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As Congress marks bank nationalisation day, a look at the politics of its economics

Nationalising private banks is arguably the single most important economic decision by any Indian government, and yet it was a result of Congress's internal politics, not an article of faith per se

Reserve Bank of India. (Photo: Reuters)

On July 19, the Congress hailed the 53rd anniversary of bank nationalisation in India, undertaken by then Prime Minister Indira Gandhi. While seeking to attack the Modi government over its proposal to privatise two public sector banks – calling it a “Bank Sale Bill” – the party said bank nationalisation had been “a transformative change”. Even the CPI(M) joined in, remembering the day.

Other commentators have argued that bank nationalisation perhaps had an impact even greater than the 1991 economic reforms. However, as RBI’s own official history describes, the reasons for Indira Gandhi’s decision were more political. With the liberalisation of the economy in 1991, the policy was virtually abandoned.

History of antipathy towards private banks

According to the History of RBI, bank nationalisation was first debated in 1948. “The Economic Programme Committee of the All-India Congress Committee (AICC), in its report submitted in 1948, had strongly recommended that banking and insurance should be nationalized as part of a total package for establishing ‘a just social order’.” While this recommendation received full endorsement by the AICC, it was put on the backburner for one-and-a-half decades. The idea of ‘social control’ of banks re-emerged in 1967, in the wake of India’s military loss to China.

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In the background, between 1951 and 1967, the commercial banking space witnessed a lot of consolidation. The number of commercial banks fell sharply from 566 in 1951 to just 91 in 1967. Despite this consolidation, the branch network improved with the population per branch office declining from 1,36,000 in 1951 to about 75,000 in 1967.

“But there was one important snag: the expansion of branches was mostly in urban areas, and rural and semi-urban areas continued to go unserved. As a result, several economic activities, in sectors ranging from agriculture to small-scale industrial units and the self-employed, did not have proper access to banking facilities,” says the History of RBI.

There was a growing perception among the political class that private banks were excessively concerned with profit alone, which made them unwilling to diversify their loan portfolios across different scales of operation of economic units, as this would raise transaction costs and reduce profits.

War with China sets off a turbulent phase

The war in 1962 was fiscally draining and by 1963, the government was struggling to finance the Third Five Year Plan. The war with China also kickstarted a terrible phase in India’s political and economic life. Apart from an empty public exchequer, the country saw rising prices. On the trade front, forex reserves were dwindling and there was “a mood of general dissatisfaction with the government”. Then, on May 27, 1964, Jawaharlal Nehru died, leading to an intense succession battle within the ruling Congress. 1965 saw another war with Pakistan as well as a failed monsoon, and by 1966, PM Lal Bahadur Shashtri too had passed away. Planning was put on hold for the next three years. War, famine, political uncertainty, economic distress — India’s cup of misery was brimming over, states the History of RBI.

Indira vs the Syndicate

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In the run-up to the 1967 elections, Indira Gandhi was, on the one hand, trying to fight the “Syndicate” of old Congress leaders and assert her control over the party, while on the other, looking for ways to revitalise the hopes of a besieged nation. This is where the widespread perception in the country against private banks came into sharp focus.

“The objective she chose was the vote and support of the poorest, and the instrument she chose to achieve this was bank nationalization. The election manifesto of the Congress party for the 1967 election declared that while those who held the levers of economic power would also ultimately run the political apparatus, it was necessary to bring most of the banking institutions under social control to serve the cause of economic growth more effectively and to make credit available to the producers in all fields where it is needed,” states the History of RBI.

While the Congress won the 1967 elections, it lost a lot of seats and led many to introspect within the party. Two clearly opposite camps started to take shape.

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“Some thought banks should be nationalized without much further ado because, otherwise, it would be impossible to ensure adequate credit facilities for deserving units, whether in the small-scale sector or the large sector. But their opponents said that the Reserve Bank already had enough control over banks and that nationalization would not in any way hasten the process of democratic socialism in the country,” states the History of RBI.

The first included many senior members such as Y B Chavan, Jagjivan Ram and K Kamaraj who pressed for urgent takeover of private sector banks. The polar opposite group was led by Morarji Desai, the Deputy PM and Finance Minister. Desai conceded that the promise made to the electorate had to be fulfilled but pleaded for a cautious approach. “He argued that there was already criticism of the inefficient working of the public sector in general and of the State Bank of India in particular, and, therefore, it would be unwise to burden the administration with the control of 94 private banks in the country, as it would pose enormous problems of integration and fitment of salaries, and efficient running of the banks,” according to the RBI publication.

Social control, not nationalisation

By December 1967, the scheme for ‘social control’ was ready. Morarji Desai agreed that the traditional links of banks with industrial and business houses needed to be snapped and that credit decisions should conform to the development priorities of meeting the credit needs of priority sectors like agriculture, small-scale industries and exports. By early 1969, a Bill to this effect was passed and enforced.

The government also created a National Credit Council (NCC) to assess the demand for bank credit from various sectors of the economy and determine priorities for the grant of loans.

Indira uses nationalisation to outmanoeuvre the Syndicate

But barely four months into the creation of the NCC, Indira Gandhi surprised everyone on July 9, 1969, suggesting nationalisation of major banks.

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The prevalent belief in Congress circles was that the issue had been settled in favour of social control. “But Indira Gandhi had, by then, decided to confront the Syndicate in what was a bid to wrest control of the party. She needed a dramatic issue and bank nationalization fitted the bill,” as per the History of RBI.

This triggered a showdown, with the two warring factions — one led by Indira Gandhi, projecting herself as a revolutionary saviour of the masses, and the other by the Syndicate, now portrayed as being anti-people and pro-rich. A split in the Congress followed. “To drive home her point, Indira Gandhi assumed the Finance portfolio.”

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On Saturday, July 19, 1969, an Ordinance was promulgated to nationalise 14 major banks with deposits exceeding Rs 50 crore with immediate effect. While Indira Gandhi went on to say that nationalisation would mark “a new and more vigorous phase in the implementation of our avowed plans and policies” and reassured industry and trade bodies that their legitimate credit needs would be safeguarded, the truth was completely different.

“The main force driving nationalization was fully comprehended by everyone as being political, rather than economic. Indira Gandhi had won the struggle for supremacy within the Congress party and managed to wrest control, decisively and finally,” states the RBI history.

First published on: 23-07-2022 at 06:52:06 am
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