Indira Gandhi’s Achhe Din

Bank nationalisation was an economic failure, but a smashing political success

Swaminathan S Anklesaria Aiyar

The 50th anniversary of the nationalisation of big banks by Prime Minister Indira Gandhi has attracted limited comment. Some critics call it a terrible economic blunder, since public sector banks (PSBs) have become a byword for enormous losses, inefficiency and loans based on phone calls from political masters. Top PSB appointments have sometimes been made to shady bankers, who guaranteed kickbacks to their appointers.

Defenders of bank nationalisation say it had positive outcomes, like spreading banking to rural areas, aiding the Green Revolution and reducing poverty. It also ended the hold of a few industrialists over bank finance, replacing it with ‘priority sector’ lending by PSBs that directed loans to socially important sectors. This last point was hotly contested by Gandhi’s key opponent Morarji Desai, who said that social aims could equally be achieved by directives to PSBs.

Swatantra From Congress

A different genre of critics says bank nationalisation was really a political ploy by Gandhi to split the Congress. It helped assert her supremacy over the powerful party apparatchiks, collectively called the Syndicate.

There is some merit in all these analyses. Yet, they miss the most important reason for Gandhi’s action. This was to combat and crush the Swatantra Party, which had emerged as the greatest threat to Congress hegemony since Independence.

Few people remember, or know, how large a threat the Swatantra Party once posed. It was formed in 1957 by C Rajagopalachari, N G Ranga, K M Munshi and other distinguished Congressmen who disagreed with Jawaharlal Nehru’s socialist policies. It quickly attracted princes and zamindars whose large landholdings were threatened by Nehru’s land reforms. It also attracted big businessmen who sought a bonfire of economic controls. Nehru castigated the Swatantra Party as one belonging to “the middle ages of lords, castles and zamindars”.

In the 1962 election, the Swatantra Party won 18 seats, a decent debut that made it the third-largest party in Parliament after Congress (351seats) and the Communist Party of India (CPI, 29 seats). Then came the debacle of the war with China, followed by the terrible droughts of 1965 and 1966, which emptied India’s foreign exchange reserves and made it pathetically dependent on US food aid to avoid mass starvation.

Anti-incumbency ran high in the 1967 election. Congress won only 283 of 520 seats. Swatantra surged to second place with 44 seats and became the Opposition spearhead. India had over 500 princely states that agreed to merge with the Indian Union in 1947, with the princes getting handsome privy purses and exemption from taxation as compensation.

Historical traditions meant that the masses in former princely states voted unthinkingly for the princes — after all, opposing princes had been called treason for millennia, punishable by death. Some princes fought and won elections without even campaigning.

After the 1967 election, Congress governments were toppled by defectors who joined hands with opposition parties to form what were called Samyukta Vidhayak Dal coalitions in Uttar Pradesh, Bihar, Madhya Pradesh and some other states. It seemed possible that the same thing would happen in the Lok Sabha, where the defection of just 22 MPs would have reduced Congress to a minority. As things turned out, that did not happen. But Congress hegemony looked like ending. In the next election, it seemed entirely possible that the money of big business plus the feudal hold of the princes would bring a Swatantra-led coalition to power.

Preparing for the Party

Indira Gandhi launched a private war against Swatantra in the guise of ‘Garibi Hatao’ (Remove Poverty) socialism. She attacked Swatantra’s two main pillars, the princes and big business. She abolished the privy purse of the princes and made them subject to income and wealth tax, pauperising most of them. Some fled abroad to reduce their tax liability.

Gandhi also raised the peak income-tax rate to 97.75%, plus a wealth tax of 3.5%. This crippled the finances of big business, which had already been hit by bank nationalisation. She went on to nationalise several more businesses like coal, general insurance and copper. Industrialists feared loss of their companies and cringed where they had once roared like lions. Both pillars of the Swatantra Party were smashed, never to recover.

Soon after came the Emergency of 1975-77. Gandhi threw all opposition leaders in jail, creating a unity among them that never existed before. The Congress (O), Swatantra Party, Jan Sangh and socialist parties merged to form Janata Party. This won the 1977 election, and formed a new government under Morarji Desai, whom Gandhi had ousted in 1969 on the issue of bank nationalisation.

Alas, Janata Party soon bickered internally and broke into fragments in less than three years. The Swatantra fragment was too weak to reemerge as a separate party. Many of its members, such as Jaswant Singh, joined BJP.

In economic terms, the nationalisation of banks is best described as a failure, or maybe as a dark cloud with some silver linings. But in political terms, it was a smashing success. It smashed Swatantra Party so comprehensively that few remember that it was once a contender to rule India.

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