The reality behind Nationalisation of Banks in India

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Understandably the Congress President, Ms Sonia Gandhi's curious speech on nationalisation of banks by Indira Gandhi way back in 1969 has evoked more hilarity than hard-hitting refutation. Sarcasm has been the hallmark of the widespread reaction to her pronouncement which implied that her mother-in-law was far-seeing enough to have divined that four decades hence there would be a global economic meltdown and took the decision to prevent the Indian banks from going the way of Lehman and Citicorp.

Even her inveterate critics take the view that she was let down by speechwriters and that, at election time, all kinds of bizarre and weird claims are made by leaders of all parties. Moreover, at the time of bank nationalization, she was new to India, having been married to Rajiv Gandhi for less than two years. Since both of them were disinterested in politics, she might not have been aware of what was going on. Otherwise, like those of us who witnessed the highly emotive drama, she would also have known that nationalisation of banks was a purely political and populist act in the midst of power struggle within the Congress party. It was indeed Indira Gandhi’s masterly counter-stroke on the Syndicate of Congress party bosses and Morarji Desai who had suddenly combined, despite their antipathy in the past, in an effort to oust her from the office of Prime Minister.

As a first step they had selected, against her wishes, Mr N Sanjeeva Reddy as the Congress candidate for the presidential election that had become necessary because of President Zakir Hussain’s sudden death. Days later she responded with bank nationalisation, through an ordinance, though the Parliament was due to meet 36 hours later.

This climatic development had taken place, however, after many convoluted moves and counter-moves that need to be put in perspective. In fact, the issue of bank nationalisation has been a part of political discourse and debate since long before Indira Gandhi’s rise to power though it had acquired salience after the sharp setback to the Congress in the 1967 general election, the first during which she, not her father, led the party. Let us therefore begin from the beginning.

As far back as after Sardar Patel’s death in December 1950, Jawaharlal Nehru had invited Jayaprakash Narayan (better known as JP) to rejoin the Congress, along with his socialist colleagues to help the Prime Minister develop the country within a socialistic framework. JP’s response, obviously in consultation with his senior colleagues, was a set of conditions for his cooperation. Nationalisation of banks had a pride of place in the list. Nehru replied that policies could be decided as they went along but there was no room for pre-conditions. By this time senior Congress leaders had become aware of the exchanges with JP and they successfully torpedoed the entire exercise. 

Thereafter, the Left parties continued to demand nationalisation of banks but Congress party, with its huge majority in Parliament and most state assemblies, could ignore it. Things changed materially after the 1967 general election in which the Congress lost eight states and had its majority in the Lok Sabha substantially reduced. This gave a boost to the party’s radical and left-leaning members, nicknamed Young Turks, who demanded radical measures such as bank nationalisation and abolition of privy purses of princes, among others. At the same time, Morarji Desai again challenged Indira Gandhi’s leadership of the party, and a dangerously divisive contest loomed large. A compromise between the two was worked out, however. Under it, Desai became deputy Prime Minister and finance minister in her cabinet.  

So tenuous and brittle was this compromise that it was bound to collapse, as it did over the selection of the party nominee for the presidency. Yet, between 1967 and early 1969, Indira Gandhi endorsed Desai’s total opposition to nationalisation though even he accepted ‘social control’ on banks, which amounted to strict supervision by committees of their credit policies. This at successive meetings of the AICC as well as at a meeting of the National Development Council that consists of all state chief ministers she held fast to giving social control a chance for at least two years.

On the eve of the Congress conclave at Bangalore, she changed her position somewhat. The young Turks had served notice that a more radical economic programme must be accepted. Staying away from the former, because of ‘indisposition,’ she sent it a note on economic policy, ‘Some stray thoughts hurriedly dictated’, asking the working committee to consider them. In this she still refrained from endorsing the young Turks’ demand for immediate nationalisation of banks. But, with delightful ambiguity, stated that she was ‘willing to reconsider the bank nationalisation issue even though the two-year period allowed to social control was not yet over’.

 On returning to Delhi from Bangalore the first thing she did was to divest Morarji Desai of the finance portfolio and she herself took it over. A stunned Desai rejected her request that he should stay on as deputy prime minister without portfolio.

Two days later, she sent for Economic Affairs Secretary, I G Patel, an outstanding economist-bureaucrat. He was generally believed to be a ‘Morarji man’ but evidently Indira Gandhi, too, trusted him. What followed is best quoted in I G’s words. “No one else was present. Without fanfare … she simply said: ‘For political reasons, it has been decided to nationalise the banks. You have to prepare within 24 hours the bill, a note for the cabinet and a speech for me to make to the nation. Can you do it, and make sure that there is no leak?’ There was no pretence that this was not a political decision, and the message was clear that no argument from me was required”. Even so, Patel ‘mustered enough courage’ to make two suggestions: ‘to leave the foreign banks alone, and nationalise only the major ones’. (Patel, Glimpses of Indian Economic Policy: An Insider’s View. OUP, 2002.)

Interestingly, in his draft of the Prime Minister’s speech, Patel, on his own, ‘inserted’ a sentence; “This is not the first step in a new wave of nationalisation. This is, in fact, the culmination of the process which began with the nationalisation of Life Insurance and the Imperial Bank to occupy the commanding heights of finance”. She read the speech as written. “It is remarkable,” adds Patel, “how momentous decisions are taken in the heat of political struggle. After this, Mrs Gandhi was heralded as an angel of the poor and she made the most of Garibi Hatao”

The only other thing I need to recall is that, as the news of bank nationalisation spread like a wild fire, crowds of people, most of whom had never darkened the door of a bank, danced in the streets with joy. Eight years later, on a cold March night, they were dancing in the streets again. Why? Because in the post-Emergency poll in 1977 not only was the Congress defeated but also Indira Gandhi and her favourite son, Sanjay, had lost in their constituencies.