OPERATION PACS
This year's Union Budget signalled reboot of the Primary Agricultural Credit Societies (PACS) as the force multiplier of change in rural India. EPISODE #112
Dear Reader,
A very Happy Monday to you.
The big headline in this year’s Union Budget was the giveaways to the middle class. However there was an equally transformative Budget proposal, which may have been overlooked in all the buzz over the middle class.
And this is about the Budget moving the needle on the ongoing makeover of the country’s cooperative movement.
Finance Minister Nirmala Sitharaman put the spotlight on Primary Agricultural Credit Societies (PACS) when she announced the roll-out of 2 lakh new ones over the next two years and to provide a multi-purpose PACS in every panchayat.
Effectively she has identified PACS to be the force multiplier of transformation in India’s rural economy. So this week I dwell on this policy pivot and the attendant implications. Do read and share your feedback.
The inspiring cover picture this week of an Indian farmer is sourced from Unsplash and taken by Deepak Kumar. Thank you Deepak.
A big shoutout to Ranjini, Premasundaran and Vandana for your informed responses, kind appreciation and amplification of last week’s column. Once again, grateful for the conversation initiated by readers. Gratitude also to all those who responded on Twitter and Linkedin. Reader participation and amplification is key to growing this newsletter community. And, many thanks to readers who hit the like button😊
THE FORCE MULTIPLIER
Historically the Primary Agricultural Credit Societies (PACS) are the bottom-tier of the supply chain for short-term credit in rural India—the two tiers on top of it are the District Central Cooperative Banks (DCCBs) and State Cooperative Banks (SCBs)—and are made up of farmers.
The way it works is that PACS mobilise funds from its farmer members and then on-lend the proceeds for short-term crop loans at subsidised rates. If they fail to mobilise sufficient resources to fork out the loans, they move up the supply chain to tap either the DCCBs or the SCBs.
In theory the idea is perfect as it is designed to assist the small and marginal farmers—the dominant cohort of Indian agriculture—access credit. The PACS have a membership of 13 crore farmers.
However, years of neglect has ensured that a significant number of PACS have become non-functional. Of the estimated 63,000 PACS which are operational, there is the overhang of the legacy of neglect—inefficiency, lack of accountability, little or no transparency and so on.
Since, they form the core of the cooperative structure in India, any reform of the sector has to begin with them. Remember that one in two villages in India are connected to the cooperative sector; and nearly every farmer has some form of linkage to the sector.
As a result the cooperative sector, launched in 1904, is intricately interwoven in the rural economy of India. As a cooperative institution, there are about an estimated 1.5 lakh societies in dairy and housing, 97,000 PACS, 46,000 labour cooperative societies and 26,000 consumer societies.
The graphic above captures the significant presence of the cooperative sector in the rural economy.
Now, the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) believes that this asset can be rebooted and turned into a force multiplier of change in the agrarian economy—especially in ensuring an even spread; at the moment the cooperatives are regionally concentrated.
Consequently, reform of the cooperative sector has become the central task of the Ministry of Cooperation that was created by spinning off the department from the oversight of the Union Ministry of Agriculture in July 2021.
However, there is a catch.
Under the Constitution of India, all activities involving cooperatives fall within the realm of states. Unless it is a multi-state cooperative.
Effectively, without the buy-in by the state governments the ambitious plan to inspire a bottom-up makeover of the cooperative sector is dead in the water.
Cooperative Federalism
The roll out of the Goods and Services Tax (GST), which enabled the idea of ‘One Nation, One Tax’ was made possible by the pooling of sovereignties of states and the Union government—all of them gave up their individual right to collect indirect tax (excise, sales tax, octroi and so on) to reclaim it as a collective right. It was by far the best example of cooperative federalism.
Now, if the initial enthusiasm for a PACS overhaul is not overwhelmed by escalating fractious politics ahead of the key general election next year, then the next big example of cooperative federalism will be the makeover of the cooperative sector.
The story so far is that following the concurrence of states, computerisation of the functional PACS has been initiated in June last year—the two other tiers, DCCBs and SCBs, are already computerised.
The idea is that once computerised, the PACS can address the objective of financial inclusion as well as improve service delivery by ensuring transparency and efficiency in its functioning—which in turn will improve the trust quotient among its farmer members.
It will also enable the three tiers to be hooked up, facilitating minimal friction in transactions and of course easier monitoring.
The project to be carried out over the next five years will cost the exchequer Rs 2,516 crore—to be split between the Centre (Rs. 1528 crore), States (Rs. 736 crore) and NABARD (Rs. 252 crore).
A New Nucleus
The first hint that the PACS will be the new nucleus of the cooperative sector was provided by Amit Shah, the Minister for Cooperation.
Addressing the national conference of State Cooperative Ministers last September, he set out afresh the context for the cooperative policy reset.
Arguing that with most of India now either having or getting access to basic amenities like financial inclusion, electricity, housing, drinking water and so on, the stage was set for the next phase of their trading-up.
“Now 70 crore poor people with aspirations want to contribute to the development of the country, but they have very little capital.
If they have to contribute, then cooperatives are the only medium—as this is the only platform where people with little capital can come together to collectively generate a large output.
Gujarat's Amul is an example of this. Today, it generates a business of almost Rs 60 thousand crore.”
And then Shah went on to add:
“We also want to carve out some new dimensions, such as insurance, health, tourism, processing, storage and services.
These are areas where we can and we should do a lot through cooperatives and for this, first of all we will share a model PACS structure and its constitution with all of you (state governments).”
The Budget
Since then the model bye-laws for PACS have been shared with states, setting the stage for this year’s Union Budget.
FM Sitharaman announced the government’s plan to launch 2 lakh new PACS over the next five years and to create multi-purpose PACS in each of the nearly 250,000 gram panchayats in the country.
In addition the finance minister also announced a massive decentralised grain storage scheme that will be driven by cooperatives. It is being touted by the government as the world’s largest food grain storage programme.
The day after the Budget was presented, the union government kickstarted action on revamping of PACS.
A memorandum of understanding was inked between the Ministry of Cooperation, Ministry of Electronics and Information Technology, NABARD and CSC e-Governance Services India Limited to enable PACS to provide services offered by Common Service Centers—access points to deliver essential public utility services, social welfare schemes, healthcare, financial, education and agriculture services.
As a result more than 300 services will be made available to the rural population including 13 crore farmer members of PACS. This includes services like banking, insurance, Aadhaar enrolment/update, legal services, agri-inputs like farm equipment, PAN card and booking rail, bus and air tickets.
If you recall I have previously written about the National Optical Fibre Network (NOFN) plan to enable broadband connectivity to rural India. After a slow start and disruption due to the onset of the covid-19 pandemic, the project is gradually gathering steam.
Check out the graphic below:
This together with the the changes that have just been initiated are providing unprecedented empowerment to PACS. Now, it is for the states and the union government to walk their talk.
Presumably, this potential to realise the desired transformation of rural India through a new avatar of PACS will not be buried at the altar of petty politics.
Recommended Viewing
Sharing the latest post of Capital Calculus on StratNews Global.
This year’s Union Budget is a standout for several reasons. It was not populist; was criticised the least; invested in growth continuity by stepping up capital expenditure to a record Rs10 lakh crore.
Yet, the standout decision, if you asked me, was the decision to cut the middle class loose. That is with respect to how they save and invest their surplus earnings. For long this has been guided by chasing tax sops offered by the government. Having achieved a critical mass of 432 million, together with their growing presence as retail investors in Indian stock markets, the writing is on the wall—they are now ready to walk alone.
To flesh this out I spoke to Sanjeev Sanyal, a member of the Prime Minister’s Economic Advisory Council. Formerly part of the finance ministry, Sanjeev is among the new crop of outspoken technocrats.
In this must watch interview Sanjeev did not pull his punches. One throw away line was when he said: “Don’t infantalise the middle class.” The context was the government’ decision to make the default income tax option free of tax sops.
Sharing the link below. Do watch and share your thoughts.
Till we meet again next week, stay safe.
Dear Anil,
Interesting and informative article on such an important topic. PACs, the smallest cooperative credit institution, work at the grass root level and help the small farmers.They provide credit to farmers to purchase inputs like seeds , fertilizers,diesel, pesticides etc.
Cooperatives are crucial for our rural development and upliftment of villages.In today's newspaper,there is full page advertisement of inauguration of various projects of cooperative sector( dairy, rice production, ethanol plant in panipat. Etc) in Karnal by Amit Shah and CM of haryana.The computerization of PACs will further play an important role in building community farming and post harvest agriculture infrastructure.
The decentralised grain storage scheme announced by the FM in the budget is also a great leap forward!!
The cooperative movement under this govt is showing promise - not just amul, nandini in karnataka is a great success and while amit shah's comments on amul and nandini tying up together got lost in a political tussle, please see how RBI is also changing the tech backbone of the co-op banks - to ensure they dont end up being a blind spot - after psu banks, nbfc, co-ops being brought under control - like all things in India, we do the right thing but at our pace. If they can leverage the PACS network as a force multiplier, we will see some serious strength and efficiency gain in the economy.