25% of its net annual profit to a statutory indivisible Reserve Fund before paying dividends on share capital.
- Ceilings on Member Shareholding: Restricted individual shareholding to a maximum of one-fifth (20%) of total share capital, or a nominal value of 1,000 rupees, preventing plutocratic domination.
6. Maclagan Committee on Co-operation (1914–1915)
Following the rapid numerical expansion of societies after the 1912 Act, the Government of India appointed a committee headed by Sir Edward Maclagan to evaluate whether the movement was developing on sound financial and organizational lines. The Maclagan Committee Report (1915) remains one of the finest classical doctrines on rural credit management.
- Rigorous Selection of Members: Membership must be restricted strictly to persons of good character and known honesty.
- Insistence on Punctual Repayment: Loans must be strictly recovered on due dates; unearned extensions and wilful defaults must be ruthlessly penalized to maintain credit discipline.
- Prudent Loan Sizing: Credit should be granted strictly for productive purposes and sized in accordance with the borrower's actual repayment capacity, not merely land collateral.
- Systematic Audit and Supervision: Annual independent financial audits and periodic field inspections must be enforced by central financing banks and the Registrar.
- Building Strong Reserves: Societies must avoid distributing high dividends and prioritize accumulating unencumbered internal reserves to achieve institutional self-reliance.
7. Montagu-Chelmsford Reforms (1919) and Provincial Autonomy
Under the Government of India Act, 1919 (Montagu-Chelmsford Reforms), the governance structure of British India was restructured under the system of Dyarchy. Co-operation was declared a "Transferred Subject", placing it under the direct legislative and executive control of elected Indian provincial ministers.
This decentralization triggered independent provincial legislation tailored to regional economic realities:
- Bombay Co-operative Societies Act, 1925: The first province to pass its own Act, establishing democratic general body supremacy, clarifying liquidation procedures, and institutionalizing land mortgage banking.
- Madras Co-operative Societies Act, 1932: Introduced stringent provisions for surcharge, statutory inquiries, and streamlined rural recovery proceedings.
- Bihar and Orissa Act (1935), Bengal Act (1940): Enacted specialized provisions to protect cooperative banks during the Great Depression of 1929, which caused catastrophic agrarian price collapses and widespread loan defaults.
Appointed under the chairmanship of Lord Linlithgow, the Royal Commission on Agriculture conducted a forensic examination of India's rural economy. In its landmark 1928 report, the Commission reviewed the myriad structural deficiencies, illiteracy, and official interference in Indian cooperatives, yet delivered an immortal verdict that defined all subsequent national policy: "If cooperation fails, there fails the best hope of rural India." The Commission stressed that despite structural defects, cooperative mutualism remained the only viable socio-economic vehicle capable of emancipating the Indian peasantry.
8. Post-Independence Transformation: AIRCSC / Gorwala Committee (1954)
At the dawn of Indian independence in 1947, institutional credit accounted for an insignificant fraction of total rural borrowing. In 1951, the Reserve Bank of India appointed the All India Rural Credit Survey Committee (AIRCSC) chaired by A.D. Gorwala (with Prof. D.R. Gadgil as a pivotal intellectual force).
Published in 1954, the Gorwala Report revealed a staggering finding: after half a century of state-sponsored cooperation, cooperatives supplied a miserable 3.1 percent of total agricultural credit, commercial banks supplied 0.9 percent, the government supplied 3.3 percent, while predatory moneylenders, traders, and landlords controlled over 92 percent of rural debt. The Committee famously summarized this paradox: "Cooperation has failed, but cooperation must succeed!"
- State Partnership at All Tiers: The government must inject major equity capital into primary, district, and apex cooperative institutions (holding 51% shares) to provide financial muscle without meddling in day-to-day autonomy.
- Integration of Credit with Marketing & Processing: Credit disbursement must be linked to crop production (Crop Loan System); borrowers must market produce through cooperative marketing societies, which automatically deduct loan installments from sales proceeds.
- Creation of the State Bank of India: Nationalization of the Imperial Bank of India through the SBI Act, 1955, mandating massive expansion of rural bank branches to facilitate remittance of cooperative funds.
- Establishment of National Funds in RBI: Creation of the National Agricultural Credit (Long-term Operations) Fund and National Agricultural Credit (Stabilization) Fund to convert short-term loans into medium-term loans during natural calamities.
9. Vaidyanathan Committee (2004–2006) and Financial Revival
Over decades of political interference, state over-regulation, and non-performing assets, the rural credit delivery system deteriorated severely. In 2004, the Government of India constituted the Task Force on Revival of Rural Co-operative Credit Institutions chaired by Prof. A. Vaidyanathan.
The Vaidyanathan Committee submitted two reports: one for the Short-Term Cooperative Credit Structure (STCCS) in 2005, and another for the Long-Term Structure (LTCCS) in 2006. It recommended a massive Revival Package of over Rs. 13,500 crores contingent upon structural legal reforms:
- Enabling complete operational and financial autonomy;
- Withdrawing state equity to below 25 percent and eliminating government-nominated directors;
- Restricting the regulatory powers of State Registrars strictly to administrative matters, while placing all cooperative banking functions directly under the Reserve Bank of India (RBI) and NABARD under the Banking Regulation Act;
- Enforcing 'Fit and Proper' criteria for CEOs and Directors of DCCBs and SCBs.
10. The 97th Constitutional Amendment Act (2011) and Ministry of Cooperation (2021)
In December 2011, Parliament passed the 97th Constitutional Amendment Act, 2011, giving constitutional status and protection to cooperative societies in India:
- Fundamental Right: Amended Article 19(1)(c) to insert the right to form "cooperative societies" as a Fundamental Right of all Indian citizens.
- Directive Principle of State Policy: Inserted Article 43B, mandating that the State shall endeavor to promote voluntary formation, autonomous functioning, democratic control, and professional management of cooperative societies.
- Part IX-B of the Constitution: Inserted Articles 243ZH to 243ZT establishing uniform democratic benchmarks: limiting Board size to maximum 21 directors, mandating 2 reserved seats for women and 1 for SC/ST, fixing director terms at 5 years, mandating independent elections before expiry of term, and restricting supersession of boards to a maximum of 6 months.
In July 2021, the Government of India created a dedicated Union Ministry of Cooperation, headed by a Cabinet Minister, under the vision of "Sahakar Se Samriddhi" (Prosperity through Cooperation). Key initiatives include national computerization of 63,000 PACS, Model Bye-laws enabling PACS to operate as Common Service Centres (CSCs), establishment of the National Cooperative Database, and setting up three new national apex multistate cooperatives for certified seeds, organic export, and global trade.
UNIT 2.2: PRINCIPLES OF CO-OPERATION: FOUR HISTORICAL EVOLUTIONARY STAGES
1. The Concept and Significance of Cooperative Principles
Cooperative principles are the essential guidelines, ethical norms, and operational rules by which cooperatives put their core values into daily practice. Unlike commercial corporations governed solely by the Companies Act and profit motives, cooperatives are socio-economic institutions whose legal validity, internal governance, and socio-economic integrity depend on unwavering adherence to these universally acknowledged tenets.
The evolution of cooperative principles spans four well-defined historical epochs:
- Stage 1: Rochdale Principles (1844) – The foundational pragmatic guidelines formulated by the 28 flannel weavers of Rochdale, England.
- Stage 2: First ICA Reformulation (Paris Congress, 1937) – Formal international standardization into 4 essential and 3 non-essential principles.
- Stage 3: Second ICA Reformulation / Karve Committee (Vienna Congress, 1966) – Modernization led by Indian economist Prof. D.G. Karve, introducing cooperation among cooperatives.
- Stage 4: Centennial Manchester Declaration (1995) – The contemporary Statement on Cooperative Identity comprising 7 universal principles and ethical values.
2. Stage 1: The Rochdale Principles (1844)
The Rochdale Equitable Pioneers Society, founded in 1844 in Lancashire, formulated a body of operational rules that ensured commercial triumph where Owenite utopian communes had foundered. The classic Rochdale Code comprised:
- Open Membership: Anyone of decent character could join regardless of social status, gender, or religious background.
- Democratic Governance (One Member, One Vote): Voting power was strictly attached to human personhood, not capital contribution. Proxy voting was prohibited.
- Pure and Unadulterated Commodities: Selling genuine, full-weight, unadulterated goods at standard market prices.
- Cash Trading (Strict Prohibition of Credit): Goods were sold strictly for ready cash, preventing debt traps, bad debts, and accounting entanglements.
- Market Prices: Refusal to undercut private shopkeepers, preventing price wars and building a substantial trading margin.
- Dividend on Patronage (Patronage Refund): Net trading surplus was distributed back to members in exact proportion to the volume of purchases each made from the store, embodying economic justice.
- Limited Interest on Share Capital: Capital was treated merely as a servant, rewarded with a strictly fixed, modest rate of interest (typically 5%), eliminating speculative rent-seeking.
- Political and Religious Neutrality: Ensuring solidarity by barring partisan political debates and religious sectarianism from society affairs.
- Allocation for Education: Mandating that 2.5% of net profits be set aside in a special fund for member education, reading rooms, and civic enlightenment.
3. Stage 2: First ICA Reformulation (Paris Congress, 1937)
By the early 20th century, cooperatives had diversified globally into banking, insurance, agriculture, and manufacturing. Many movements found strict adherence to all 14 Rochdale practices impracticable (e.g., cash trading in agricultural credit). In 1930, the International Cooperative Alliance appointed a Special Committee to examine the present application of Rochdale Principles, presenting its report at the 15th ICA Congress in Paris (1937).
The 1937 Congress categorized the Rochdale tenets into two distinct classes:
Essential Principles (Mandatory for ICA Affiliation):
- Open Membership: Freedom of entry without arbitrary, artificial, or discriminatory restrictions.
- Democratic Control: Equal voting rights (one member, one vote) ensuring democratic member sovereignty.
- Distribution of Surplus in Proportion to Transactions: Return of economic surplus based on patronage.
- Limited Interest on Capital: Capital receives only a strictly controlled, non-speculative return.
Non-Essential Principles (Advisory Guidelines):
- Political and Religious Neutrality: Recognized as vital, but difficult to maintain in totalitarian or newly planned socialist economies.
- Cash Trading: Declared impractical for agricultural supply, long-term credit, and capital-goods procurement.
- Promotion of Education: Strongly encouraged as an ethical imperative, but omitted from conditions for legal ICA membership.