Bank Nationalisation – A Different Perspective

Most friends find it difficult or even impossible to believe or even consider that nationalisation of banks (in 1969 and 1980) was anything other than an economic masterstroke.

Well, they can't really be blamed. That is what we have been brainwashed with over the last 50 + years. The irony is that no political party, irrespective of persuasion, wants to call out this bluff.  The benefits of having a pliable banking sector under constant leash is too lucrative. 

Most economists, social scientists, or policy makers, who should be aware of the horrendous and prolonged ill-effects of this decision are unwilling to go on record if they have any misgivings. It is human nature that it is extremely difficult to go against the grain. (With the honourable exception of Arvind Subramanium - his view is included in this essay). 

There are at least three conundurams to the issue of bank nationalisation. First, was it essentially a political bluff or an economic game-changer. Second,  has this decision adversely affected our economy and society and how. Third, what can be done to rectify the situation, if it needs rectification.

This is the first part of my series where I give evidence as to why I changed my opinion and am now convinced that the sole reason for nationalisation of banks was purely political for extremely petty and selfish reasons. 

From: Of Counsel by Arvind Subramanian (page 18)

If you were to ask me what the two egregious economic sins we committed in the past were, they are the Industrial Policy Resolution, which started the licensing of industry, and bank nationalisation in 1969.

Extract from Jairam Ramesh’s biography of PN Haksar (Intertwined Lives – P N Haksar & Indira Gandhi), who masterminded the nationalisation of banks announced by Prime Minister Indira Gandhi.

As late as 9 July 1969, [PN] Haksar was not entirely convinced that banks had to be nationalised right away. Then three days later came the assault on Indira Gandhi’s authority with the announcement of Sanjiva Reddy as the Congress’s presidential candidate (12/07/1969). Subsequently, Morarji Desai’s resignation was secured after four days (16/07/1969).

My guess is that between 12 July 1969 and 15 July 1969, Haksar and Indira Gandhi must have confabulated and decided to shed their caution on bank nationalisation. On 16 July 1969, she asked PNH to meet with KN Raj, one of India’s most distinguished economists and find out his views on bank nationalisation.

Another eminent economist, PN Dhar, was also present when PNH and K N Raj met. Dhar was to later write that Raj strongly favoured nationalisation but felt it would take at least six months to carry it out.

But just three days later, on 19 July 1969, 14 banks were indeed nationalised, making one of Indira Gandhi’s “stray thoughts” an immediate reality. This account is from the memoirs of DN Ghosh, who was then the official concerned in the banking division of the Ministry of Finance and who was to later become the chairman of the State Bank of India (SBI). It was the night of 17 July 1969 and Ghosh recalls being summoned to Haksar’s residence:

I saw that Haksar was browsing through a mass of papers, among which I could spot the Reserve Bank publication, Statistical Tables Relating to Banks in India. He was trying to figure out how many banks accounted for 80 per cent to 85 per cent of the total resources of the system. Off the cuff, I said the number could be 10 to 12 banks.

Just then, the Union Minister of State for Company Affairs, KV Raghunatha Reddy, strolled in and stood listening to our discussion. He piped up that it was a golden political opportunity to nationalise all banks and that we should go ahead with the bold decision. Haksar waived his suggestion politely and requested him to keep his impetuous radicalism to himself.

Haksar wanted to be left alone till he himself had been fully briefed on a subject that was entirely foreign to him. I then asked him if the Prime Minister had made up her mind on nationalising the banks. “Not yet”, he replied. “We are to discuss this tomorrow morning.” He was not sure if it would be possible to sort out all the legal conundrums involved and have the ordinance [for nationalisation] ready by 19 July which was a Saturday. The date was crucial for two reasons. [Acting] President VV Giri was due to demit office on the forenoon of 20 July and the Lok Sabha would begin its monsoon session on 21 July.

The choice of Ghosh by Haksar to be the “keeper of secrets” as far as bank nationalisation was concerned reveals much of how PNH operated.

A Bakshi, who was then deputy governor of the RBI, had worked with Haksar in London in the early 1950s. They were ideologically also similar and were exceedingly close personal friends. Thanks to Haksar, Bakshi would join the soon-to-be-created department of banking in the Ministry of Finance and later become the Comptroller and Auditor General (C&AG) of India in 1972. It was Bakshi who had given the seal of approval to Ghosh and had joined the duo late that night of 17 July 1969 for confabulations.

The next day (18^th July 1969), Ghosh writes, the prime minister herself summoned him in the morning. She wanted to be convinced that the legislative draft for nationalisation of banks could actually be prepared in less than 24 hours. When she was told that such a draft had, in fact, existed from the end of 1963 when nationalisation of five banks had first been considered, she appeared to relax and swore Ghosh to absolute secrecy saying that in case of any hitch he should apprise PNH.

For the next few hours, Haksar, Bakshi, Ghosh and a few others who had been specially commandeered for this purpose, like RK Seshadri (an RBI official) and Niren De (attorney general) slogged to prepare the ordinance – which was an executive order that would have to be ratified by Parliament later.

At 8.30 pm on the night of 19 July 1969, Indira Gandhi addressed the nation on radio and announced the nationalisation of banks.

From: India – Government & Politics in a Developing Nation

Robert L Hardgrave Jr, & Stanley A Kochanek

In an effort to build and maintain a progressive image, the Congress party over the years had adopted a series of resolutions promising a fundamental transformation of the Indian economy. These resolutions had acquired an increasingly radical tone as Congress fortunes began to slip at the polls. Calls for nationalisation of private-sector banks, insurance companies, and key industries entered the Congress program.

Demands for redistributive justice became embroiled in Congress factional politics when Indira Gandhi’s power was challenged by her senior and more conservative colleagues in the Cabinet and the party. Mrs Gandhi, on the advise of P N Haksar, decided to counter this challenge by transforming the factional dispute into an ideological crusade. …. The strategy was a resounding political success and resulted in reversing the process of economic liberalization. (Page 361).

From : Barons of Banking – Glimpses of Indian Banking History by Bakhtiyar K Dadabhoy

(Dr. I G) Patel gives us his version of events in his memoirs. Indira Gandhi sent for him and asked him if banking was under his charge. No one else was present. On his telling her it was, 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 on the radio tomorrow evening. Can you do it and make sure there is no leak?’ (Page 305)

Dadabhoy has supported this view point by referring to The Evolution of the State Bank of India (Vol 3, Pae 34)

From: Perspectives on Development by Dr. V V Bhatt (GM & CEO IDBI at that time)

By 1969, prominent commercial banks were nationalised by Prime Minister Indira Gandhi, purely for political reasons. L K Jha (RBI Governor) was not in favour of this policy. Neither was I. I wrote an article in the Economic and Political Weekly (October 1970) criticising the move (I have been unable to access this article).

From: Interview of Y V Reddy published on 15/07/2019

https://www.bqprime.com/business/dont-allow-public-sector-banks-to-whither-away-says-yv-reddy

“Banks were nationalised at the whim of a Prime Minister, they will be de-nationalised at the whim of another Prime Minister.” Y V Reddy.

From: Bank Nationalisation: The Original Sin by DN Ghosh

https://www.bqprime.com/opinion/bank-nationalisation-the-original-sin

So, is bank nationalisation the original sin? Alternatively, was it a case of bad economics but good politics? To answer all that, some contextualisation is necessary.

From: Finance at the Frontier by J D von Pischke

Commercial banks were considered by some central bankers, government officials, academicians and by many politicians to be at best indifferent to farmers and at worst unpatriotic corporate citizens. 

This report (Report of the Expert Group on State Enactments Having a Bearing on Commercial Banks Lending to Agriculture – Talwar Committee 1971) dispels the view that prior to their nationalization Indian commercial banks were unwilling to lend in rural areas because of urban bias or lack of interest. (PS: I have been unable to locate this report).

From: Breaking the Mould by Raghuram Rajan & Rohit Lamba

A similar approach is needed for momentous policy decisions. … Yet by their very nature, they occur without much consultation, are often based on short-term political calculations, and can have unintended effects, especially in large, complex modern economies. Arguably, the 1969 nationalisation of banks and the 2016 demonetisation both fall in this category. (Page 114)

Both the overnight bank nationalisation in 1969 and the declaration of the Emergency in 1975 were done suddenly and without much consultation. Few would assert they benefited the nation. (Page 252)