Time to reassess Indira’s bank nationalisation

When internationally well-known banks were coming crashing down under the weight of their own greed in 2007-08, and seeking bail outs from their governments, Indian and foreign commentators had noted that Indian banks did not catch the global infection because of their government ownership. India should have thanked the much-vilified Indira Gandhi for nationalising banks. This July marks the 50th anniversary of bank nationalisation.

On the day man first landed on the moon, the Indian government walked the first step on the road to climbing the ‘commanding heights of the economy’ with bank nationalisation. This now-distant July was packed with intrigue and struggle for power within the Congress party, and economics became the handmaiden of power and influence.

Swift political currents began to reshape Indian polity after prime minister Lal Bahadur Shastri’s death in early 1966. Powerbrokers in the party installed Indira as his successor, thwarting Morarji Desai. In the first general election held in the post-Nehru era in 1967, Congress had lost power in many states and the Opposition ranks in Parliament had swelled, especially that of the Swatantra Party, which represented ex-royalty and business, and the Jan Sangh. Congress was seemingly losing its traditional social and regional base and also the support of business and industry. In the new Congress government, Morarji was made the deputy prime minister as well as the finance minister. While Indira opposed his proposal to bring farm incomes under income tax, Desai stalled her suggestion for bank nationalisation with his ‘social control’ -- a system of token oversight over banks.

The Bangalore All-India Congress Committee (AICC) session at the glasshouse in Lal Bagh in the summer of 1969 became a watershed. Congress president Nijalingappa, identified with the party old guard, called for pro-market policies in his opening address. Indira countered with her ‘stray thoughts’, outlining a more pro-people line hinting at greater government control over the economy.

On July 14, the prime minister’s office notified the news agencies that Morarji had been stripped of his finance portfolio. I was then his Information Officer, and went into his office. On being shown this news flash in his office, Morarji sent in his resignation letter, asked for his personal car, and left for his residence. From that moment up to July 19, I was at his residence from morning till late into the night. On July 19, in the afternoon, Indira accepted Morarji’s resignation from the cabinet.

At around 6 pm, Economic Affairs Secretary I G Patel gave me a copy of the ordinance nationalising 14 private banks but forbid me from leaving the finance ministry until 8.45 pm when Indira was expected to announce bank nationalisation over All India Radio. It was her masterstroke to go to the people for support over the heads of party powerbrokers who wanted her to be their ‘goongi gudiya’, or dumb puppet.

Some top officials in the finance ministry changed and a new banking department was added to it to exercise broad policy oversight over banks. The finance and other economic ministries, under strict prime ministerial supervision, came up with a series of policies whose traces are present in most sectors of the economy even today. Many such policies for the broadening of the industrial base, entrepreneurship, advances in agriculture and allied occupations, and measures to change the face of rural India, perhaps, would not have been possible without bank nationalisation.

Until bank nationalisation, a few business houses maintained their dominant position through a cosy arrangement with commercial banks and general insurance, since they were also their owners. An RBI report on rural credit bared the stark reality of rural poverty and the total neglect of agriculture and the rural sector by private banks. Morarji’s ‘social control’ did nothing to correct this situation. Successive governments that claimed to have enhanced the flow of credit to farmers rarely thanked Indira for giving them this powerful tool.

Banking in unbanked areas as well as the opening of millions of ‘zero balance’ accounts have become possible because of Indira’s move. Bank depositors in India have overwhelmingly voted for the safety offered by public sector banks, even while foregoing some of the blandishments offered by their private competitors.

Whenever the subject of expansion of access to banking in underserved areas comes up, arguments are advanced for opening up of the sector to private and international banks. It is rarely noticed that even the nationalised banks needed to be cajoled and incentivised to move into difficult geographies and sectors. The banks had to be driven to unfamiliar rural and other sectors with a definite policy of priority lending. For the first time, the banks were asked to lead economic development, with the district as the focus. Each bank adopted a district and prepared a detailed survey of its economic potential and the steps needed to tap it.

While there is a wealth of research damning the effects of bank nationalisation, partly motivated, undertaken when rainbow economic conditions prevailed, contrary non-partisan research is sparse. The all-pervading economic gloom of the present, perhaps, is an opportunity for a proper appraisal of the politics of the ideological debate over bank nationalisation and the road ahead. This needs to be separated from the other debate over the merits or otherwise of the government dominating the ‘commanding heights of the economy’. Or, for that matter, from the issues of moral hazard of loan waivers, mounting bank NPAs and their write-downs, crony capitalism assisted by pliable government banks.

There is a section of opinion that has been attacking the government ownership of banks on the ground that banks lend under political pressure and acquire toxic debts. Such critics should remember that in the West, including in the US, private banks brought down the global financial system by their unregulated greed and mismanagement. While billions of dollars of public money was lost due to misconduct on the part of bank managements, they were let off with fines of a few million dollars.

It is not ownership that matters for the growth and development of healthy financial institutions, of which banks are a vital part. What is required is independent, specialised and prudent regulatory vigilance of the financial system that is not influenced by political exigencies.

In the normal course, the golden anniversary of bank rationalisation should have been an occasion for recording their saga — their immense contribution to the building of modern India during the past five decades. Unfortunately, their NPA story, authored by Indian politics, is eclipsing their positive legacy.

(The writer is a former Information Adviser to the prime minister)