Nationalisation of Banks and Other Sectors of Economy

Bank nationalisation was a step on this path, as Indira Gandhi sided with the Young Turks (one of whose leaders was Chandra Shekhar). She relieved Morarji Desai of his finance portfolio as he opposed the idea, pointing out that the step would cause a strain on the government administration and lead to lower resources for economic development even as it increased bureaucratic control. Indira Gandhi then adopted the ordinance way to nationalise fourteen major private banks in July 1969. The ordinance was later passed by Parliament to become the Banking Companies (Acquisition and Transfer of Undertakings) Act. (In 1980, when Indira Gandhi came back to power, another six banks were nationalised.)

The prime minister explained over the radio that India might be an ancient country but was a young democracy and, as such, should remain vigilant against the “domination of the few over the social, economic or political systems”. Banks, she said, should be publicly owned so that they catered

to not just large industries and big business but also to agriculturists, small industries and entrepreneurs. Furthermore, the private banks had been functioning erratically with hundreds of them failing and causing loss to the depositors who were given no guarantee against such loss.

The nationalisation did result in a huge expansion of the banking sector with branches not only increasing in numbers but also coming up in remote and rural areas where the formal credit system was hitherto unknown. Household savings increased with deposits increasing. Investments rose in the informal sector. The nationalisation of banks led to credit being provided to agriculture and small and medium industries. It was stipulated that banks had to reserve a certain

percentage of credit to the priority sectors (agriculture and small and medium industries). Differential interest rates scheme introduced in 1972 required the public sector banks to provide at lower than normal rates of interest to the weaker sections of the society.

After being re-elected in 1971 on a campaign that endorsed nationalisation, Indira Gandhi went on to nationalise the coal, steel, copper, refining, cotton textiles, and insurance industries. The main reasons were to protect employment and the interests of the organised labour. Whatever industries remained in private hands were strictly regulated. The foreign- owned private oil companies in the India created obstructions for India by refusing to supply fuel to the Indian forces during the war of 1971. In consequence, Indira Gandhi nationalised the oil companies in 1973; since then, the major oil companies have to maintain a minimum stock of oil for military use when needed.