Devaluation of the Rupee

There was pressure from the US, the World Bank and the International Monetary Fund on India to reduce its controls over trade and industry and to devalue the rupee. Indira Gandhi

did devalue the rupee in June 1966 by 36.5 per cent, increasing the dollar’s value against it by 57.4 per cent. (According to B.K. Nehru’s account in Nice Guys Finish Second, Lal Bahadur Shastri had decided upon devaluation as early as January 1966 before he went to Tashkent.) The idea behind the step was that devaluation would help India sell more abroad and get the dollars to pay for its imports of food, oil and capital goods.

The step was severely criticised. The critics seemed to be vindicated when the World Bank fell short on its commitment to quickly organise more aid. Foreign capital did not come as expected. Indira Gandhi felt betrayed and lost faith in promises made by the West – this could have been a factor in her subsequent shift leftward. Furthermore, another drought added to macroeconomic difficulties, and the effect of devaluation was ineffective due to contradictory export-import policies. Devaluation thus came to be seen as a failure. The medium-term effect of devaluation was, in fact, beneficial: India managed to avert famine as well as bankruptcy, and the trade deficit reduced drastically by 1970-71. In the short term, however, it led to inflation and failed to the extent that it was not accompanied by other reforms.

In the circumstances, the idea of liberalising the economy became politically unacceptable and was abandoned. Indira Gandhi chose to control the deficit through drastically cutting down government expenditure. This led to an industrial slowdown. Indira Gandhi had by now turned leftwards and launched some radical policies – nationalising banks and insurance, enacting the MRTP Act, enacting the Foreign Exchange Regulation Act (FERA) which placed restrictions on foreign investment and foreign companies functioning in India, taking over ‘sick’ companies (especially in the textiles sector) rather than letting them close down. In the long term, some of these steps weakened the Indian economy, causing stagnation and slow growth, but in the short term, they led to an improvement in the economic situation, so much so that India was able to stay clear of a debt crisis. Foreign exchange was painstakingly built up. The resolve was to avoid food aid; it seemed sensible to use the foreign exchange to buy food grains commercially – as was done after the poor

harvests in 1972. Of course, the success of the Green Revolution helped to restore the food economy.