Shastri’s appointment as the PM was welcomed by the business community for his non-ideological, pragmatic approach and connections with the business class. This stood in contrast to the socialist-minded Nehru who preferred to hobnob with the modern, secular intelligentsia instead of courting relations with the traditionalist businessmen operating in his mixed economy.
From 1991 onwards, two characteristic features of economic liberalisation in India have been reforms during crisis and reforms by stealth. The successive political regimes after the watershed year of 1991 have resorted to the same mechanism. However, these twin features of the political economy of liberalisation were also present in the mid-1960s. Those years were marked by political uncertainty after Nehru’s death, serious food crisis, high levels of inflation, war with Pakistan, shortage of foreign exchange reserves, decline in industrial growth, rampant unemployment, and the failure of the plan to meet the targets.
Faced with such challenges in the post-Nehru era, Lal Bahadur Shastri as the prime minister sought to bring radical changes in the economic paradigm. After his sudden death in Tashkent, his successor PM Indira Gandhi initially followed a similar policy agenda. Ironically for the leader of the capitalist bloc during the Cold war, it actually took a betrayal by the US for India under Indira Gandhi to abandon the economic liberalisation agenda in favor of leftist populism.
Shastri’s appointment as the PM was welcomed by the business community for his non-ideological, pragmatic approach and connections with the business class. This stood in contrast to the socialist-minded Nehru who preferred to hobnob with the modern, secular intelligentsia instead of courting relations with the traditionalist businessmen operating in his mixed economy. During his tenure as the Minister for Commerce and Industry between 1958 and 1960, many contracts for technical and foreign collaboration were approved while the number of new companies established in those nine months amounted to 1252. His track record thus showed the possibility of a wider role for the private sector now that he was the PM.
Moreover, the key members of the Shastri cabinet (T T Krishnamachari, C Subramaniam, Asoka Mehta) were devoid of an ideological commitment to socialism, sans the labor minister D Sanjivayya. All these influential ministers favored greater reliance on the market. The Railways minister and powerful regional satrap S K Patil had been openly critical of Nehruvian planning. L K Jha, the influential Principal Secretary to Shastri, was also very much a pro-market bureaucrat. Soon after his appointment to the post, he was involved in almost every secretary level committee on economic affairs in the Government of India.
The first concrete step for liberalisation under Shastri came in the summer of 1964 when he announced in Parliament his intention to reconsider controls in general. It was followed by the removal of controls in the steel and cement sector. The privilege enjoyed by the unwieldy public sector came under question as Shastri ordered a review of major projects that had not taken off. Further, he sought to devolve decision-making power away from the Planning Commission. To this end, the National Planning Council as an advisory body on policy issues was set up in February 1965. The Council consisted of stakeholders like industrialists, economists, trade unionists, and rural workers. Also announced was the formation of a Business Advisory Council as a consultant body to the Planning Commission for formulating the industrial sector agenda in the Fourth Plan.
The 1965 budget was seen as an attempt to recognize the importance of the private sector in the economy. The notable measures included relief in direct taxation, reduction in excise duty on several basic consumer items, tax relief to industries, and reduction in the rate of personal tax. In overall terms, the budget was seen as export and production oriented.
Further impetus to economic liberalisation came from the outside. By this time, it was widely recognized in the West that the audacious project of democratic state-led development in the seemingly neutral India was faltering. Several studies by the World Bank and the ten-volume Bernard Bell Report made the case for a comprehensive overhaul of Indian economy by way of liberalisation. The World Bank and IMF wielded influence over Indian political leadership by way of the instrument of aid, a perennial need at that time given the failure to achieve sustained economic growth. Noticeably, Indian businessmen like G D Birla, S L Kirloskar, and M S Oberoi served as an intermediary between the donor organisations and Indian policymakers.
The 1965 consultations between Indian policymakers and World Bank officials led to the understanding that India would liberalise its economy by changing exchange rate and allowing imports in return of promised aid. By the end of 1965, the decision to devalue the rupee in principle was communicated informally to the IMF. Soon after, though, Tashkent happened. In the ensuing succession battle, Indira Gandhi emerged as the next PM. In her early months in office, she continued with the economic policies and technocratic team put in place by Shastri. At a FICCI meeting in 1966, she made her intentions clear: “We have weeded out some controls and we will always be ready to eliminate those that outlive their utility.” The words were followed by action with the delicensing of eleven industries in May 1966.
In late March 1966, Indira Gandhi visited the US to secure food and foreign exchange. Interestingly, the ground for her visit was prepared by G D Birla who went to Washington in the early March. Based on his extensive consultations, Birla suggested Ms Gandhi to adopt a positive approach towards liberalisation. During her visit, she agreed to devalue the currency, bring the US collaboration in fertiliser industry, and reduce state controls on industry. In return Johnson promised both food and aid in dollars.
In a follow-up to her successful visit, Asoka Mehta engaged with the World Bank president George Woods and promised to replace import control with tariffs, simplify industrial licensing, and devalue the rupee. On June 6th 1966, the rupee devaluation drive was announced. The decision received flak from all corners mostly on sentimental grounds and put Indira Gandhi in a precarious political position. Even the Congress Working Committee passed a resolution denouncing the government move. More importantly, though, the Johnson administration went back on its promise and the aid did not materialise.
Given the political fallout and the US betrayal, historian Medha Kudaisya has argued that Indira Gandhi decidedly shifted her economic policy away from liberalisation and also shunted out the pro-market technocrats. Nonetheless, the aborted liberalisation drive of the mid-1960s makes for a fascinating what-if account in contemporary Indian history.