How Indira Gandhi's nationalisation of banks enhanced the infrastructural power of the Indian state

In early August 1969, the chief minister of Tamil Nadu, M Karunanidhi, penned an enthusiastic missive to the prime minister. 'I emphatically welcome this bold step of yours,' he wrote, 'which is perhaps the most significant in the last 20 years of the history of independent India.' Two weeks earlier, Indira Gandhi had promulgated an ordinance nationalising fourteen private banks. More than three decades on, Karunanidhi's judgment would be echoed by the official historians of the Reserve Bank of India (RBI), who wrote: 'It remains, without doubt, the single most important economic decision taken by any government since 1947. Not even the reforms of 1991 are comparable in their consequences – political, social and, of course, economic.'
These verdicts sit awkwardly with much of the writing on Indira Gandhi's decision to nationalise the banks – a decision that is rightly seen as driven by political considerations. However, in focusing all but exclusively on the intention behind nationalisation of banks, we risk occluding its historical significance. To get the measure of this, we need to plumb the consequences that flowed from this decision.
Bank nationalisation tremendously enhanced the 'infrastructural power' of the Indian state: its ability at once to syringe resources out of the society and to pursue policies aimed at securing the society. These were enabled by constructing a novel fiscal-monetary apparatus and grafting it to the focus on targeted alleviation of poverty. In the short run, it also cemented the prime minister's power vis-à-vis her party and considerably advanced her Caesarist mode of politics. Finally, when the economic temperature began to soar, it enabled her government to adopt difficult measures and showcase the muscle of the executive.
Let's start with the construction of what has aptly been described as the 'fiscal-monetary machine.' Bank nationalisation led to a major expansion of the banking network, especially in rural India. By incentivising people to deposit their money, these bank branches soaked up the savings of a large section of society that had hitherto lain out of the formal banking system. A significant portion of these deposits was siphoned away by the government – by getting the banks to purchase government bonds. In any system, banks will hold some government securities, for these are risk-free sovereign-guaranteed assets. In the Indian case, the government cornered a big chunk of the sector's resources by legally mandating banks to hold a specified quantum of their assets – calculated as a ratio of their total deposits – in government bonds. In effect, this 'Statutory Liquidity Ratio' (SLR) specified the amount of money banks had to lend to the government. Furthermore, banks were required legally to deposit a certain amount of cash, which earned no interest, with the RBI – the 'Cash Reserve Ratio' (CRR). This enabled the government to borrow more from the RBI.
By steadily hiking the SLR and the CRR, the government was able to borrow an increasing proportion of the monetary system's resources and deploy it for fiscal requirements, especially for agricultural subsidies and poverty reduction programs. The SLR went from 25 per cent in July 1969 to 36 per cent in September 1985, and the CRR from 3 per cent to 9 per cent over the same period. By the end of the long 1970s, the banks and the RBI together held 67 per cent of government securities. If we include the state-owned Life Insurance Corporation's holdings, then the nationalised financial sector accounted for a whopping 78 per cent of government debt.
At the same time, the government used the nationalised banking system to lend to poorer sections of Indian society, whose 'credit worthiness' would have deterred most commercial banks. In so doing, the government effectively forced the banks to pursue its agenda of poverty reduction. Between 1969 and 1990, bank branches were opened in some 30,000 rural locations that had no financial or banking institutions. Rural lending rates were kept lower than urban rates; savings rates worked in the opposite direction. By 1990, rural households were getting almost a third of their credit from the nationalised banks. Over this period, bank expansion, savings mobilisation, and provision of credit significantly influenced growth in per capita output and poverty reduction in rural India.
There were, of course, limits to how far this fiscal-monetary machine could travel. For one thing, the massive 'preemption' of the banking sector's resources by the government choked the flow of credit to other commercial and industrial requirements. For another, the requirements of lending to the government and poorer segments of society reduced the profitability of the banks. For a third, it enveloped the central bank in a double bind. On the one hand, the government's mounting borrowing requirements compelled the RBI to lend to it directly. This expanded the RBI's balance sheet with a multiplier effect down the banking system and the consequent risk of inflation. On the other hand, the RBI's freedom to wield its main monetary policy tool – interest rates – was abridged. All said, in the long 1970s this system did not run out of steam; though the ride was anything but smooth.
This fiscal-monetary apparatus did not spring fully formed from anyone's forehead. Policymakers and bureaucrats, economists and bankers felt their way towards constructing and tinkering, regulating and fine-tuning it. At the moment of bank nationalisation, the government had no clear ideas of what it wanted to accomplish. The discussions since 1967 on 'social control of banking' had hardly moved beyond windy expressions of intent. A lengthy note prepared for the prime minister had merely underlined the need for 'more intensive home work' on 'equitable allocation and efficient use' of bank deposits and resources. Unfortunately, the assignment had no takers because it was regarded as political hot air.
Nor did the idea of nationalisation have much traction in the bureaucracy and the banking system. The then secretary to the prime minister, LK Jha, told her that 'it would be difficult to argue that nationalisation of the banking system is necessary to increase public control over private banks.' Contrary to the claims of the left-leaning 'Young Turks' in the Congress party, nationalisation would not reduce the flow of credit to big businesses: 'One could as well ask why is it that the Railways, which are State-owned, carry such a high proportion of freight which emanates from the bigger industrial groups.' The government, he argued, had adequate control over the financial system to channel industrial and agricultural credit. Two months later, Jha was appointed as the governor of the RBI. When Indira Gandhi decided to take the plunge, Governor Jha was kept out of the loop until the last minute – owing to his dislike of the idea. The speed and secrecy with which the move was executed ensured that no expert, barring IG Patel in the finance ministry, was consulted. When the announcement was made on 20 July 1969, the government – like the dog that caught the car – had to quickly decide what to do next.
The immediate concern was to deal with the organisational changes necessitated by this move. Thereafter, the legal challenge to bank nationalisation in the Supreme Court consumed substantial energies of the government. Yet the prime minister knew from the outset that she needed expert knowledge and policy advice. Among those to whom she first turned was the chairman of the Syndicate Bank, TA Pai. A progressive banker from Manipal in Karnataka, Pai's thoughts proved influential in shaping the discourse on the fiscal-monetary apparatus. Not surprisingly, Pai would later join the Congress party and serve in Indira Gandhi's third cabinet.
Pai suggested two principal objectives for the nationalised banking system: broadening the base of banking and paying attention to neglected sectors. India had hardly 12 million bank accounts for a population of 500 million. The challenge was 'to convert a system of class banking into banking for the masses.' The banks had total deposits of Rs. 43 billion, when, by international standards, the deposits should have stood at least at Rs. 120 billion. Worse, half of the existing deposits came from just three states: Maharashtra, Gujarat, and West Bengal. By contrast, six states accounting for 40 per cent of the population – Jammu and Kashmir, Madhya Pradesh, Rajasthan, Bihar, Orissa, and Assam– contributed a paltry 6 per cent of the deposits. 'It is imperative therefore that banking should spread more intensively in all these states.'
Conversely, the Indian banking system had only 1.8 million borrowing accounts. Syndicate Bank had the highest, with 180,000 accounts, while the State Bank of India, with 10 times the loans, had only 122,000 borrowing accounts. 'This shows that the banks are catering only to a few in the country and when we know that nearly 600 accounts have borrowed 50 per cent of the total advances, viz. Rs 15 billion we can appreciate the tragedy of the situation.' Bank credit, he argued, could 'act as a potential catalytic in the economic growth of the people.' The new system should have clear priorities, such as small-scale industry, retail trade, self-employed professionals, students, and agriculture. Bank finance, he wrote, 'must make even subsistence farmers into surplus farmers.' Instead of aiming at annual increases in credit to agriculture and industry, targets should be linked to 'the total advances as a percentage to be achieved within a reasonable period.'
In the days after the nationalisation, the bureaucracy was humming with rumours of Governor Jha's imminent resignation. Indira Gandhi requested him to stay in the saddle: 'I shall need to rely a great deal on you … It should be possible for you to pick out the priority areas for action . . . so that we can give the people the feeling that the nationalisation of banks will affect their lives in some concrete way.' Jha promptly sent her two detailed notes. The governor observed that 'concern for the underprivileged sections of the community and the desirability of improving their access to credit facilities can be said to be one of the prime objectives of nationalisation.' He listed several 'areas for special attention': 'small scale industries, retail trade, specially in the rural areas, individuals who operate their own trucks or autorickshaws on hire … the self-employed generally. Artisans like carpenters and tailors, people who run service and repair establishments.' In short, the more productive segments of the emerging informal economy. Further, with the advent of the Green Revolution, there was 'a much greater need for credit for the farmer both for his inputs and for his marketing.' The nationalised banks should adopt 'a rationalised programme of branch expansion … paying special attention to those States and those parts of the country which have so far been neglected.'
Having focused on constructing the capillaries of the new apparatus and on enabling the flow of credit to poorer sections, Jha turned to the apex and its requirements. Banks were required by law to maintain 25 per cent of their deposits in government securities (the Statutory Liquidity Ratio) and 3 per cent of their deposits as cash (Cash Reserve Ratio) with the RBI. 'After nationalisation,' he wrote, 'a progressive step up in the investment of the banking system in Government securities will be undertaken to bring the level of investment around 30 per cent and this can be achieved without any change in the law.' The governor had put his finger on an open sesame. But he would rapidly be disabused of his hope for a gradual increase and a moderate ceiling. Within months, the government escalated the SLR and CRR rather close to Jha's 30 per cent. By the mid-1980s, they added up to 67 per cent.

Try Our AI Features

Explore what Daily8 AI can do for you:

Learn with AIFact CheckingText to SpeechAI Summary

Related Articles

India Today

35 minutes ago

• India Today

Cameras, courts and confidentiality: Inside Election Commission's 45-day rule

While one is hearing whispers from many quarters that videos from the polling stations should be made available, sources with the Election Commission have told India today that this is VOTER SECRECY COMES FIRST - ECIThe Election Commission of India (ECI) has taken a firm stance:It will not yield to political privacy and security are will not be released publicly except under court secrecy is a constitutional guarantee, protected under Section 128 of the Representation of the People Act, 1951. Any violation of this confidentiality is a punishable offence, inviting imprisonment, fines, or FOOTAGE: WHY IT'S STORED AND WHY IT CAN'T BE SHARED Despite mounting pressure from political parties and advocacy groups, polling station footage will not be made public, sources within the Election Commission told India video recordings related to polling are preserved for 45 days after election results are declared in line with the statutory window for filing an Election Petition (EP) under Indian such a petition is filed, the footage is retained until the legal proceedings conclude and may be submitted in court if EXACTLY GETS RECORDED?The Election Commission deploys video surveillance and webcasting extensively to uphold transparency and accountability throughout the election process. Recordings cover:EVM checking and storageMovement and transport of voting machinesActivities inside and outside polling stations on voting dayThe counting processCampaign events and public ralliesadvertisementThis system allows the EC to track expenditures, ensure compliance with the Model Code of Conduct, and address any electoral violations PUBLIC SHARING OF THIS FOOTAGE IS PROBLEMATICDespite its critical role in election monitoring, this footage is not intended for public release. Calls to make it public, although framed as transparency demands, are both misleading and dangerous, the EC cautions. Key Risks Include:Threat to Voter PrivacyPolling footage can unintentionally disclose:Identities of voters entering of individual about voter turnout or access to such data can lead to:Voter profilingTargeted harassment or intimidationRetaliation in areas with low or 'undesirable' turnoutSources in the EC stress that such risks strike at the heart of free and fair LEGAL SHIELD: SECRECY AND THE COURTSSupreme Court Precedent: Right Not to Vote = Right to PrivacyIn the landmark case People's Union for Civil Liberties v. Union of India (2013), the Supreme Court ruled that:Citizens have the right not to right is covered under the right to the act of abstaining from voting must be kept non-voters could expose them to coercion, pressure, or social discrimination, all of which are = A 'LIVE' FORM 17AadvertisementElection footage effectively mirrors Form 17A, a sensitive record maintained at polling stations that logs:Voter arrival roll from polling stations captures similar details, making it equivalent to a 'live' version of Form Rule 93(1) of the Conduct of Elections Rules, 1961, Form 17A is protected from public access and can only be examined under court supervision. Since video footage captures similar data, its public release without legal sanction is equally OF MISUSE: A REAL POSSIBILITYMaking this footage publicly accessible can have severe consequences:Political actors may identify and target voters who didn't support may face harassment, inducement, or social can be edited or misused, fuelling conspiracy theories and prevent such scenarios, the EC discourages footage retention beyond 45 days unless a legal challenge necessitates MEANT FOR INTERNAL OVERSIGHT, NOT PUBLIC DISTRIBUTIONWebcasting serves as a real-time monitoring mechanism for the EC, helping prevent malpractice and streamline election its purpose is strictly a court requires this footage during an election petition, the EC will provide it with full assurance that judicial processes also safeguard voter Watch

Business Standard

41 minutes ago

• Business Standard

Rahul Gandhi slams PM Modi over 'Make in India', cites job concerns

The Leader of Opposition in Lok Sabha and Congress MP Rahul Gandhi on Saturday criticized Prime Minister Narendra Modi saying that despite promises of a "Make in India" factory boom, manufacturing in the country is at a record low and youth unemployment is very high. Gandhi questioned the effectiveness of the "Make in India" initiative, highlighting that manufacturing in the country has fallen to a record low of 14 per cent of the economy since 2014. He also pointed to rising youth unemployment and a doubling of imports from China, accusing Prime Minister Narendra Modi of focusing on slogans rather than real solutions. In a post on X, Rahul Gandhi shared a video and wrote, "Make in India" promised a factory boom. So why is manufacturing at record lows, youth unemployment at record highs, and why have imports from China more than doubled? Modi ji has mastered the art of slogans, not solutions. Since 2014, manufacturing has fallen to 14% of our economy." He highlighted the challenges faced by India's youth, sharing in a post that he met two talented young men, Shivam and Saif, in Nehru Place, New Delhi, who remain unable to fulfil their potential. He criticised the country's current economic model and said, "In Nehru Place, New Delhi, I met Shivam and Saif - bright, skilled, full of promise - yet denied the opportunity to fulfil it. The truth is stark: we assemble, we import, but we don't build. China profits." He said that Prime Minister Modi has no new ideas and has given up on growing India's industries. He added that even the important PLI scheme is being quietly stopped. Gandhi called for big changes to help Indian producers with honest reforms and financial support, warning that if India doesn't build its industries, it will keep buying from other countries. "With no new ideas, Modi ji has surrendered. Even the much-hyped PLI scheme is now being quietly rolled back. India needs a fundamental shift - one that empowers lakhs of producers through honest reforms and financial support. We must stop being a market for others. If we don't build here, we'll keep buying from those who do. The clock is ticking," the post reads The Make in India initiative was launched by the Prime Minister in September 2014 as part of a wider set of nation-building initiatives.

News18

an hour ago

• News18

Sri Lanka Thanks India For Evacuating Its Students From Iran Amid Escalating Tensions

Sri Lankan Foreign Ministry said that this act of solidarity exemplifies the strong and enduring partnership between both the neighbouring nations. Sri Lanka on Monday thanked the Indian government for evacuating its students from Iran alongside Indian citizens. Hailing the diplomatic ties between New Delhi and Colombo, the Foreign Ministry of Sri Lanka said, 'Sri Lanka extends its sincere gratitude to the Government of India for the timely assistance to evacuate Sri Lankan nationals from Iran alongside Indian citizens." 'This act of solidarity exemplifies the strong and enduring partnership between Sri Lanka and India, and is deeply appreciated by the people of Sri Lanka," it wrote on X. Meanwhile, a second flight carrying 256 Indian students landed in New Delhi Airport on Saturday as a part of Operation Sindhu. Iran opened its airspace in a special gesture to support the evacuation of the students. The Ministry of External Affairs on Saturday informed that so far over 800 Indian nationals have returned from Iran. The MEA shared the update on the status of the evacuation operation in a series of posts on X. Operation Sindhu was launched on Wednesday for the safe evacuation of the Indian citizens in Iran. '#OperationSindhu flight brings citizens home. India evacuated 290 Indian nationals from Iran, including students and religious pilgrims by a charter flight. The flight arrived in New Delhi at 2330 hrs on 20 June and was received by Secretary (CPV& OIA) Arun Chatterjee," MEA Spokesperson Randhir Jaiswal said on X. 'Government of India is grateful to the Government of Iran for the facilitation of the evacuation process," he added. Sharing the details, Jaiswar wrote, 'OperationSindhu continues. A special evacuation flight from Ashgabat, Turkmenistan landed in New Delhi at 0300 hrs on 21st June, bringing Indians from Iran home. With this, so far 517 Indian nationals from Iran have returned home under Operation Sindhu. In another post in the evening, Jaiswal informed about the arrival of a separate evacuation flight. '#OperationSindhu Another evacuation flight from Mashhad landed in New Delhi at 1630 hrs on 21 June with 310 Indian nationals from Iran. With this, a total of 827 Indians have been evacuated," he said. Get breaking news, in-depth analysis, and expert perspectives on everything from geopolitics to diplomacy and global trends. Stay informed with the latest world news only on News18. Download the News18 App to stay updated! First Published: