The Emergency: The economic crisis that preceded the political

Hardly had the government taken office in 1971 when it was faced with the Bangladesh crisis, which put the economy under heavy strain on account of the ten million refugees. This was followed by war with Pakistan and the termination of US aid.

The economy deteriorated further because of the failure of the summer and winter rains in 1972-3, which resulted in a sharp decline in agricultural production; food grain output came down by 8 per cent.

When OPEC raised oil prices fourfold overnight in 1973, a bad situation became a crisis: India's import bill suddenly increased by a billion dollars. The oil price hike also caused an across the board increase in import prices, especially of food and fertilisers. The result of all these events, over which the government had no control, was an unprecedented bout of inflation.

The Price level rose by 23 per cent in 1973 and escalated to about 30 per cent by the middle of 1974.

The economy had become too fragile to withstand these setbacks without a reorientation of strong basic policies. The preceding eight years – that is, the three years of plan holiday plus the Fourth plan period—had shown no improvement in its performance; in fact, the rate of growth of national income had decreased. So, had industrial investment, particularly in the sectors producing basic and capital goods.

Not only was economic growth not picking up, the basis of future growth was getting eroded. An economy which had been suffering from low growth had virtually nothing to cushion the sudden deterioration in the balance-of-payments situation caused by OPEC.

To save the country from financial bankruptcy, to sustain the imports of oil, fertilisers, and other essential items, and to prevent unacceptable shortages of food supplies, this crisis had to be met.

But this could not be managed without the adoption of several unpopular measures. Besides going to the international Monetary Fund, the World Bank, and donor countries for more aid, India's rigid controls and licensing needed to be loosened to increase production and promote exports. Large business houses had to be permitted to expand production, which they had not been free to do before the crisis. To check inflation the government had to take steps not only to increase the supply of goods, but also to restrain the demand for them. For this purpose, all wage increases and half of the additional dearness allowance of salaried employees were frozen and converted into compulsory deposits.

These measures were criticised as anti-working class, even though a ceiling was imposed on all dividends paid by private companies, and tax payers with an income of more than ₹15,000 were required to put an additional four to eight per cent of their income into compulsory deposits.

All these steps went against the earlier policy pronouncements of the government, which aimed at less dependence on foreign aid, the decentralisation of economic power, the promotion of distributive Justice through nationalisation, an expansion of the public sector, and a stricter regulation of the private sector.

The government thus became vulnerable to criticism for ideological retreat. Mrs. Gandhi found herself in a difficult situation as she was now subjected to contrary pulls from her professional advisers and her party colleagues. Her dilemma in this regard was highlighted dramatically when the government took over the wholesale trade in wheat and abandoned it precipitately when it ran into problems that had been anticipated.

The proposal had been strongly opposed by B.S. Minhas, an economist member of the Planning Commission and her own office, but since it was even more strongly supported by the party leadership, it had gone through. The fiasco of the wheat trade takeover brought out clearly the contradictions arising out of the dual role of a prime minister as head of an administration grappling with harsh economic realities on the ground, and as leader of a ruling party saddled with excessive ideological baggage.

But for these difficulties, the crisis could have been turned into an opportunity for more basic reform of the economy. With politics in command, the exercise for reform could not go beyond the management of immediate crisis.

The leftists in the ruling party had developed clever techniques to keep Mrs Gandhi committed to their ideological line. Manipulating the press was one such technique. The Following episode will serve as an illustration. In late September 1973 when, on the initiative of the prime minister's office, a task force was being set up to suggest ways and means of handling the economic crisis, I submitted a note to Mrs Gandhi which spelt out the policies that the task force might consider.

In view of the political sensitivity of some of the policies suggested, she showed it to some of her political colleagues. One of the more radical among them got a highly distorted and colourful version of it published in The Times of India. The authorship of the note was jointly attributed to me, to L.K. Jha (governor of Kashmir), and to B.K. Nehru (high commissioner in London).

Since Jha and Nehru were supposed to be pro-American, their collaboration was expected to discredit the note. “The Jha-Nehru-Dhar paper argues that the benefits India could reap in the form of investment, technology and exports, justifies inviting multinational giants to enter the Indian market in selected fields. This would involve a reversal of the existing policy, which inhibits the inflow of foreign capital,” the newspaper reported in bold letters. This embarrassed Mrs Gandhi so much that she decided to contradict the story herself.

Extracts taken from the book Indira Gandhi, The Emergency, and Indian Democracy by PN Dhar, with permission from Oxford University Press