New Delhi: In 1966, India embarked on its first attempt at broad-based economic reforms. The aim was to increase foreign aid, a crucial factor for financing the country’s plans. However, the expected boost in aid did not materialize, and the reforms did not last long. The effort represented a mix of economic missteps, political status quo, and poor economic planning.
India struggled to secure enough aid for the Second Five-Year Plan (1956-1961), which led to a recognition of the need for a more reliable source of funding for future plans. In 1958, Braj Kumar Nehru, an Indian civil servant and cousin of Jawaharlal Nehru, was sent to Washington to negotiate concessional aid from rich countries and international institutions like the World Bank and IMF.
India faced a complicated diplomatic environment, with tensions between its anti-market stance at home, support for the Soviet Union abroad, and its critical rhetoric toward the West. To overcome these challenges, India initiated a prolonged public relations campaign, which included speeches, lobbying, and appeals to the global conscience about India’s poverty. This strategy gained support from key American figures, including Eugene Black, John F. Kennedy, and others.
As a result of this diplomatic effort, India secured a commitment for $1 billion a year for the next two years from the Aid India Club/Consortium (AIC) in 1961, with the US contributing half of the amount. The aid was meant to help address India’s foreign exchange deficit, but the overall economic situation remained difficult.
India’s economy was struggling during this period. Agricultural production had stagnated, and the country faced the dual challenges of droughts in 1964-65 and rising defense spending after the 1962 India-China war. These factors put immense pressure on India’s finances, with a growing balance of payments crisis and a rising debt burden. By 1966-67, India’s debt servicing costs were consuming a significant portion of its export earnings.
To control the external deficit, India imposed harsh import controls, which further exacerbated industrial production and export growth. Inflation, particularly in food, surged during the mid-1960s, contributing to economic instability.
This economic crisis eventually catalyzed the Green Revolution in India, a shift toward more modern agricultural practices, which started to yield positive results in addressing food shortages and boosting agricultural output.
The economic crisis was dire enough for the AIC to commission a report by American economist Bernard Bell, tasked with recommending reforms for India’s economy. Bell had previously worked as a consultant in Indonesia and Israel and was known for his successful reform efforts. His interim report was submitted in 1965, and the final report came later that year, just as tensions with Pakistan were escalating into war.
Indira Gandhi became India’s Prime Minister on January 24, 1966. In April of that year, after consulting economists and policymakers, she decided to devalue the rupee. This was a significant shift, influenced by external consultations, especially with the International Monetary Fund (IMF).
The decision to devalue the rupee was made quickly and without much in-depth consultation with all relevant political leaders. The exchange rate of the rupee was changed from Rs 4.76 to Rs 7.50 to a dollar, marking a 36.5% devaluation. This decision was controversial and unpopular, particularly with Congress leadership, who were not consulted in advance, and the intelligentsia, who were generally anti-Western.
The devaluation occurred at an unfortunate time, coinciding with another drought in the summer of 1966. This worsened food shortages, triggered price rises, and caused an industrial recession. As a result, many blamed the devaluation for the ensuing economic problems.
A crucial element in the strategy was securing foreign aid, but the Aid India Club (AIC) meeting that followed was a disappointment. Much of the promised aid did not materialize, which worsened India’s economic situation, especially as the country had anticipated foreign assistance to mitigate the negative effects of the devaluation.
The devaluation and subsequent economic turmoil led to a significant political fallout for Indira Gandhi. The economic reforms were seen as failures, which led to a loss of political capital and a loss of faith in foreign aid donors. This discontent contributed to the weakening of her political position and paved the way for a new political identity: that of a radical populist.
After losing face due to the devaluation crisis, Indira Gandhi moved towards more populist policies. She initiated nationalizations of banks, insurance companies, coal, and oil industries, and imposed strict controls on the economy. This period, which some call a decade of “economic vandalism,” was characterized by increasingly interventionist policies that prioritized political considerations over economic reforms.
Although Indira Gandhi was pragmatic, she became willing to jeopardize the economy for political expediency. This reflects a shift from reformist zeal to a more politically motivated approach to economic management.
The timing and political environment are crucial. While it might be easier to implement reforms during a crisis, their effectiveness is often compromised because the crisis makes short-term pain more visible and harder to manage politically. The ideal scenario for reforms is when the economy is stable, and the government has the resources to cushion the short-term disruptions that reforms often cause.
India tends to delay reforms, often waiting for external pressure, and as a result, political leaders are less able to make a compelling case for long-term structural changes. This approach leads to a cycle of reform attempts that are often abandoned before their benefits can fully materialize.