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5 days ago
- Business
- Scroll.in
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.
Time of India
7 days ago
- General
- Time of India
DMK celebrates Karunanidhi's birthday as Semmozhi Day
Chennai: Celebrating late DMK patriarch M Karunanidhi 's 102nd birth anniversary as Semmozhi Day, chief minister M K Stalin inaugurated an exhibition titled 'Tamil Semmozhi,' on Tuesday. The expo displaying pictures of Tamil inscriptions portraying rich Tamil history would be open for public till June 9. Stalin commenced the day with a visit to Karunanidhi memorial in Marina beach where he paid floral tributes. He then proceeded to Omandurar govt hospital to garland Karunanidhi's statue. Later, he visited DMk headquarters Anna Arivalayam, Karunanidhi's residence in Gopalapuram and then the residence of DMK MP Kanizmozhi Karunanidhi in CIT colony. Subsequently, he participated at a function in Kalaivanar Arangam where he inaugurated the 'Tamil Semmozhi' exhibition. He also released a book on four year achievements of the DMK govt and distributed Kalaignar Karunanidhi Semmozhi Tamil award to Tamil scholar Thayammal, which carried a cash reward of 10lakh and a miniature statue of Karunanidhi. He also gave prizes to students who won various competitions conducted for Semmozhi Day at the school and college levels. Across the state, DMK organised 102 events marking the 102nd birth anniversary. Special celebrations were also organised at Karunanidhi's birthplace Thirukkuvalai in Nagapattinam district.
Time of India
7 days ago
- General
- Time of India
Karunanidhi's 102nd birthday celebrated at ancestral village
Trichy: The 102nd birth anniversary of former Tamil Nadu chief minister and DMK president M Karunanidhi was celebrated at his ancestral village Thirukkuvalai in Nagapattinam district on Tuesday. Tired of too many ads? go ad free now Karunanidhi was born in Thirukkuvalai on June 3, 1924. DMK cadres paid floral tributes and led 'Semmozhi Naal' processions across districts. The cadres distributed sweets and refreshments to the public. They also served food at Karunalaya Old Age Home in Thirukkuvalai. Chairman of Tamil Nadu Fisheries Development Corporation (TFDC), N Gowthaman led the celebration at Karunanidhi's ancestral residence. The functionaries garlanded the idols of Karunanidhi and his parents, A Muthuvel and M Anjugam. Chairman of Tamilnadu Adi Dravidar Housing Development Corporation (TAHDCO), U Mathivanan and several other DMK functionaries were present. School education minister Anbil Mahesh Poyyamozhi led the celebrations in Trichy. He garlanded Karunanidhi's idol near TVS Tolgate, distributed sweets, and led the 'Semmozhi Naal' procession. In Thanjavur, MP S Murasoli, former MP SS Palanimanickam, MLAs Durai Chandrasekaran (Thiruvaiyaru), TKG Neelamegam (Thanjavur) led the celebrations. Backward classes minister Siva V Meyyanathan led the events in Mayiladuthurai. Poompuhar MLA 'Nivetha' M Murugan and Sirkazhi MLA M Panneerselvam were also present.
India Gazette
03-06-2025
- Politics
- India Gazette
Congress pays tribute to former Tamil Nadu CM M Karunanidhi on his birth anniversary
New Delhi [India], June 3 (ANI): Indian National Congress remembered former Tamil Nadu Chief Minister M Karunanidhi on his birth anniversary and praised his legacy, which empowered the marginalised and strengthened the Tamil identity, which continues to inspire generations today. In a post on social media X, Congress stated, 'Remembering M. Karunanidhi, a visionary leader, prolific writer, and champion of social justice. His legacy of empowering the marginalised and strengthening the Tamil identity continues to inspire generations. Our heartfelt tribute to him on his birth anniversary!' Earlier today, Tamil Nadu Chief Minister MK Stalin also remembered M Karunanidhi, praising him in a post as the 'sun of knowledge who came to elevate the downtrodden Tamil Nadu'. In the post on social media X, Stalin paid tribute to the 'guardian of three Tamil languages.' Happy birthday to the Tamil leader Kalaignar, who came as the sun of knowledge to elevate the downtrodden Tamil Nadu! Praise the guardian of the three Tamil languages, who made the classical language special for the Tamil languages, which were seen by the Mu Sangam,' the post stated. Stalin further said in his post: 'Let us be proud to be the siblings of the leader Kalaignar, who ruled Tamil Nadu as the Chief Minister five times, created a lot of history, and led the Dravida Munnetra Kazhagam, a great movement that guided India, for 50 years, and provided both light and shadow!.' M. Karunanidhi, an influential politician and leader, was a prominent figure in Tamil Nadu's politics and played a crucial role in the Dravidian movement and the state's political landscape. Associated with the Dravida Munnetra Kazhagam (DMK), he served as the Chief Minister of Tamil Nadu five times, and held his position from 1969 to 1971, 1971 to 1976, 1989 to 1991, 1996 to 2001, and 2006 to was known for his powerful oratory skills, and his commitment towards the people of the state, advocating for the rights of the Tamil-speaking population and working towards the cause of social justice. His demise on August 7, 2018, was the end of an era for Tamil Nadu politics. (ANI)
New Indian Express
02-05-2025
- Politics
- New Indian Express
Tamil Nadu Assembly budget session ended on a high with bold resolutions, landmark legislations
CHENNAI: Bold resolutions, landmark legislations, fierce debates, witty remarks, quick replies, walkouts by and evictions en masse of opposition parties marked the recently concluded budget session of the state Assembly. The intense debates on delimitation of Lok Sabha constituencies, NEET and two language policy; resolutions on Waqf Act and retrieval of Katchatheevu; key legislations including those on nominating around 14,000 persons with disability to all local bodies, stringent punishment for those using coercive methods to recover loans, establishment of a university in the name of M Karunanidhi, booking those dumping medical waste under Goondas Act, and a high-level committee headed by former Supreme Court Judge Kurian Joseph to study centre-state relations, were the highlights of this session. Colony fades into oblivion One of the key announcements made by the CM was the decision to remove the term 'colony' from the government records and public usage, as the term has been regarded as a symbol of dominance and euphemism for untouchability. The Assembly also adopted a resolution moved by the CM urging the union government to withdraw the Waqf (Amendment) Bill, 2024 in toto on the basis that this bill would severely affect the minority Muslim community. When the Act was passed in the Lok Sabha, the CM criticised it in the House. Perhaps for the first time, the chief minister raised slogans within the House, demanding that the bill be withdrawn. The resolution moved by AIADMK seeking to remove Speaker M Appavu from office was defeated by a margin of 91 votes. AIADMK moved the resolution despite knowing well that it would be defeated.
