Federalism and cooperatives

Synopsis: SC verdict has brought clarity in the regulation of co-operatives. Also, it has firmly stated that Reforms in the cooperative sector should not be at the cost of federal principles.

Background

• In a landmark judgment, 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 97th Constitution Amendment & Part IX(B)

• The 97th Constitution Amendment came into effect in 2012. It was a major step towards infusing autonomy, democratic functioning, and professional management.
• Part IXB delineated the contours of what State legislation on cooperative societies ought to contain, such as
  • Provisions on the maximum number of directors in each society,
  • Reservation for seats for SCs, or STs, and women,
  • Besides, the duration of the terms of elected members, among others.

Why the Constitution (97th Amendment) Act, 2011 was struck down?

• The Parliament had passed the 97th Amendment without sending it to the states for ratification by at least half the state legislatures.
• Since co-operative societies were part of the State List of the Constitution, the 97th Amendment violated the basic structure of the Constitution.
• The Supreme Court, by a 2:1 majority, upheld the judgment holding the amendment invalid, but only in relation to cooperatives under the States.
• The elaborate amendment would hold good for multi-State cooperative societies, on which Parliament was competent to enact laws.

Principle of Checks and Balance

• 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 has reiterated that the Parliament cannot make laws on state subjects without shifting them to the Concurrent List or the Union List. Except in cases of national interest, under Article 249.
• The court reasoned that even well-intentioned efforts towards reforms cannot be at the cost of the quasi-federal principles underlying the Constitution. Permitting such an action would undermine the entire federal structure of the country.

What would be the impacts of this judgment?

• 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, had written to the prime minister, arguing against the September 2020 amendments to the Banking Regulation Act, 1949.
• The act strengthens the Reserve Bank of India’s (RBI’s) powers to regulate cooperative banks.
• These regulatory changes will now have to be re-examined in 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.

What is the Way forward?

• The functioning of the Cooperative sector is hampered by political interference, lack of regular elections, etc. The cooperative movement certainly needs reform and revitalisation.
• There is no denying that the scope for democratising the functioning of cooperative societies and enhancing their autonomy remains unchanged.
• 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-capitalized. It is also necessary for consumer protection.

Conclusion:

The Supreme Court’s order may have made it harder to ensure cooperative banks are properly regulated. Nonetheless, the Centre must find another way to do so in keeping with constitutional principles.