50 Years of Bank Nationalisation: Relooking at the Indian Economy Under Indira Gandhi
- In Economics
- 10:32 PM, Jul 22, 2019
- Ranabir Bhattacharyya
The direction of the economy of a country is based on the policies it undertakes. 50 years back, erstwhile Indian Prime Minister Indira Gandhi decided to nationalize 14 major private sector banks. Call it an economic or a political decision, motivated by the Congress think-tank, the decision itself did have a major impact upon the country. Coming into the present era, under the Narendra Modi government, 'nationalization' of PSUs has been a major debate altogether. Whether they are profit-making or adding unwanted fat in the economy, the country is at the crossroads. Very recently, BSNL itself was in the news as the employees didn’t get stipulated salary over the last few months. Did the nationalization of banks help India in the 1970s? Well, the discussion certainly demands various factors of concern which are relevant even today.
In July 1969, there were only 8262 banks in India and at present, there are nearly one lakh public bank branches along with 1.45 lakh ATMs. Added to that, almost 30,000 private bank branches also exist. 50 years ago, the largest bank to be nationalized was Central Bank of India and Bank of Maharashtra was the smallest in terms of aggregate deposits. As far as profitability is concerned, before nationalization, Central Bank of India topped the chart whereas Indian Bank was least profitable.
In the whole process of nationalization, 14 new banks were created, and assets were transferred accordingly. Interestingly, Allahabad Bank and Indian Bank opted for all cash compensation. The Central Bank of India received maximum compensation, amounting to Rs 1750 crore. There is no denying that nationalization of the banks helped the national savings rate but the constant need for fresh capital was always there. In other words, the banks never became self-reliant.
Frankly speaking, the decision of nationalizing banks was more of a political decision or desperation from Indira Gandhi. Going back to 1967 General Elections, Congress was uneasy as it lost in some of the states in spite of a simple majority. Congress was losing the social fabric and Mrs. Gandhi was looking to revamp or reboot her pro-poor image among the urban mass. The bank nationalization served the purpose from all perspectives. Indira Gandhi in her earlier days closely followed the advice of the World Bank and US. Her decision gave the banks a sovereign guarantee and the option of bailouts gave added confidence to the banks themselves. But prudential lending ultimately became weaker. Importantly, the trilemma over-regulation and liabilities didn't help in the long run. Let's not forget that Indira Gandhi didn't reach any consensus regarding this as nationalization was done through an ordinance. Countrymen can certainly remember that Indira Gandhi faced stiff criticism from Deputy Prime Minister and Finance Minister Morarji Desai and the industry, but she was hell-bent on nationalization of banks, asserting that the move will benefit agriculture, small scale industry and so on.
A significant number of left liberals in India believe that privatization itself doesn't ensure the job security of the employers and that in case of a bank, privatization ultimately puts the money of common people at higher risk. That is why erstwhile CPM leader Jyoti Basu hailed Indira Gandhi's decision to nationalize banks. The devaluation of rupee was also a decision to be taken along with at that time. Class banking was also referred to as a reason behind, especially providing credit to agriculture. The nationalization was more of an effort to socially control the financial institutions. But, in 2019 itself, RBI was there to monitor and whatever social control meant to Mrs. Gandhi.
It goes without any saying that the Indian National Congress itself took a U-turn with their financial approach in the 1990s when the Narasimha Rao Government opted economic reforms for an open economy. India entered the globalized era with the 1991 reforms. What seemed politically and socially relevant in the 1970s, looks preposterous in 2019. The economic template of Indira Gandhi concerning nationalization of banks was more politically motivated and one can say, she was probably not far-sighted in this regard.
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