The decision by the central government to nationalise 14 private sector banks in July 1969 is often cited as a defining moment for India. Arguably the most important economic decision taken by any Indian government since 1947, its impact – political, social and economic – is something that even the reforms of 1991 cannot compare to. In fact, it was because of this decision that Indian banks emerged relatively unharmed from the recent
The road to this social control of banks, however, wasn’t constructed overnight. Although the idea of social control of banks emerged in 1967, the Economic Programme Committee of the All India Congress Committee (AICC) in its report in 1948 had already strongly recommended that banking and should be nationalised as part of a total package for establishing “a just social order”. The matter, however, rested for a decade and a half until the political climate called for it.
The reasons behind this decision, by the then Prime Minister Indira Gandhi, were dictated both by economics and politics. In January 1966, when Indira Gandhi ascended to power with the help of the ‘Syndicate’ of older and established Congress leaders (K. Kamaraj, S. Nijalingappa, Nilam Sanjiva Reddy, Atulya Ghosh, Srinivas Mallya, S. K. Patil among others), India was besieged by several problems.
Severe droughts had brought down the crop yield, prices had shot up by 16% and US food aid was heavily dictated by geopolitics. A crisis was brewing with the International Monetary Fund (IMF) demanding that India devalue its currency. On a separate front, the country flared up with identity politics in Punjab and Haryana, inter-state feuds between Karnataka and Maharashtra over the newly independent Goa, -Hindi agitation in Tamil Nadu and tribal troubles threatening peace in the north eastern states crisis.
Plagued by these and many more troubles, Indira Gandhi resented the control of the Syndicate as well. This required her to assert her leadership to restore the authority of her government, rebuild the Congress, revitalise nation’s hope and put her firmly in control. Mrs. Gandhi chose ‘vote with the support of poorest’ as her objective and the nationalisation of banks was her instrument. Her move to wreck the Syndicate resulted in a split in the Congress party, forcing her to prove majority in the Parliament. She aligned with Left parties commanding 42 seats in the House of 520. Subsequently, at the Bangalore AICC session in 1969, Indira Gandhi expressed her intention of nationalising the private sector banks in a paper titled, “Stray thoughts on Bank Nationalisation”. The paper received an overwhelming support from the public.
On her return from Bangalore, Indira summoned I. G. Patel (the then secretary in the Ministry of ) and asked him to prepare an ordinance for the nationalisation of banks. Both, the then Union Finance Minister Morarji Desai and the then RBI Governor L. K. Jha, had no hint about the move. Later that year in July, Desai was divested of the Finance portfolio after he voiced his disagreement with the idea that Indira Gandhi was promoting. After announcing the decision to nationalise the 14 banks, Indira Gandhi herself took over the Finance portfolio, thereby making it difficult for Morarji Desai to remain in the Cabinet. When he expressed his strong resentment at her action, she told him he could continue in the Cabinet as Deputy Prime Minister and hold charge of some other portfolio. Describing it as “an amazing proposal and a very clever move”, Desai conveyed his inability to continue in the Cabinet. Patel along with Jha, and RBI Executive Director R. K. Seshadri worked on the ordinance for bank nationalisation. And the ordinance was passed without any murmur.
On July 19, 1969, the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance was promulgated by acting President V. V. Giri that resulted in the transfer in the ownership of 14 largest commercial banks to the State. These included the Central Bank of India, Bank of India, Punjab National Bank, Bank of Baroda, United Commercial Bank, Canara Bank, Dena Bank, United Bank, Syndicate Bank, Allahabad Bank, Indian Bank, Bank of Maharashtra, Indian Overseas Bank and Union Bank. At that time these 14 banks controlled 70% of the nation’s deposits.