The crisis before the crisis — how a failing economy was one of the triggers for the Emergency

Indian Express

10 hours ago

While a swelling Opposition campaign and an Allahabad High Court order setting aside Prime Minister Indira Gandhi's election to the Lok Sabha in 1971 were the immediate trigger for the imposition of Emergency, trouble had been brewing for the better part of a decade in the non-political sphere.
After a strong 1963-64 and 1964-65, over which GDP growth averaged 6.7%, the Indian economy was hit by a phenomenon not seen in 75 years of official data — two consecutive years of decline in overall economic activity.
In 1965-66, India's GDP shrunk by 2.6%. This was followed by a 0.1% decline in 1966-67. It was because of another rare occurrence — consecutive droughts. According to a 2005 India Meteorological Department paper, the previous 130 years had only seen one such other case, in 1904 and 1905. Inflation, as a result, shot up to nearly 16% in 1966-67.
The twin droughts came at a time when India was already a huge importer of foodgrain. With grain output crushed by a fifth, India leaned heavily on the US's PL-480 scheme for grain – under which the US distributed foreign food aid – and was soon the programme's biggest beneficiary. Not helping matters was the tension with Pakistan, with the Budget for 1965-66 estimating that of the total revenue expenditure of Rs 2,116 crore, Rs 749 crore or roughly 35% would be spent on defence services.
'With two wars (1962 and 1965), a series of poor harvests including two droughts, and an unstable external environment, the 1960s were years of severe strain for the Indian economy,' as per the second volume of the History of The Reserve Bank of India (RBI).
India also required significant financial assistance from Western countries and the World Bank. As its current account deficit rose to 3.7% of GDP in 1966-67 and foreign exchange reserves declined, there were concerns about how India would meet its external debt repayments.
In June 1966 — just a few months after taking over as PM – Mrs Gandhi had already approved the devaluation of the rupee by 36.5%, to Rs 7.50 per dollar from Rs 4.76 per dollar.
In the 10 years starting 1965-66, the economy averaged just 2.6% growth. The share of the biggest employer, agriculture, in India's GDP fell to 31.5% in 1966-67 from over 40% a decade ago. Come 1974-75, agriculture's share had changed little, being about 31.1%, while the share of manufacturing had edged up by 60 basis points to 13.8%.
To say that Mrs Gandhi inherited a flailing economy in January 1966 would be an understatement. But the years that followed were not easy either, with her government's first challenge being the peasant movement in Naxalbari, which hit its peak in May 1967.
While growth somewhat recovered in the late 1960s and averaged 5.7% in the four years ending 1970-71, by then Mrs Gandhi, having survived a split in the Congress, had nationalised banks, abolished privy purses and privileges and hiked income tax rates to above 90%. Her government had also approved a licence for her son Sanjay Gandhi to manufacture an 'Indian Volkswagen'.
Amid all the tumult, Indira announced that the next general elections would be held a year early, in 1971. 'The millions who demand food, shelter, and jobs are pressing for action. Power in a democracy resides with the people. That is why we have decided to go to our people and seek a fresh mandate from them,' she said in December 1970 in a broadcast to the nation.
As the Opposition came up with the slogan 'Indira Hatao', she countered with 'Garibi Hatao (remove poverty)'. While this worked, the tide was already turning before an old foe struck again – India saw another drought in 1972.
'As famine loomed in rural India, Indira's slogan 'Garibi Hatao'…came back to haunt her. She told her growing chorus of critics that poverty could not be eradicated overnight. They said she was not removing poverty; she was removing the poor,' American biographer Katherine Frank wrote in her 2001 book Indira: The Life of Indira Nehru Gandhi.
The domestic unrest was fuelled further by the 1973 oil crisis, which pushed up wholesale inflation to more than 20%. The government responded by cutting expenditure and enforcing mandatory savings on salaries. Corruption was rife, factories shut down, and strikes became regular. Pressure further increased against the Indira Gandhi government with the successful Navnirman Andolan in Gujarat and a 1974 Railway strike led by George Fernandes, then president of the All India Railwaymen's Federation.
The rail strike was cited by Mrs Gandhi as an attempt by the Opposition to paralyse the country for political gains. It was crushed with wide-scale firings and evictions from staff quarters, among other measures. However, the end was nigh.
June 12, 1975, was a particularly difficult day for Indira. First, her confidant and then Ambassador to the Soviet Union, D P Dhar, died in hospital. Then came the results of the Gujarat Assembly elections, with a united Opposition under the Janata Morcha defeating the Congress. Finally, in the afternoon, came the Allahabad High Court order.
Less than two weeks later, the Emergency was declared.