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Co-operative Movement in India


In this article we will discuss about the cooperative movement in India:- 1. Subject-Matter of the Co-Operative Movement in India 2. Early History of the Co-Operative Movement in India 3. The Act of 1904 4. The Act of 1912 5. Maclagan Committee 6. The Depression and the Co-Operative Movement in India 7. The Second World War 8. The Co-Operative Planning Committee 9. Causes of Slow Progress.


  1. Subject-Matter of the Co-Operative Movement in India
  2. Early History of the Co-Operative Movement in India
  3. The Act of 1904
  4. The Act of 1912
  5. Maclagan Committee
  6. The Depression and the Co-Operative Movement in India
  7. The Second World War
  8. The Co-Operative Planning Committee
  9. Causes of Slow Progress

1. Subject-Matter of the Co-Operative Movement in India:


The Co-operative Movement in India was born out of the distress and turmoil that prevailed in the last quarter of the 19th century. The Industrial Revolution had given a death blow to village industries and driven people to agriculture, the only avenue of employment and livelihood. The consequent sub-division and fragmentation of holdings had made agriculture an uneconomic proposition.

This, combined with the rigidity of land revenue collection, uncertainty of rainfall and, therefore, of crop production, compelled the agriculturist to knock at the door of the money-lender who advanced money cither by purchasing the crop at a throwaway price or by charging a sky-high rate of interest.

The deteriorating condition of farmers under the heavy strain of increasing indebtedness and frequent famines not only proved the inadequacy of legal measures but also emphasised the need for the provision of cheap credit through an alternative agency.

2. Early History of the Co-Operative Movement in India:


The prevalence of widespread distress in the country, the growing volume of rural debt and the machinations of the money-lender led to certain voluntary efforts in the field of rural credit. In the Madras Presidency were organised ‘Nidhis’ or Mutual-Loan Associations.

Based on the Co-operative Principle, these associations achieved considerable success. By 1901, there were 200 nidhis with more than 36000 members and subscribed capital of more than 2 crores of rupees. In the Punjab, a society on co-operative lines was started as early as 1891 at Panjawar in Hoshiarpur district for controlling .

The common land of the village for the benefit of the co-sharers and functioned (ill 1922 when the land was partitioned. Another society started in 1895 embraced 22 villages? The state of Mysore introduced Agricultural Banks’ in 1894, while U.P. saw the establishment of village banks and the beginnings of distributive co-operation.

All these efforts were purely voluntary, strictly non-official, and, at best, en­joying only govt’s patronage. The first official step was taken when Sir William Wedderburn made, after the Deccan riots, the proposal for the establishment of agricultural banks as a remedy against rural indebtedness.


In 1881, some Bombay capitalists drew up a scheme for starting an agricultural bank in Poona. Even a bill to that effect was introduced in the Legislative Council by Mr. Mandlik. Meanwhile, Wedderburn tried but failed to enlist public support for his scheme and it could not take practical shape.

The interest of the govt. now turned to voluntary mutual credit associations modelled on Raiffeisen co-operative societies of Germany.

In 1892, the Madras Govt. deputed Fredrick Nicholson to Germany “on special duty for the purpose of enquiring into the possibility of introducing into this Presidency system of Agricultural or other land banks.”

In his Report, Nicholson stressed the point that “the substitution of organised credit for that of the money-lender is a necessary development of civilisation —the individual system must be eventually passed as general wealth, order, business confidence, and habits of business associations develop.”

As to I he form it should lake, Nicholson favoured the establishment of co-operative societies based on Raiffeisen model. He, therefore, summed up his report in the two words: “Find Raiffeisen.” The Govt., however, took no immediate action on the report which was submitted in 1895.

While Nicholson’s enquiries were in progress, Mr. Dupernex began ex­perimenting with ‘Peoples Banks’ in U.P., Maclagan; and Crosthwaite started similar societies in Multan district of the Punjab and Mr. Lyon in Bengal.

The interest shown by local agriculturists in these societies and the powerful support lent by the Indian Famine Commission (1901) induced the govt. to set up a committee under the presidentship of Sir Edward Law to report on the introduction of co-operative societies in India. The Committee reported favorably in 1903 and the first co-operative Societies Act was passed in 1904.

The main provisions of the Act were as follows:

3. The Act of 1904:


(1) Any ten persons living in the same village or town or belonging to the same class or tribe could form a co-operative credit society ‘for the en­couragement of thrift and self-help among the members’.

(2) Societies were classified as Rural and Urban. A society in which 80% of the total membership was agricultural was classed as rural, and the one in which 80% of the membership was non-agricultural, was classed as urban.

(3) Rural society was to have unlimited liability but urban societies were free to opt for either limited or un-limited liability.

(4) Rural society was not permitted to distribute profits, but in the case of urban societies, profits could be distributed after carrying 25% of the net profits to the Reserve Fund.


(5) Loans could be made only to members usually on personal security or on the security of some immovable property.

(6) Loans could also be made by one credit society to another with the sanction of the Registrar.

(7) No member could hold shares in a society for more than Rs. 1000.

(8) The organisation and control of the movement in each province was put under the charge of a Registrar of Cooperative Societies.


(9) The societies were exempted from the payment of stamp and registration duties as well as the Income Tax.

Even with the passing of the Act, the movement did not make the progress expected of it. By 1911, there were only 8177 credit societies all over the country with a share capital of Rs.50.5 lakhs and a membership of a little over 4 lakhs. For this, the fault lay with the Act itself.

In the first place, it permitted the registration of only credit societies but gave no legal protection to non-credit societies. Secondly the Act, unlike the Wedderburn’s scheme of Agricultural Banks, made no provision for mobilising urban savings for financing agricultural operations. Institutions like central banks or unions could have been very useful in this respect but the act did not permit their establishment.

That is why these societies suffered from a great paucity of funds, their entire working capital being “less than the rural indebtedness of a single taluk in many parts of India.” In the third place, the classification of societies into urban and rural was found to be arbitrary, unscientific, and highly inconvenient.

Fourthly, the prohibition regarding the distribution of profits in rural unlimited societies was a hardship especially in the Punjab and Madras where share capital had become important.

Fifthly and lastly, a good many provisions of the Act of 1904, as interpreted by the Courts, became a hindrance to the further spread of the movement. These drawbacks were removed by the passing of the second Co-operative Societies Act in 1912.


4. The Act of 1912:

Under this Act:

(1) Any society, credit or otherwise, could be registered which had as its objective, the promotion of the economic interest of its members.

(2) A federal society like the central Bank or union could be registered.

(3) Unless otherwise directed, the liability of central societies was to be limited and that of rural credit societies un-limited.

(4) No member could have more than 1/5 of the total share capital or hold share exceeding Rs. 1,000 in such a society.


(5) The societies were granted exemption from compulsory registration and from the payment of income tax and stamp duties.

(6) 1/4 of the net profits of a society were to be carried to its reserve fund.

(7) Co-operative Societies were given the first claim to enforce the recovery of certain dues.

(8) Requirements of annual audit were retained, as were numerous other provisions of the Act of 1904.

The enlargement of the functions infused fresh life into the movement and it did not “take long to outgrow the dreams of its founders.” The number of co-operative societies rapidly grew to 15000 and their membership to 6,95,000 in 1914.

A number of new societies sprang up for such purposes as the sale of agricultural produce, cattle insurance, the purchase of seeds, manures and im­plements, and the promotion of irrigation projects. District unions of primary societies and central banks began to be established. Loan, policy was liberalised and, from 1914, co-operative societies were authorised to grant loans even for ‘domestic occasions.’

5. Maclagan Committee:


These fast changes rapid growth obliged the govt. to take stock of the situation and, accordingly, a committee headed by Sir Edward Maclagan, was appointed in 1915, to study and report whether the movement was proceeding on economically and financially sound lines.

The Maclagan Committee, in its report, emphasised the need for proper selection of members, knowledge of co-operative principles, honesty, proper audit, careful scrutiny of loan applications, one man, one vote, thorough audit to prevent bad management and embezzlement and prompt repay­ment of loans.

Its report, submitted in 1915, resulted in reorganization and thorough overhauling of the whole administration of Co-operation. Attempt was made to eliminate societies which did not live up to the ideals of co-operation, and in particular, to insist upon prompt repayments.

Under the Reforms Act of 1919, co-operation became a transferred subject with the result that the control and direction of the movement passed entirely into the hands of the new Provincial govts.

This gave the movement the advantage of greater flexibility since it could now be adapted in accordance with the needs of every province. Besides, advanced provinces could no longer be held back by the backward ones.


Several provincial govts, set Up special enquiry committees, important among them being the Oakden Committee of U.P., King committee of C.P., Townsend committee of Madras and the Calvert committee of Burma.

Many provinces, realising the inadequacy of the Act of 1912, decided to replace it with acts of their own. Bombay govt. was the first to have a separate Act in 1925 followed by Burma and Madras which enforced their separate acts in 1927 and 1932 respectively.

The Royal commission on Agriculture also emphasised the need for strengthening the movement for, according to it, the best hope for progress and prosperity of the agriculturist in India lay in co-operation. “If co-operation fails, there will fail the best hope of rural India.”

It was this deep and comprehensive realisation of the difficulties of cooperative movement that led the govt. of India to establish an Agricultural Credit Department in the Reserve Bank of India in 1935.

The period between 1913-14 to 1927-28 was one of substantial progress in the field of cooperation. The number of societies increased from 14881 to 96091, membership from 6.96 lakhs to 37.80 lakhs and working capital from rupees 7.44 crores to rupees 76.70 crores.

In other words, the growth was by over 6 times in the number of societies, more than 5 times in membership and by about 10 times in working capital. The period is also significant for the birth of the Land Mortgage banking in India, the first such bank having been established at jhang in the Punjab in 1920.

Heartening as the progress was, the movement was yet inadequate. It affected a small proportion of the rural population ranging from 1.8% in U.P., to 36.2% in coorg. Among the major provinces, the Punjab and Bombay stood highest with a record of 11% and 10% respectively while U.P., and C.P. stood at the bottom with only 1.8% and 2.4% of the rural population having been covered by the movement.

Broadly, the movement made greater progress in the roytwari areas of Punjab, Bombay and Madras where the agriculturist had mortgageable rights in land than in the zamindari areas of U.P., Bihar and Orissa and Bengal where he had nothing to offer but his personal security.

6. The Depression and the Co-Operative Movement in India:

The onset of the depression ‘imposed on the movement a much severer strain than it had ever had to face before’. The precipitate fall in the prices of agricultural commodities adversely affected the economic condition of the agriculturists.

Their repaying capacity dwindled. The demand for loans increased while the proportion of overdoes mounted up from 20% in 1927—28 to 40% in 1932—33. In Madras, more than 60% of the short-term loans fell in arrears.

This threw the entire movement in a very precarious state with many societies and central banks winding up their affairs. An investigation by Sir Darling showed that up to the end of 1934, 24% of the total number of societies started since the beginning of the movement had gone into liquidation—the percentage varying from 9 in Bengal to 49 in C.P. and Berar.

The timely help provided by some of the provincial govts, considerably helped the movement to tide over the crisis created by the depression.

7. The Second World War:

With the rise in prices and the return of agricultural prosperity during world war II, a new chapter opened in the progress of the movement. Between 1938-39 and 1945-46, the number of societies rose from 1.22 lakhs to 1.72 lakhs; membership from 53.7 lakhs to 91.6 lakhs and working capital from rupees 106.45 crores to 164.0 crores.

This amounted to a 41% rise in the number of societies, 70.6% in membership and 54% in working capital.

The progress may also be judged from the fact that in 1945-46, there was one society for very 3.8 villages and 10.6% of their population as against only one society for 5.4 villages and 6.2% of their population in 1938—39.

The overdoes were repaid and the demand for new loans fell with the result that many societies and central banks came to possess surplus funds for which they were keen to find profitable outlets of investment.

The most notable contribution of the war was the shifting of emphasis from credit to non-credit aspect of the movement, the percentage of non-credit societies having increased from 17 in 1938—39 to 23 in 1945-46.

The shortage of consumer articles like sugar, cloth, Kerosene and matches led to the establishment of a large number of consumer’s Co-operative Stores. Similarly, many new types of producers’ societies like weavers’ co-operative societies marketing societies, Fruit grower and cane-Grower societies, Motor transport societies came to be formed.

The war period also saw a growing trend towards the establishment of multipurpose co-operative societies.

In short, the war broadened the functional range of the movement and brought about a shift from the lopsided emphasis on the credit aspect to the productive and distributive functions or to its multipurpose poten­tialities and thereby imparted that ‘richness and balance’ which was so necessary for its proper development.

8. The Co-Operative Planning Committee:

In 1945, the govt. appointed the cooperative planning committee to draw up a plan of cooperative development in the country. The committee, which was presided over by R.G. Saraiya, fixed an overall target of bringing 50% of the villages and 30% of the rural population within the scope of the movement in a period of ten years.

With the achievement of Independence and the advent of planning, the role of cooperatives underwent a radical change.

Co-operation no longer signified a ‘series of activities organised on cooperative lines’ but it was acknowledged as an organisation that could play ‘a very useful role in the promotion of economic and social democracy and in the implementation of democratic planning in the country.’

In order to equip the movement for its new role, it was necessary to formulate a long term policy in regard to its structure and organisation. It was in this context that the Rural credit survey Committee was appointed in 1951.

The committee put forward an integrated scheme of rural credit based on:

(a) ‘State partnership at different levels;’

(b) ‘Full coordination between credit and other economic activities, especially marketing and processing;’

(c) And administration through adequately trained and efficient personnel, respon­sive to the needs of the rural population. This scheme was approved and accepted as the basis for the future development to be incorporated into the second Five year plan.

A notable shift in policy occurred in 1958 when the National Development Council passed a ‘drastic and sweeping’ resolution” which in effect, led to the rejection of the old large-sized credit society and the emergence of small sized ‘Service Cooperatives’.

Over the period of the three Plans, the co-operative movement made rapid progress.

The number of societies of all types increased from 1.8 lakhs to 3.47 lakhs; membership rose from 137 lakhs to 503 lakhs and their working capital expanded from Rupees 276 crores to rupees 2800 crores. In other words, there was a near-doubling of the number of societies, a more than 3½ times increase in membership and a more than 10 times rise in working capital.

This growth was, however, not equally shared among all the states. The progress was more marked in the Stales of Maharashtra, Gujarat, Tamil Nadu, Punjab and Madhya Pradesh. The movement was, however, weak in the eastern region comprising the states of Assam, Bengal, Bihar, Orissa, Manipur and Tripura.

The uneven progress was reflected in wide differences in the per capita loan distribution to rural population which ranged all the way from rupees 33 in Maharashtra to just two rupees in Bihar and Assam.

A most welcome development during the plan period was the diversification of the movement. A major breakthrough was witnessed in the field of agricultural marketing and processing. The development of consumer’s Stores and industrial co-operatives was also significant.

This can be judged from the fact that in 1965-66 the number of stores stood at 13077, membership at 33.32 lakhs and sales at 162.30 crores of rupees. In the sphere of industrial co-operatives, there were 78 sugar factories, 142 rice mills, 155 cotton ginning and pressing societies, 298 oil crushing and 329 Paddy husking societies in 1965-66.

The co-operative movement, during a span of over six decades, had come a long way. From humble beginnings in 1904, it had expanded into a mammoth organisation covering 85% of villages and 33% of the rural population of the country. In 1961-62 it met 25.8% of the credit needs of the agriculturists as against 3.1% in 1951-52.

The average Loan advanced per member had increased from rupees 44 in 1950-51 to rupees 137 in 1965-66. Apart from providing finance, the movement had diversified into such fields as agricultural production, marketing and processing, small and medium industries, housing, transport, and distribution of essential commodities.

And yet it failed to ‘convulse’ the country. More than 60% of the rural population was still outside its fold and for nearly 75% of his credit needs, the cultivator was dependent on agencies other than the co-operative society.

The movement had neither materially reduced the burden of the agricultural’ debt nor their dependence on the money-lender. It even failed to improve their self-reliance, resourcefulness, or capacity for concerted action. In the words of Dr. Gadgil, “over large areas, was a sense of disillusion regarding the actual performance of the co-operatives.” What was the cause? Where had the movement gone wrong?

9. Causes of Slow Progress:

i. Lack of Knowledge:

Knowledge of the principles of co-operation is an essential condition for the success of the movement. In most cases, however, this condition was not fulfilled. Members did not understand and appreciate the aims, objectives, and the pos­sibilities of the movement. They joined a society only as ‘clients of convenience’ and deserted it after their needs were met. There was no genuine urge to develop the movement.

ii. Small Size:

An other reason for the poor performance of the movement was that “a large number of primary agricultural credit societies were neither viable nor even poten­tially viable and must be regarded as inadequate and unsatisfactory agencies for dispensing production oriented credit.”

iii. Rapid Growth:

The qualitative aspect of the movement suffered on account of the ‘waves of promotional enthusiasm’ which superimposed co-operative societies by the thousands on villages where patient work had not laid the foundations for successful growth. This policy of hurried expansion or ‘target hunting’ led to the formation of a number of societies which were either still born or suffered an early death.

iv. Uninspiring Leadership:

A major factor responsible for the poor performance of the movement was the lack of “competent leaders on a scale commensurate with the considerable expansion” that took place in the movement.

The leadership thrown up by the movement was inadequate, incompetent, faction-ridden and lacking in knowledge, integrity, and dedication. No wonder, that the movement continued to be dominated by money-lenders and others who used its funds to promote their own ends, financial or political.

v. Lack of Supervision, Audit and Inspection:

Another defect was that the co-operative societies were neither strictly supervised nor properly audited. From non-existent or ineffective supervision arose many other weaknesses such as ‘book adjustment of debts, bogus loans, misutilisation of credit, and failure to effect recoveries’ and window-dressing. Even where accounts were properly audited, audit objections were seldom attended to.

vi. Lack of Spontaneity:

To co-operative movement was officially sponsored in 1904. Ever since its birth, it remained govt., controlled, govt. financed and govt. directed. This rigid official control and interference did great harm in the sense that it provided few opportunities for the people to learn to do things for themselves, to develop a spirit of self-reliance and self-dependence.

In the words of Pandit Nehru, “if govt., money comes, that money is followed by govt. officials the petty official becomes not only the petty boss but big boss.” The movement, therefore, func­tioned at best as a govt., department ; it never developed into a genuine people’s movement.

vii. Lack of Proper Atmosphere:

Co-operation is a democratic movement based on the principle of equality. But the socio-economic background of the Indian village, especially in areas with long-standing feudal relations, was hardly conducive to its proper functioning and healthy growth.

The caste system, inadequate spread of literacy, and types of land tenures prevailing in certain areas, prevented the co-operative institutions from operating strictly in accordance with democratic principles. This was par­ticularly the case where there were large disparities between members not only in economic terms but also in respect of factors such as influence, authority and social status.

The movement would have succeeded had it incorporated a frontal attack on the existing power structure in the village. It instead aimed at improving conditions without disturbing the socio-economic set up. No wonder, the move­ment failed to take roots or grow rapidly.

viii. Piecemeal Approach:

According to Dr. Gyan Chand, the failure of the movement was largely due to co-operation having been conceived and worked in a ‘fragmentary way’. Rural credit, marketing, small industries, better farming, production and distribution of milk, animal husbandry, irrigation, processing all were treated in isolation; the interrelations of these activities or their bearing on one another or on the rural economy as a whole were never kept in mind. This “gravely hampered in the realisation of their potential.”

ix. Defective Loan Policies and Procedures:

Loan policies and procedures followed by co-operative institutions were not adopted in accordance with the much publicized crop-loan system. Loans were mostly given on the security of land and not on anticipated crop.

The entire amount was given out in lump sum instead of being paid in instalments; loans were generally given in cash and not in kind. In addition, there were inordinate delays in the disbursement of loans. These defective, cumbersome, and dilatory procedures and policies made the societies unpopular and stood in the way of the speedier growth of the movement.

x. Structural Obsolescence:

The co-operative organisation was based on the principle of federalism under which local societies were federated into a secondary society which, in turn, federated into a tertiary and finally a national society.

Whatever its other ad­vantages, this system, in practice, became ‘self-defeating’ in as much as the weaknesses of the local unit got pooled at the secondary society level with the result that the secondary institutions, instead of facilitating the working of the primaries, became a drag on them.

xi. Inefficient Management:

Most of the general ills from which co-operative institutions suffered such as the lack of proper accounting, irregularities of loans, maintenance of records, were largely due to a lack of trained and qualified staff. In 1965-66, only 14% of the societies had full-time paid secretary—manager.

Even the working of higher institutions suffered on account of the dearth of trained and qualified personnel. Despite the introduction of training programme, the quality of staff in the co­operative institutions had not attained a high standard of efficiency.

Recruitment was not based on merit but on a candidate’s capacity to pull wires. That is why there were complaints of inefficiency, graft, corruption and accumulation of over-dues.

xii. Absence of Self-Help:

One of the major failures of the movement was its inability to develop the habit of thrift and savings amongst its members. This may be seen from the fact that, in 1965-66 the share of borrowings in the working capital of credit societies was 66%, the percentage of owned funds to working capital being only 27%.

This means that the movement was not self-sufficient or self-financing but had degenerated into a conduit for channeling stale funds. This too much dependence on slate finances had made the co-operative societies “a semi-state organisation in which there was hardly any initiative, auto activity, or autonomy__”.

xiii. Over-Dues:

Another very disquieting feature of the movement was the incidence of over- dues. From a small figure of rupees six crores in 1950-51, they mounted to rupees 125 crores in 1965-66, recording a more than 20 times increase. The proportion of over-dues to out standings also went up from 22% in 1950-51 to 29% in 1965-66.

Even in an advanced state like Maharashtra, over dues con­stituted 21% of the outstanding loans in 1964-65. It was the failure in this respect (over dues) that mainly accounts for the stagnation in the movement.

xiv. Vested Interests:

A more disturbing trend, however, was the domination of co-operative in­stitutions by group politics. Communalism and casteism were other factors eating into its vitals.

The result was that either a society did not do much work or there was favouritism and nepotism in the grant of loans restricting the benefits to favoured members. There were instances where members of rival faction persuaded people not to repay their dues.

As commerce pointed out, the sudden rise of over-dues in 1961—62 was directly connected with the general election of 1962. Political interests were thus affecting the working of co-operative in­stitutions in various ways causing credit to be denied to certain groups and providing it to others in violation of all rules in force. This led Jaya Parkash Narain to condemn co-operative societies as “tools of self-aggrandizement.”

xv. Benefit to the Rich:

The gravest flaw of the movement was that it had become ‘a combination of the strong not for the week but against them.’ It had been almost completely captured by the rich and middle farmers with the result that credit went beyond the reach of precisely those who needed it the most but whose assets were scanty.

On the other hand, it was readily available to the few men of means. In the yeotmal district of Maharashtra in 1965-66, only one percent of the total area covered by short term credit belonged to holders of five acres and less while 65.7% belonged to holders of 20 acres and above. Co-operative credit thus became an instrument for accentuating rather than mitigating inequalities.

The most fundamental cause responsible for the failure of the movement was the basis of credit. While in theory, co-operative credit was personal-credit based upon the character and repaying capacity of the cultivator; in actual practice, a higher proportion of the advances in many cases was against the security of land.

The landless peasants and agricultural workers, who need credit the most but have no land to offer, received little benefit. They, therefore, turned to the money­lender.

These imperfections and weaknesses notwithstanding, the co-operative move­ment in India still remains an excellent potential instrument for the economic and social emancipation of the poor and the weak. If the movement did not achieve the required degree of success, it was not because the principles of co­operation were not sound, but because “these were honoured more often in their neglect than in their execution.”

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