[Kurukshetra January 2023 Summary] Cooperatives to FPOs: A Paradigm Shift – Explained, pointwise

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The cooperative movement is a voluntary movement of the people. The movement has been carried out democratically by pooling together of resources for completing a given activity. The purpose is to achieve or secure certain benefits or advantages that people cannot get individually. Cooperative Movement also aims to promote specific virtueS and values such as self-help, mutual help and general goods of all. The history of cooperatives in India is more than a century old. In agricultural development, the cooperatives have contributed significantly to the Green and White Revolutions. However, the cooperative experience in India has been varied over space and time, as they have largely been State-sponsored, with a focus on welfare. Indian agriculture is dominated by small and marginal farmers accounting for nearly 86.66% of the total operational land holdings (Agricultural Census, 2015-16). The challenges faced by the small and marginal farmers are multi-fold that can be addressed through farmers’ collectives in the form of Farmer Producer Organisations (FPOs)/ Farmer Producer Companies (FPCs). FPOs are presently being viewed as a beneficial alternative to cooperatives, with the main goal of encouraging smallholder commercialisation and boosting farm incomes. The primary objective of this initiative is to increase the collective negotiating power of small and marginal farmers.


A cooperative is “an autonomous association of persons united voluntarily to meet their common economic, social and cultural needs, and aspirations through a jointly owned and democratically-controlled enterprise”. The salient features of Cooperatives are:

First, Cooperatives are people-centred, enterprises owned, controlled and run by and for their members. Cooperatives bring people together in a democratic and equal way.

Second, Cooperatives are based on the values of self-help, self-responsibility, democracy, equality, equity, and solidarity.

Third, Cooperatives are democratically managed by the ‘one member, one vote‘ rule; members share equal voting rights regardless of the capital they put into the enterprise.

Fourth, Cooperatives with the principles of fairness, equality, and social justice allow people to work together to create sustainable enterprises that generate long-term jobs and prosperity.

Cooperative Movement

Cooperative is one of the most significant social innovation since the 18th century. The first documented cooperative was started in 1769 at East Ayshire in Europe. However, with the establishment Rochdale Principles in 1844 (Seven Golden Principles of Cooperatives), modern cooperatives developed and spread across the globe encompassing all the sectors of the economy.

Seven Golden Principles of Cooperatives FPOs UPSC

Pre-Independence: Indian cooperative movement started during the pre-independence period (1890) as a Maharashtra farmers’ movement against the money lenders. With the enactment of the Cooperative Credit Societies Act, 1904; the Cooperative Societies Act, 1912; the Government of India Acts 1919 and 1935 and the Multi-Unit Cooperative Societies Act, 1942, the structured development of cooperative societies was shaped through the provincial independence.

Post-Independence: Cooperatives were made an integral part of the Five-Year Plans (FYPs). Indian planners considered cooperation as an instrument of planned socioeconomic development. Indian constitution has enacted provisions for cooperative development through Article 43 of Directive Principles of State Policy, Article 14 (right to equality) and Article 19(1)(c) as right to form associations or unions.

Task Force on ‘Revival of Cooperative Institutions‘ in 2004 by the RBI (under the Chairmanship of A. Vaidyanthan) was an important landmark in the history of cooperatives in India. The Indian cooperative sector has completed 118 years of its existence in 2022 (since its first legislative enactment in 1904). In all these years, the legislative environment and framework has been one of the most important dimensions of cooperative sector’s development. The government is formulating a new national level policy for cooperatives.

Agricultural Cooperatives

An agricultural cooperative, commonly referred as a farmers’ cooperative, is a cooperative through which farmers pool their resources for their farming activities. There are two types of agriculture cooperatives.

Agricultural Production Cooperatives: They are classified into three types viz., Cooperative Tenant Farming Societies, Cooperative Joint Farming Societies, and Cooperative Collective Farming Societies.

Agricultural Service Cooperatives: They are classified into two types viz., Supply Cooperatives and Marketing Cooperatives. Supply Cooperatives supply their members with inputs (seeds, fertilisers, fuel, and machinery services) for agricultural production. Activities like transportation, packaging, pricing, distribution, sales and promotion of farm products (both crop and livestock) are looked after by the Marketing Cooperatives.

The agricultural service cooperatives play a useful role by maintaining a constant flow of essential agricultural services like: (a) Supply of farming requirements in terms of improved seeds, fertilisers, implements etc.; (b) Supplying and maintaining the agricultural machinery on hire; (c) Providing essential household needs; (d) Encouraging thrift and savings among the members to make them self-sufficient.

The National Commission on Agriculture (1976) had recommended the setting up of Farmers Service Cooperative Societies with the active collaboration of the nationalised banks.

Development of Credit Cooperatives: Farmers also rely on credit cooperatives for both working capital and investments. In India, credit cooperatives have evolved hierarchically into a three-tiered structure with: (a) Primary Agricultural Credit Societies (PACS) at the base/ village level; (b) District Central Cooperative Banks (DCCB) at the district level; (c) State Cooperative Banks (SCB), at the State level.

The broad aim of PACS is achieved by: (a) Promoting savings among members; (b) Providing loans to the members; (c) Supplying agriculture and domestic requirements; (d) Arranging for the marketing of their agriculture produce.

National Cooperative Development Corporation (NCDC) Act, 1962 guides the planning and promoting programmes for the production, processing, marketing, storage, export and import of agricultural produce ,foodstuffs, industrial goods, livestock, certain other commodities and services on cooperative principles. Since inception till March 2021, NCDC has disbursed INR 1.77 lakh crore to cooperatives for their development. Finance schemes of NCDC cover activities like agro-processing, credits, inputs, computerization, storage, cold chain, sugar, dairy, livestock, renewable energy, rural housing etc.

Farmer Organisations (FO)

Several organisational prototypes have emerged from integrating marginal and small farmers into the value chain to decrease transaction costs and increase incomes. One such alternative is Producer Organisations/ Farmer Organisations (FOs), which enable farmers to organise themselves as collectives. There are many types of FOs.

Community-Based, Resource-Orientated FOs: They are village-level cooperatives or associations dealing with inputs needed by the members and the resource owners to enhance the productivity of their businesses based on land, water or animals. These organisations are generally small, have well-defined geographical areas, and are predominantly concerned about inputs. However, the client group is highly diversified regarding crops and commodities.

Commodity-Based, Market-Orientated FOs: This type of FOs are specialised in a single commodity and opted for value-added products, expanding markets. They are designated as output-dominated organisations. Their members are generally regional growers of that commodity who are interested in investing some share capital in acquiring the most recent processing technology and professional human resources. These FOs are generally large and operate in a competitive environment. Research, input supply, extension, credit, collection of produce, processing, and marketing are all integrated to maximize the returns on the investments of the members who invested in the collective enterprise. The profits generated are used to provide supplementary and supportive services at a reduced cost to encourage members to use them. Common examples include Grape growers’ associations, Onion Growers’ associations, Mulkanoor cooperative marketing society, Amul Milk and other Dairy FOs etc.

Farmer Producer Organisations (FPOs)

In India, agricultural production involves a number of risks for small and marginal farmers. FPO/FPC is a new aggregation model for smallholders that replaces cooperatives. FPO links small and marginal farmers to markets by strengthening forward and backward linkages.

FPOs are distinguished from Cooperatives in terms of membership, governance, and business strategy. Due to a hybrid business model (between a private company and a cooperative), the institutional structure of FPOs restricts membership to only primary producers who contribute equally to the FPO’s operating capital and democratically govern it by sharing equal voting rights.

The Board of Directors is elected or appointed by the FPO’s general body for a specified term. The Board directs the hired outside experts to run the day-to-day operations.

The primary goal of an FPO is to organise small and marginal farmers for (a) Backward linkages of inputs like seeds, fertiliser, credit, insurance, information, and extension advisory services; (b) Forward linkages for things like collective marketing, processing, market-led agricultural production, etc.

Promotion of FPOs: FPOs emerged as farmer collectives in 2003 under the provisions of the Companies Act. Based on the recommendations of the Y.K. Alagh Committee, the Government of India passed the Producer Companies Act in 2002 by inserting a new section IXA into the Indian Companies Act, 1956. The Producer Companies Act instils in management a professional attitude while enshrining the cooperative culture and fundamental principles.

During 2011-12, the Department of Agriculture, Cooperation, and Farmers’ Welfare (DAC&FW), Ministry of Agriculture and Farmers’ Welfare (MoA&FW) launched a pilot programme to promote FPOs through two sub-schemes of the Rashtriya Krishi Vikas Yojana (RKVY), namely the National Vegetable Initiative for Urban Clusters and the Pulses Development Programme for 60,000 rained villages.

In 2013, the Government of India developed and issued a national policy and process guidelines for FPOs. However, FPOs have faced challenges such as a lack of market access and credit connections, insufficient financial support, managerial skill etc.

The Government of India has developed a special central sector initiative called ‘Formation and Promotion of 10,000 FPOs‘ for nationwide implementation during the year 2021, with a total budgeted outlay of INR 6,865 Crores. According to the plan, establishment and promotion of FPOs is based on Produce Cluster Area Approach and the strategy based on specialised commodities. FPOs will be formed using a cluster-based strategy with the motto ‘One District, One Product‘ to foster product specialization. This scheme allows FPOs to register under Companies Act, 1956 or under the State’s Cooperative Society Act. Professionally managed Cluster Based Business Organizations (CBBOs) will provide five years of handholding.

Formation and promotion of FPO will be based on produce cluster area which includes geographical area where product is grown. To qualify for this scheme, minimum 300 farmers in plains, and 100 farmers in North-Eastern and hilly areas must be members of an FPO.

FPOs will promote processing, branding, marketing, and product export for better price realisation. FPOs will adopt a cluster-based approach for produce/product mix and ‘One District One Product’ approach for product specialisation. FPOs can federate at the district, state, or national level to process, brand, and market produce/commodities for scaling up, survival, and growth in a competitive environment.

Formation and development of FPOs is the responsibility of 3 agencies; The Small Farmers’ Agribusiness Consortium (SFAC), the National Cooperative Development Corporation (NCDC), and the National Bank for Agriculture and Rural Development (NABARD).

FPOs formed and promoted by the SFAC and the NCDC are registered under the Companies Act and the States’ Cooperative Societies Act respectively. FPOs promoted by NABARD are registered under either Act. It helps FPOs get financial institution credit for projects and working capital for business growth. The dedicated Credit Guarantee Fund (CGF), managed by NCDC and NABARD, provides adequate credit guarantee coverage to speed up institutional credit to FPOs by relieving financial institutions loaning to

Activities of FPOs: FPOs are formed to leverage collectives through economies of scale in production and marketing of agricultural and allied sector produce. FPOs provide value-added services like cleaning, assaying, sorting, grading, packing, storage, farm-level processing, and transportation facilities based on user-charges at a reasonable rate.

They also encourage seed production, mushroom cultivation, beekeeping, aggregation, value addition, and marketing smaller quantities of member farmers’ produce for better marketability. For strengthening marketing channel, they provide market information for production and marketing decisions and shared-cost logistics services like storage, transportation, loading/unloading, etc.

FPOs/PCs are gaining popularity among farmers/producers and promoting agencies due to their many advantages over producers’ cooperatives.

According to the SFAC report on State-wise progress of FPOs (2021), approximately 900 FPOs have involved approximately 9 lakh farmers. However, the numbers vary greatly across States. Madhya Pradesh and Maharashtra have the highest number of farmers mobilised per FPO. 6 states account for more than half of all farmers mobilised (Karnataka, Madhya Pradesh, Maharashtra, West Bengal, Rajasthan, and Uttar Pradesh). Madhya Pradesh, Karnataka, and Maharashtra are also at the top of the list in terms of the number of FPOs, accounting for more than 33% of all FPOs promoted by SFAC. Through the recently approved central sector scheme, the Government of India has given a strong push to form and promote 10,000 new FPOs over the next five years.

Way Forward

One of the most efficient methods to address agriculture’s various issues is to group producers, particularly small and marginal farmers, into producer organisations. This improves farmers’ access to investments, technologies, inputs, and markets. FPOs have the potential to be the most suitable institutional structure for energising farmers and enhancing their ability to pool their production and marketing resources. Productivity and income of farmers are increased through efficient, cost-effective, and sustainable resource use and realising higher returns for their produce. However, a high calibre of representative and enlightened leadership is required among the grower members. It is challenging and demanding to conceive, design, build, and nurture it. Sustainability of FPOs is vital; group dynamics and effectiveness at different stages of development and their determinants hold significance. Through government-supported collective action, productive cooperation with academic, research organisations, civil society, and private sector, Cooperatives and FPOs will be key for building a prosperous and sustainable agriculture sector.

Source: Kurukshetra January 2023

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