Gandhi felt herself besieged by a variety of challenges from within the Congress party and outside. The general elections were to be held in February 1967. If the Congress won fewer seats in the Lok Sabha and lost some states, the economic situation in the wake of devaluation and the worsening food scarcity situation played a significant role.
A Survival Strategy
The push for the ten-point agenda for action, unveiled by Gandhi at the AICC session in New Delhi in June 1967, came largely from leaders like Chandra Shekhar and Mohan Dharia, who were members of the CFSA.3 Chandra Shekhar was a socialist politician from Uttar Pradesh, but had joined the Congress in 1968. Dharia belonged to Pune in Maharashtra and was a Congress leader. Both came close to Gandhi and provided her socialistic policy inputs, but had turned against her as she turned authoritarian, leading to the imposition of the Emergency. Both were detained in jail during the Emergency.
The ten points of the new economic policy revealed Gandhi’s shift towards the Left. Some of those points were aimed at achieving social control of banks, nationalization of general insurance, introduction of state trading in import and export, state trading in foodgrain, expansion of cooperatives in processing and manufacturing industries, effective steps to curb monopolies and concentration of economic power in light of the monopolies commission report, provision of minimum needs to the people, restrictions on unearned increase in urban land values, a plan for a rural works programme and quicker implementation of land reforms and removal of privileges enjoyed by princes and ex-rulers of states that had acceded to the Union of India during Independence in 1947.
The clout of the CFSA was on the rise even after the adoption of the ten-point economic policy at the New Delhi AICC session. In particular, leaders like Chandra Shekhar and Mohan Dharia made no secret of their disenchantment with the government’s failure to prevent the growing concentration of wealth among a few industries and to ensure a more equitable distribution of resources of the weaker sections of society. In August 1967, Gandhi, under advice from her secretary, P.N. Haksar, set up a committee to investigate if large industrial houses secured undue advantage over others in the grant of industrial licences and whether they got a larger share of these licences. The committee (the Industrial Licensing Policy Inquiry Committee) was to address the CFSA’s concerns that the existing industrial licensing system had made large industrial houses larger and created monopolies in the process. Expectedly, the Committee’s findings endorsed the CFSA’s fears. The political ground had thus been laid for the eventual legislation to curb the growth of monopolies and concentration of wealth in a few industrial houses. This was the political background to how the Monopolies and Restrictive Trade Practices (MRTP) Act was passed by Parliament later in 1969, which essentially curbed the growth and expansion of any company that had an asset base of over Rs 20 crore. Accordingly, all such expansion plans would be subjected to closer scrutiny by the government before any fresh licences could be granted to them.
By July 1969, Indira Gandhi presented yet another document at the Bangalore session of the AICC. It was called ‘Note on Economic Policy and Programme’. That was 9 July. The document went well beyond what the ten-point economic policy agenda that was circulated at the New Delhi AICC session almost two years ago. It talked about the need for land reforms and steps to curb the concentration of economic power in the hands of a few industrial groups. Interestingly, the idea of bank nationalization had not yet entered the thought process of the Congress leadership even at that time. The discussion was still focused largely on social control of banks and how it could be made more effective. Bank nationalization as a natural follow-up measure to social control of the banking sector was only an idea then—at best a suggestion from the country’s prime minister, and nobody had thought then that Gandhi would take just another ten days to announce the biggest disruption for India’s banking sector—the nationalization of fourteen banks. There could be no doubt about the enormity of its impact on the Indian economy.
Bank Nationalization as a Trump Card
It is not that Indira Gandhi’s government had been slow in implementing its June 1967 idea of enforcing social control on banks. On 14 December 1967, Morarji Desai, who was then deputy prime minister and finance minister, told the Lok Sabha that the government had plans to introduce a legislative bill on social control of banks. This bill was to facilitate the reconstitution of the boards of directors of banks, prohibit advances or guarantees to directors and to the companies in which they were interested. The Bill was to also facilitate the acquisition of the business of a particular bank by the government, if the bank defaulted in complying with the provisions of the new law and the directives issued under it. The RBI, it was pointed out, would enjoy additional powers to ensure the new law’s enforcement.
It was clear from Desai’s clarifications in the lower house of Parliament that he had some concerns over the negative impact the new law would have on the business of banking. He said that the most important objective of the law was to ensure that there was no favouritism towards any group or firms on the question of sanctioning loans. The Hindu, in a report published on 15 December 1967, stated the following:
Stating the Indian banking system had attained stability and strength over the last 15 years, Mr Desai expressed the confidence that the implementation of the social control measures would lead to a positive reorganisation of the banking system on sound lines and enable it to fulfil the role that was required of it.4
A year later, the law to enforce social control on banks was passed by Parliament, and it came into force on 1 February 1969. While introducing the Bill in Parliament, which after passage came to be known as the Banking Laws (Amendment) Act, 1968, Desai said that the aim of the scheme of social control was ‘to regulate our social and economic life so as to attain the optimum growth rate for our economy and to prevent at the same time monopolistic trend, concentration of economic power and misdirection of resources’.5 The objective of the new law was to ensure more equitable distribution of the banking system’s resources and the allocation of adequate loans to priority sectors like agriculture, small-scale industry, the public sector and the self-employed. A national credit council, chaired by the finance minister with the RBI governor as vice-chairman, was set up to determine the norms for flow of credit needed for different sectors of the economy. Even as the newly set up Council got down to the task of overseeing the allocation of loans, Gandhi decided to go for the next move: nationalization of banks. The objective of the National Credit Council was to ensure adequate credit availability to needy sections of society and it left the ownership patterns of the banks unchanged. The move to nationalize banks was also to ensure that bank credit was more easily available to the sections of society that needed it the most, but the government decided to achieve that goal by giving itself more power and acquiring the banks.
What happened on 9 July at the Bangalore AICC session had a definite impact on the developments that took place between 16 July and 19 July. The political logic of that move was as important; the government believed it to be its economic policy imperative.
In the normal course, officials like the finance minister and RBI governor should have mattered a great deal in the way developments took place in 1969 with regard to bank nationalization. But what really transpired in the month of July was somewhat different. RBI Governor L.K. Jha had earlier ensured that the RBI put its best foot forward in reaching the goals outlined under the scheme for social control of banks. But he was not greatly enthused by the idea of nationalizing banks. I.G. Patel was the special secretary in the economic affairs department of the finance ministry. He too was not excited about the idea of bank nationalization. Patel was considered to be close to the finance minister, Morarji Desai. By this time Desai had become a sworn political rival of Gandhi. On the other hand, Gandhi became more reliant on a group of advisers and bureaucrats led by her secretary in the prime minister’s secretariat, P.N. Haksar.
Af
ter 9 July, relations between Gandhi and Desai had grown too bitter for either of them to tolerate each other. On 16 July, Gandhi divested Desai of the finance ministry portfolio and took charge of the ministry herself. It was a move that appeared to have had a two-pronged objective. One, Gandhi had made up her mind on bank nationalization, which Desai was not happy about. Two, she might have been also acutely aware that the nationalization move would be able to help her win popular support, and secure her credentials as a leader keen on bringing about social and economic equity through government policies. She might have also wanted to get the powerful groups within the Congress, including those who were part of the CFSA on her side. And she also would have believed that the move would marginalize as also side-line the powerful Syndicate leaders, Desai and even her home minister Y.B. Chavan. In any case, she did not want the credit for bank nationalization to be shared with anybody else, let alone Desai.
Thus, on 17 July, she gave the green signal to her secretary, Haksar, to make preparations for nationalizing a clutch of banks. No numbers were given as to how many of them had to be nationalized. Such details were left for Haksar to work out. She also wanted the entire preparations for bank nationalization to be completed in utmost secrecy. She would not consult RBI Governor L.K. Jha, who happened to be in New Delhi that day. She would not consult her special secretary in the Department of Economic Affairs, I.G. Patel, though she and Haksar thought highly of him as an economist and an economic administrator. The reasons for this secrecy was that she had two more political goals to be achieved before she could take everyone by surprise with the decision on bank nationalization.
One, she wanted Desai to quit the government before she could reveal her plans. Two, she wanted to get the ordinance to be signed by her trusted Vice-President V.V. Giri before 20 July. Giri had been officiating as the president since May that year when the President Zakir Hussain died. Now elections were to be held for the next President of India. Gandhi was trumped by the Syndicate leaders, including then Congress president Siddavanahalli Nijalingappa, who also wanted their candidate to run for the post of the President. Sanjiva Reddy was the Syndicate’s nominee as the Congress candidate. Gandhi had endorsed the candidature of Reddy but had an alternative plan ready with the help of Giri. She wanted to outwit the Syndicate by allowing Giri to contest the elections as an independent candidate, but for whose candidature she would ensure all her followers supported him.
Once Haksar got the go-ahead from Gandhi to work towards bank nationalization, he talked to D.N. Ghosh, who was then a deputy secretary in the banking division of the economic affairs department in the finance ministry. It was late at night of 17 July that Ghosh6 got a phone call and he drove down to Haksar’s residence on Race Course Road, only to be told that he had to prepare the legislative draft and the ordinance to enable the government to announce bank nationalization by 19 July. In his book, No Regrets, Ghosh writes that he and Haksar discussed the pros and cons of the bank nationalization move till late that night. Ghosh had another round of meeting with Haksar and Gandhi in South Block on Friday, 18 July. Till then, neither the RBI governor nor the top officials of the finance ministry were aware of the move that would fundamentally change Indian banking.
Jha and Patel were brought into the loop only by the evening that day, after Desai quit the government subsequent to being divested of the key finance portfolio. This was an insult to a senior leader of the party and Desai had little option other than quitting Indira Gandhi’s council of ministers. There were no guesses on who succeeded Desai as the next finance minister. Gandhi appointed herself as the finance minister, which was an additional charge for her. The entire evening that day Ghosh and other senior officials worked late into the early morning of Saturday at the RBI guesthouse and completed the draft ordinance and the law to give effect to bank nationalization. The Cabinet met at 5 p.m. and passed the proposal. A couple of ministers raised questions over the compensation package for the private-sector entities which would lose control of those fourteen banks, but those doubts were addressed and Ghosh had to be summoned to explain the logic of the package to the ministers. Once the Cabinet passed the proposal, Ghosh ran to Giri, who was waiting for the Cabinet’s recommendation and gave his seal of approval. Gandhi addressed the nation over All India Radio and announced her government’s decision to nationalize fourteen banks.
About forty-seven years later, on 8 November 2016, another Indian prime minister would speak to the nation on television and announce an even bigger disruption—annulling about 86 per cent of the country’s currency in circulation in one stroke and replacing them with new notes.
What Indira Gandhi told the Lok Sabha on 21 July 1969, two days after promulgating the ordinance on bank nationalization, encapsulates the political justification of her decision. Referring to the 1956 Industrial Policy Resolution, she said:
Nearly 15 years ago, Parliament approved that we should set before ourselves the goal of a socialist pattern of society. Since then Government have taken several measures towards the achievement of this goal. Public ownership and the control of commanding heights of national economy and of its strategic sectors are essential and important aspects of the new social order which we are trying to build in the country. We regard this as particularly necessary in a poor country which seeks to achieve speedy economic progress consistent with social justice in a democratic political system one which is free from the domination of a few and in which opportunities are open to all.7
The decision to nationalize banks was challenged in the Supreme Court, whose verdict in February 1970 was a temporary setback for Indira Gandhi. Actually, the verdict had upheld the acquisition of the fourteen banks and the legislative rights of Parliament in taking such a step, but it had declared invalid the principles and procedures used to determine the amount of compensation to be paid to the shareholders who had been divested of those institutions. But since the compensation formula was an integral part of the overall law on nationalization, the apex court had to strike down the entire legislation. The government, however, reworked the compensation formula and Parliament passed a new legislation to make it a law on 31 March 1970.
It was a unique junction where India’s economic policy disruption coincided with a political disruption. Gandhi had made up her mind that after the 1967 general election setback, where the Congress lost as many as seventy-eight Lok Sabha seats, she must isolate the Syndicate Congress consisting of old-guard leaders of the party that included K. Kamaraj, Neelam Sanjiva Reddy, Atulya Ghosh, S.K. Patil and S. Nijalingappa. On the other hand were the CFSA leaders who were putting pressure on Gandhi to bring about socialistic economic policies that ensured greater economic and social justice for poor people in particular. Gandhi wanted to kill two birds with one stone—come out with a big-bang policy that addressed the concerns of the CFSA and, at the same time, take the initiative away from the Syndicate Congress leaders. Divesting Desai of the finance minister’s portfolio, which eventually forced him to quit the government, propping up and supporting Giri to become the next President by defeating the official Congress candidate, N. Sanjeeva Reddy, and bank nationalization were part of the same grand plan of Indira Gandhi in 1969. In the end, Gandhi succeeded in her mission and benefitted politically from both these disruptions. For Gandhi and her very close advisers, bank nationalization was not a sudden decision. They were aware of the direction of economic policy as far as the financial sector was concerned. Social control of banks was just the beginning in December 1968 and its culmination was bank nationalization in less than a year.
A Nationalization Spree
Next in line for nationalization was coal mining, one of the oldest industries in the country. Commercial coal mining began in the late eighteenth century. Sumner and Heatly of the East India Company started operations in the Raniganj Coalfields in 1774. But the growth and development of coal mining was slow initially as there was not much demand for coal in the domestic economy. The launch of steam locomotives in
1853 triggered an increase in the demand for coal. Annual coal production quickly rose to about 1 million tonne and further to about 6 million tonnes by 1900. Around the time India became independent in 1947, the country’s coal production had increased five times and reached 30 million tonnes. By the time India’s coal production, largely in the private sector, rose to about 40 million tonnes in 1956, a major policy shift took place. The Nehru government set up the National Coal Development Corporation (NCDC) and it brought under the newly set-up organization all the coal mines owned by the Indian Railways, which needed a stable, reliable and uninterrupted supply of coal for running its locomotives. NCDC was the first step in independent India to undertake planned development of the coal industry. At around the same time, Singareni Collieries Company Limited (SCCL), which had begun operations in 1946, was acquired by the Andhra Pradesh government. Subsequently, SCCL became a joint undertaking with the Indian government owning 49 per cent shares and the Andhra Pradesh government owning the remaining 51 per cent. The state’s footprint over the country’s coal sector had thus expanded.
The year of 1956 also saw the announcement of the Industrial Policy Resolution, which had listed coal and lignite among the seventeen industries mentioned in Schedule A. This did not mean that the government would nationalize the coal industry. Nor should it have created any fears in the minds of the private sector that at some point in time the government could nationalize the existing private coal-mining units. The growth in these Schedule A industries, including coal mining, would be led by the State, but it did not preclude the continuation of the private sector in these industries and even growth within their existing ownership structure. Only four industries, mentioned in Schedule A, were to be government monopolies, requiring the government to take them over. These were: railways, air transport, arms and ammunition and atomic energy. The Industrial Policy Resolution had stated that Schedule A would include industries, ‘the future development of which will be the exclusive responsibility of the state . . . All new units in these industries, save where establishment in the private sector has already been approved, will be set up only by the State.’
The Rise of Goliath Page 11