July 19 marked the 50th anniversary of bank nationalisation in India. It was on this day in 1969, that then Prime Minister Indira Gandhi announced to the nation the nationalisation of 14 private banks in an address on All India Radio. When she bounced back to power post-Emergency, six more banks were brought under state control, in April 1980.
Bank nationalisation was perhaps one of the most controversial and bold decisions taken by Indira Gandhi, especially at a time when her hold on power was still precarious. It was controversial because it had its fair share of critics, then and now.
The idea of nationalisation, or ‘social control’ of banks, had been on the government’s radar since 1963. But it kept getting postponed as the issue was a hot potato even during the ‘socialistic’ era where the government’s ‘commanding heights’ in directing the economy was a given.
The economic reasons for bank nationalisation were straightforward — taking banking services to the masses and making access to credit easy for them. But there were some equally pressing political factors at play. Indira Gandhi became Prime Minister in 1966 after the sudden death of the incumbent, Lal Bahadur Shastri. The Congress old guard, popularly known as ‘the Syndicate’, comprising Kamaraj, Atulya Ghosh, Nijalingappa, Morarji Desai and others, installed her as the PM as she was perceived to be ‘weak’. The Syndicate thought that, with Indira Gandhi at the helm, the real power would lie with them. This was a fatal miscalculation as later events would bear out.
Indira Gandhi, though initially diffident and wary, slowly started asserting her authority, much to the dismay of the Syndicate, and things came to a head in that crucial year of 1969.
Senior Congress leader Jairam Ramesh, in the fascinating book Intertwined Lives: PN Haksar and Indira Gandhi published last year — on Haksar, who was Indira Gandhi’s chief advisor between 1966 and 1973 — recounts the fascinating tale of how the events leading up to bank nationalisation unfolded.
After an absolute hold on power at the Centre and the States, the Congress party suffered a string of losses in State Assembly elections in 1967 including in Tamil Nadu. Coming soon after Nehru’s death, these reverses led to a lot of soul-searching within the party. The party was also slowly seeing a split between the old guard, led by the Syndicate, and the ‘young turks’, led by fiery socialists such as Chandrashekhar, Mohan Dharia and Bhagwat Jha Azad.
In his book, Ramesh says that a ‘Note on Economic Policy and Programmes’, largely written by Haksar (who was dubbed Indira Gandhi’s alter ego) was circulated among the AICC delegates in July 1969. This note, according to Ramesh, also came to be known as the ‘Stray Thoughts Note’. But Ramesh says that, even as late as July 9, 1969, the talk was only about ‘social control’ of banks and not outright nationalisation. But just 10 days later, banks were nationalised, which Ramesh, not without some hyperbole, calls ‘Ten days that shook India’, taking a cue from the title of a famous book on the October revolution in Russia.
It was also the year when President Zakir Hussain died, leading to a major clash between the Syndicate and the Indira faction on who would succeed him. The Syndicate supported Sanjiva Reddy as the Congress candidate which was not to Indira Gandhi’s liking. Though she went along with this decision initially, a day after Reddy filed his nomination, VV Giri threw his hat into the ring. This, Ramesh says could not have happened without Indira Gandhi’s consent. So now the rift between the Congress old guard and new was out in the open. Morarji Desai, a leading light of the Syndicate, was relieved of the Finance Minister’s post on July 16, 1969, barely three days before banks were nationalised.
According to Ramesh, Indira Gandhi asked Haksar to meet economist KN Raj on July 16, 1969, to pick his brains on bank nationalisation. Raj strongly supported the move though he felt the whole process could take up to six months. Merely three days later, however, the banks were nationalised. Ramesh gives a riveting account of how senior bureaucrats such as DN Ghosh and A Bakshi, along with Haksar, played a key role in the events that unfolded. On July 17, 1969, Indira Gandhi wanted a legislative draft on bank nationalisation readied in 24 hours. She was told by her officials that such a draft was in existence since 1963, when the idea of bank nationalisation was first mooted.
So it was on the night of July 19, 1969, that Indira Gandhi announced bank nationalisation. Ironically, according to Ramesh, this was one speech that was not worked on by Haksar. It was ‘right to the last comma’ IG Patel’s speech. Ironic because Patel was then seen as a ‘market-friendly’ economist close to Morarji Desai. This clearly proves that bank nationalisation then had the approval of economists from both the ‘Left’ and the ‘Right’.
Though officially Indira Gandhi endorsed Sanjiva Reddy’s candidature, which took place on August 17, 1969, three days before the elections, she asked her party MPs for a ‘conscience vote’. Giri went on to win by a slim margin and became President which eventually led to the split in the party.
So the decision to nationalise banks was driven as much by politics as economics.