Author: Arvind Panagariya
Publication: The Economic Times
Date: August 24, 2011
Introduction: India's rush to socialism between
1969 and 1976 holds up a mirror to the last seven years of halting reform
The story of India's march to socialism between
1969 and 1976 under Prime Minister Indira Gandhi offers an interesting parallel
(and contrast) to the last seven years. Prime Minister Lal Bahadur Shastri,
who succeeded Prime Minister Jawaharlal Nehru in 1964, unexpectedly died in
January 1966. The Congress party bosses, known as the Syndicate, chose lightweight
Mrs Gandhi over rival Morarji Desai in the hope of continuing to rule the
country by proxy.
In the February 1967 elections, the Congress
fared poorly, winning just 283 out of 516 seats in the Lok Sabha. Morarji
Desai won his seat with substantial following in the new Parliament. This
forced the Syndicate and Mrs Gandhi to accept a compromise whereby Desai became
deputy prime minister and finance minister. A group of radical socialists,
loosely organised under the Congress Forum for Socialist Action, had been
active within the Congress since the late 1950s but without influence on policy.
So long as he was Nehru was alive, his pragmatism prevailed and after him
the Syndicate, which was more sympathetic to business, kept them at bay. But
by 1967, some firebrand radicals known as the Young Turks had begun to make
their influence felt.
Coincidentally, Mrs Gandhi was keen to challenge
the authority of the Syndicate following the election. But she lacked the
necessary political base. While she is said to have had no strong views on
socialism yet (according to historian Ramachandra Guha, she had "rarely
invoked the word 'socialist' before 1967"), her principal secretary P
N Haksar was a doctrinaire leftist. Perhaps on his advice, she decided to
make a common cause with these young socialists, helping them push their Ten-point
Programme through the All India Congress Committee (AICC) in June 1967. Fearing
that opposition by them may split the party and leave them without power,
Syndicate bosses played along. The implementable agenda in the Ten-point Programme
was long on curbing the wealthy, short on aiding the poor. It sought social
control of banking institutions; nationalisation of general insurance; nationalisation
of export and import trade; public distribution of foodgrain; curbs on monopolies
and concentration of economic power; limits on urban incomes and property;
better implementation of land reform; and an end to princely privileges and
privy purses.
Rather than social control, the Young Turks
had sought nationalisation of banks. But Mrs Gandhi, who had different political
goals, demurred. For now, she preferred to let Desai take the lead and establish
social control. A parliamentary Act toward this end was passed in 1968, which
the Young Turks saw as wholly reflecting the views of Desai. Until as late
as April 1969, when the AICC met in Faridabad, Mrs Gandhi publicly opposed
nationalisation. But the death of President Zakir Hussain in May 1969, which
threw open the question of the nomination of the Congress candidate for presidential
election, brought to a head the conflict between the Syndicate and Mrs Gandhi.
The decision on the candidate was to be made by the Congress Parliamentary
Board (CPB) at the July 10-12, 1969 AICC session. Recognising that she lacked
the votes in the CPB to see her candidate through, Mrs Gandhi acted strategically.
She took a 180-degree turn and sought a resolution for the nationalisation
of the major banks. To avoid direct public confrontation, the Syndicate once
again acquiesced and the AICC passed the necessary resolution.
With the resolution in hand, Mrs Gandhi moved
swiftly. She stripped Desai of the finance portfolio on July 16 and promulgated
an ordinance nationalising 14 largest banks on July 19, 1969. The move eventually
split the Congress, but 220 Lok Sabha members stayed with Mrs Gandhi. Two
communist parties provided the balance of the votes necessary for majority.
The nationalisation made Mrs Gandhi an instant national hero, leading her
to fully own the socialist agenda. The radical socialists had, thus, scored
complete victory. In the following years, Mrs Gandhi nationalised insurance,
coal mines and oil industry; severely restricted investments by large firms
under the Monopolies and Restrictive Trade Practices Act, 1969; reserved many
labour-intensive products for exclusive manufacture by small-scale enterprises;
tightened controls on exports and imports; nearly banned foreign investment
under the Foreign Exchange Regulation Act, 1973; effectively denied the firms
with 100 or more workers the right to layoff workers; and severely limited
the ownership of urban land under the Urban Land Ceilings Act, 1976.
The results were devastating: per-capita income
rose from . 775 per month in 1969-70 to just . 815 per month in 1976-77 at
1999-2000 prices. The average per-capita income growth during the period was
just 0.8% with no reduction in poverty achieved. India had lost almost an
entire decade.
It was not until 1991 that socialists were forced into retreat. The reforms
during the 1990s and early 2000s undid some of what had been done between
1969 and 1976. But history repeated itself in 2004. The reformist government
of Prime Minister Atal Bihari Vajpayee lost the election and the Congress
came to power, once again with the aid of communist parties. This returned
the socialists within the Congress to the forefront of policymaking but with
a difference. The debacle under Mrs Gandhi and accelerated growth in the 1980s
and 1990s had taught them the value of growth. They now understood that growth
brings larger revenues so essential for large-scale social programmes. Therefore,
even though they would not push growth-centered reform agenda, they resisted
the instinct to curb the incentives for wealth creation that the past reforms
had put in place. Nevertheless, a lacuna remained: they still did not appreciate
that social sector required reforms, too. Social engineering is more than
just spending money on social programmes.
