India's Aborted Liberalization-1966

Author(s): Rahul Mukherji

Source: Pacific Affairs , Autumn, 2000, Vol. 73, No. 3 (Autumn, 2000), pp. 375-392
Published by: Pacific Affairs, University of British Columbia

Stable URL: https://www.jstor.org/stable/2672025

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide
range of content in a trusted digital archive. We use information technology and tools to increase productivity and
facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at
https://about.jstor.org/terms

Pacific Affairs, University of British Columbia is collaborating with JSTOR to digitize,

preserve and extend access to Pacific Affairs

This content downloaded from

122.163.42.222 on Thu, 10 Jun 2021 07:22:45 UTC
All use subject to https://about.jstor.org/terms
 India's Aborted
Liberalization - 1966
Rahul Mukheji*

W Ad thy did India not sustain its trade liberalization after devaluing its
currency in 1966? Exogenous shocks (such as wars and droughts)
leading to balance of payments crises can generate the transition
from import substitution (ISI) towards export promotion.' When
governments do not have much foreign exchange left to pay for their imports,
they need the help of the International Monetary Fund (IMF) since
commercial lenders are not easily persuaded to lend to such risky customers.
The classic dependence argument would suggest that dependence on the
IMF for precious hard during a foreign exchange crisis should enable the
IMF to dictate a policy of trade liberalization on the borrowers.2 The Indian
devaluation of 1966 challenges this view of economic transition. India bowed
to external pressure in the immediate aftermath of a severe foreign exchange
crisis, a foray into liberalization that was short-lived, however, and India
reverted back to an ever more stringent form of import substitution after
1969. 1 examine the political economy of a reversed liberalization in this paper.
India's decision not to sustain liberalization after the initial 1966 rupee
devaluation constitutes an important decision sequence in India's trade
policy. It meant that India had decided to forego the growth opportunities
provided by international trade that Europe, Japan, Taiwan and Korea had
exploited so effectively. Second, for a student of political economy, it provides
the insight that it is difficult to engineer economic transitions in developing
countries as large and self-contained as India, purely on the basis of external
pressure. This goes against the literature on economic transition that credits

*The author gratefully acknowledges the comments and help received from Sumit Ganguly, V. A.
Pai Panandiker, Jagdish Bhagwati, P. N. Dhar, Arjun Seng-upta, David Baldwin, Helen Milner, Jack
Snyder, Anjali Mukherji and the three anonymous reviewers of the journal. The shortcomings that
yet remain must rest with the author.
l A typical import substituting industrialization (ISI) policy prescription is characterized by high
tariffs, an overvalued exchange rate and import licenses. These measures are supposed to protect the
domestic producer from foreign competition at home. Export oriented policies, on the other hand,
characterize a situation where the effective exchange rate for exports is not significantly different
from the effective exchange rate for imports. See Jagdish Bhagwati, "Rethinking Trade Strategy," in
Development Strategies Reconsidered, eds. John P. Lewis and Velleriana Kallab (NewJersey: Transaction
Books, 1986).
2 For the concept of dependence see Albert 0. Hirschman, National Power and the Structure of
Foreign Trade (Berkeley: University of California Press, 1945/1980), chapter 2; David A. Baldwin, "Inter-
dependence and Power: A Conceptual Analysis," International Organization vol. 43, no. 4 (1980); and
Kenneth N. Waltz, Tieowy of InternationalPolitics (NewYork: McGraw Hill Publishing Co., 1979), chapter 7.

375

This content downloaded from

122.163.42.222 on Thu, 10 Jun 2021 07:22:45 UTC
All use subject to https://about.jstor.org/terms
 Pacific Affairs

the ThirdWorld debt crisis and subsequent IMF pressure as the harbinger of
economic reform.3 I argue that domestic executive orientation is essential
for charting out a development trajectory.
The 1966 case was unique in India's economic history. This was the only
time India was faced with the conjuncture of a severe foreign exchange crisis
in the presence of an executive which was in favour of import substitution. I
have argued elsewhere that the oil shocks (1973 and 1980) did not pose a
severe foreign exchange constraint for India, thanks to remittances pouring
in from non-resident Indians.4 In 1991, the combination of a pro-liberal
executive and a severe crisis of foreign exchange changed the trajectory of
India's trade policy.5 The years 1966 and 1991 are comparable contrasts. In
1991, the pro-liberal executive opened India up to trade and investment
aided by a balance of payments crisis; in 1966, a foreign exchange crisis did
not lead to sustained liberalization when executive orientation was just the
opposite. In this paper, I document the importance of executive orientation
by describing the adverse impact on liberalization due to an executive
orientation that was averse to it.
Section 1 will describe the outcome I seek to explain, namely, the short-
lived policy change in favour of trade liberalization in 1966. Section 2 will
analyze the causes behind the failure to sustain trade liberalization. First
and foremost, I will describe executive orientation. I argue that Prime
Minister Indira Gandhi, leader of the Indian executive, was not convinced
about the merits of liberalization. Second, while organized capital overtly
supported the devaluation, it was seeking protection and subsidies through
the back door. Organized labour was divided on the question of trade liberal-
ization. Section 3 will analyze the various factors at work and draw conclusio
I regard the orientation of labour and capital as important to the analysis
of trade and investment liberalization, since both were relatively small and
cohesive economic interest groups in India.6 They were therefore likely to

'Barbara Stallings, "International Influence on Economic Policy: Debt, Stabilization, and Structural
Reform," in The Politics of Economic Adjustment, eds. Stephan Haggard and Robert R. Kaufman (New
Jersey: Princeton University Press, 1992); Stephan Haggard and Sylvia Maxfield, "The Political Economy
of Financial Internationalization in the Developing World," in Internationalization and DomesticPolitics,
eds. Robert 0. Keohane and Helen V. Milner (New York: Cambridge University Press, 1996); and
Joan M. Nelson, ed., Economic Crisis and Policy Change (Princeton: Princeton University Press, 1990).
4Rahul Mukherji, "APath to Trade and InvestmentLiberalization," (Ph.D. diss., Columbia University,
1999), chapter 4. See also Montek Singh Ahluwalia, "Balance-of-Payments Adjustments in India, 1970-
71 to 1983-84," World Development vol. 14, no. 8 July 1986), p. 943.
5Ibid., chapter 5.
6 For a discussion on how compact organized groups impact policy see Mancur Olson, The Logic of
Collective Action (Cambridge, MA: Harvard University Press, 1971), chapter 1. Industry was a small an
cohesive group organized around the Federation of Indian Chambers of Commerce and Industry
(FICCI). Organized labour was small in proportion to the total Indian labour force but could disrupt
industrial activity. In the 1990s only about 27 million or 8.5 percent of India's labour force was in the
organized sector. See Roberto Zagha, "Labour and India's Economic Reforms," Paper presented at
the Conference on India 'sEconomicReforms (Cambridge, MA, Center for International Affairs and Harvard
Institute for International Development, 13-14 December 1996), pp. 34.

376

This content downloaded from

122.163.42.222 on Thu, 10 Jun 2021 07:22:45 UTC
All use subject to https://about.jstor.org/terms
 India's Aborted Liberalization - 1966

have an impact on the executive's decision-making. Second, both groups

were likely to be directly affected by the devaluation. For example, if most of
the industrial class practices import substitution rather than being export
oriented, these corporations are likely to be the losers in the immediate
aftermath of trade liberalization. Devaluation of the rupee would make
imports more expensive and therefore increase the price of finished Indian
goods that require the importation of intermediate goods. The Federation
of Indian Chambers of Commerce and Industry (FICCI), India's leading
industry organization, supported the devaluation overtly while opposing it
behind the scenes.
Labour being the abundant factor of production, it should benefit from
trade liberalization. Being cheap in labour-abundant countries, it should
become the source of comparative advantage, which should enable it to
gain from increased trade.' However, if the overwhelming majority of the
labour force is unorganized, and organized labour is largely in the import
substituting sector, labour as an organized group might oppose devaluation
because it hurts import substitution. Organized labour in India was divided
on the rupee devaluation of 1966.

Short-lived Liberalization

Severe dependence on the IMF and the World Bank for resources produced
a policy shift in the direction of trade liberalization. The value of the rupee
(Rs) was brought down from Rs. 4.76 to the dollar ($) to Rs. 7.50 to the
dollar. Devaluation of the rupee was considered to promote trade because it
would render Indian exports cheaper in foreign markets, while making
imports more expensive. The donors had opined that this was a good way to
promote Indian exports while discouraging the excessive imports required
for import substitution. Second, export subsidies in the form of the import
entitlement scheme and tax credits were abolished. A few cash subsidies,
which had been introduced in 1966, were also removed.8
One exception was made to the laws of the market. Countervailing export
duties on India's traditional manufactures such as jute, tea and raw cotton

'This is derived from the results of the Stopler Samuelson theorem. See Wolfgang Stopler and
Paul A. Samuelson, "Protection and Real Wages," Review of Economic Studies vol. 9 (1941); and Ronald
Rogowski, Commerce and Coalitions: How TradeAffectsDomesticPoliticalAlignments (Princeton, Princeto
University Press, 1989), chapter 1.
'The Bell Mission's Report of 1 October 1965 summarizes the donor position well. World Bank
president George Woods had sent Bernard Bell, under the auspices of the Bell Mission, to evaluate
the crisis. John Lewis and Charles Lindblom had done intensive work on India on behalf of USAID,
which had helped the Bell Mission immensely. See Mukherji (1999), "A Path to Trade and Investment
Liberalization," (fn. 4), pp. 68-70. See also John P. Lewis, The Quiet Crisis in India (Washington.:
Brookings Institution, 1962). My knowledge about the Bell Report is derived from David B. H. Denoon,
Devaluation Under Pressure: India, Indonesia, and Ghana (Cambridge, MA: The MIT Press, 1986), pp.
72-75; and John P. Lewis, India's Political Economy: Governance and Reform (Delhi: Oxford University
Press, 1997), p. 138.

377

This content downloaded from

122.163.42.222 on Thu, 10 Jun 2021 07:22:45 UTC
All use subject to https://about.jstor.org/terms
 Pacific Affairs

were allowed because it was thought that India had a monopoly position as
a supplier of these goods. Their demand did not vary much with price.
Therefore, these duties, by raising the price of exports, would only bring the
Indian exchequer more foreign exchange, as was the case in the pre-
devaluation era.9Jagdish Bhagwati and T. N. Srinivasan have calculated the
net devaluation after discounting for these policy changes: for exports it was
21.6 percent while for imports it was 44.8 percent.'0
The policies outlined in the aggressively pro-trade budget speech of
Finance Minister Sachin Choudhury of 6 June 1966 were quickly reversed,
beginning in August 1966 ." John D. Rockefeller reported to World Bank
president George Woods inJuly 1967: "The devaluation was a flop; India did
not make the policy changes we expected."''2 The pre-devaluation import
entitlement scheme, which had been abolished, was replaced by another
similar import replenishment scheme; both these measures were a means of
subsidizing exports.13 In May 1967, a policy of supplying indigenous metals
such as iron, steel and tin plate at international prices by subsidizing domestic
industry was adopted and a policy of refunding excise and import duties on
direct inputs into exports was continued. The State Trading Corporation
continued to suffer losses on the exports of rice, sugar, art silk fabrics and
jute goods.14
The regulation of trade grew even more comprehensive after 1968. Import
licenses were made easily available to units that exported more than ten
percent of their output. Collaboration with multinationals like IBM or Coca
Cola was conditioned by exports obligations. The Foreign Investment Board
was established the same year to scrutinize all investments with greater than
forty percent equity participation. There were to be severe restrictions on
foreign investment unaccompanied by technology transfers.'5 Bhagwati and
Srinivasan note in their pioneering study of India's trade liberalization of 1966:

9Denoon (1986), Devaluation Under Pressure (fn. 8), pp. 72-75.

10Jagdish N. Bhagwati and T. N. Srinivasan, Foreign Trade Regimes and Economic Development: India
(New York: Columbia University Press for the National Bureau of Economic Research, 1975), p. 97.
11 For a text of the radio broadcast see: "Finance Minister's Broadcast: 5June 1966," in Devaluation
of the Rupee: Its Implications and Consequences, ed. L. M. Singhvi (New Delhi: S. Chand and Company,
1968), pp. 251-56.
12Denoon (1986), Devaluation Under Pressure (fn. 8), p. 72.
1 Under the import entitlement schemes, eligible exporters were allowed to keep a pre-specified
part of the free on board (f.o.b.) value of their export earnings. Given the exchange control regime
prevalent at that time, these entitlements had a market premium, which could be construed as export
subsidies.
141 It is easier to quantify net devaluation than the level of export assistance. Bhagwati and Srinivasan
quote Frankenna's work that suggests that the cash subsidy for engineering goods and steel was 12.4
percent and 8 percent of the f.o.b. prices respectively. See Bhagwati and Srinivasan (1975), Foreign
Trade Regimes and EconomicDevelopment: India. (fn. 10), pp. 105-7.
15 See Nagesh Kumar, "India: Industrialization, Liberalization and Inward and Outward Foreign
Direct Investment," in Foreign Direct Investment and Governments, ed. John H. Dunning and Rajneesh
Narula (London: Routledge, 1996).

378

This content downloaded from

122.163.42.222 on Thu, 10 Jun 2021 07:22:45 UTC
All use subject to https://about.jstor.org/terms
 India 's Aborted Liberalization - 1966

By 1969-70, the liberalization appeared to have been largely reversed.

The import premium was back to 30 to 50 per cent on the average,
export subsidies were reinstated and were up to high levels, industrial
de-licensing amounted to little, especially because of continuing
quantitative restrictions (QRs), automatic protection with QRs was still
the order of the day, and the picture looked very similar to that which
obtained during 1962-65.16

The Causes of Short-Lived Liberalization

In this section, I argue that it was the foreign exchange crisis and the
consequent dependence on international donors to finance India's
development that forced India to devalue the rupee. For Prime Minister
Indira Gandhi, financial need rather than a pro-trade orientation drove
devaluation. There is substantial evidence to suggest that she was not a votary
of devaluation and her political supporters were opposed to devaluation.
Indian industry acquiesced to the devaluation since it understood the need
for foreign exchange to finance import substituting industrialization (ISI).
The trade unions were divided. The Congress Party-backed Indian National
Trade Union Congress kept quiet while the left-sponsored unions opposed
the devaluation.

The Foreign Exchange Crisis

The balance of payments crisis of 1966 resulted from wars and droughts that
had put a severe constraint on the financial resources available for the Fourth
Five-Year Plan. India had suffered a humiliating defeat at the hands of China
in 1962 and, emboldened by the Chinese success, Pakistan engaged India in
the Rann of Kutch between April and June 1965 and had opened another
front in Kashmir's Chamb sector by July 1.17 In that period of national
emergency, the National Development Council voted sweeping authority to
Prime Minister Shastri to "reorient, alter, and amend the plan as necessary,
to meet the emergent situation and safeguard the country's security and
long-term interests."18 In a situation of dire emergency, Shastri directed I
Planning Commission to draft an Annual Plan for 1966-1967 in advance of
the draft outline of the Fourth Five-Year Plan.
The wars had come with severe droughts and stagnant agricultural
production, which had not grown between 1960 and 1963. Subsequently,
food-grain production dropped by 17 percent between 1964-1965 and 1965-
1966. The wholesale price of food-grain shot up by 14 percent and by

lc Bhagwati and Srinivasan (1975), Foreign Trade Regimes andEconomicDevelopment: India (16), p. 30.
17 Sumit Ganguly, Origins of War in South Asia (Boulder, Westview Press, 1992), Chapters 1 and 3;
and Vijayjoshi and I. M. D. Little, India: Macroeconomics and PoliticalEconomy (Delhi: Oxford University
Press, 1994), p. 74.
18 Francine R. Frankel, India's Political Economy: The Gradual Revolution (Princeton: Princeton
University Press, 1978), p. 285.

379

This content downloaded from

122.163.42.222 on Thu, 10 Jun 2021 07:22:45 UTC
All use subject to https://about.jstor.org/terms
 Pacific Affairs

November 1965, all buffer stocks of food had been exhausted.'9 At

commercial prices, India would have needed to pay $400 million for food
imports.20 Defense expenditures had also risen from 2 percent of the gross
domestic product (GDP) in 1960 to 4 percent of GDP in 1964. Despite a
total net aid of $1.3 billion in 1965-1966 (2.4 percent of GDP), the foreign
exchange reserves at Rs. 2 trillion would pay for only about two months of
imports.2' The need for food imports at reasonable prices and the foreign
exchange shortage made India critically dependent on the U.S., the World
Bank and the IMF.
At a time when India needed cheap food-grain imports the most, suppliers
were unwilling to oblige. Dismayed by the war between India and Pakistan,
the U.S. terminated the four-year agreement for food aid to India and
Pakistan under the PL 480 program inJune 1965. Subsequently, theJohnson
administration implemented a policy of "short tether," making stocks available
for only a few months. Against an estimated need of 8 million tons, the U.S.
released only 2 million tons between September and December 1965. The
failure of seasonal monsoons in 1965 was followed by another such failure
in 1966. In December 1966, PresidentJohnson agreed to commit only half
of the 1.8 million tons of PL 480 grains for the February and April shipments.22
The non-U.S. donors were not willing to oblige either. France would only
sell wheat on commercial terms; the Soviet Union was not prepared to listen
to India's requests until December 1966; and Canada could only provide a
limited amount of wheat owing to problems at its West Coast grain terminals.23
In 1967, India needed about 10 million tons of food-grains, of which the
U.S. committed 3.6 million tons, the USSR 200,000 tons, Canada 200,000
tons and Australia 150,000 tons. PresidentJohnson wanted to see India move
in a more market-friendly direction before supplying the 5.7 million tons of
wheat that India still needed.24 India was therefore highly dependent on
Western donors for food-grains and foreign exchange on the eve of the
devaluation episode inJune 1966.
India's resource position was very fragile in 1965, with export earnings
not likely to exceed Rs. 51 trillion against import requirements of Rs. 53
trillion. In addition, debt-servicing obligations would amount to Rs. 13.5
trillion. India would be short by Rs. 15.5 trillion even if no further
developmental activity were undertaken. If the Food and Agriculture

'9Ibid., p. 286.
20 Robert L. Paarlberg, Food Trade and Foreign Policy: India, The Soviet Union and the United
(Ithaca and London: Cornell University Press, 1985), p. 146.
21Joshi and Little (1994), India: Macroeconomics and EconomicPolicy (fn. 17), pp. 73-74.
22 Frankel (1978), India's Political Economy. (fn. 18), p. 286.
23Paarlberg (1985), Food Trade and Foreign Policy. (fn. 20), pp. 158-59.
24James Warner Bjorkman, "Public Law 480 and the Policies of Self-Help and Short-Tether: Indo-
American Relations, 1965-68," in The Regional Imperative: The Administration of USForeign Policy Towards
South Asian States UnderPresidentsJohnson and Nixon, ed. Lloyd I. Rudolph and Susanne Hoeber Rudolph
(NewJersey: Humanities Press, 1980), pp. 232-33.

380

This content downloaded from

122.163.42.222 on Thu, 10 Jun 2021 07:22:45 UTC
All use subject to https://about.jstor.org/terms
 India's Aborted Liberalization - 1966

Ministry's import requirement of Rs. 11 trillion were added to this, India

would need Rs. 26.5 trillion in external assistance. The Planning Commission,
on the other hand, asserted that the Fourth Five-Year Plan could only be
implemented if external assistance worth Rs. 40 trillion were made available.25

Executive Orientation

The "executive" in my story is a rational actor with an incentive to increase

its tenure in office. The executive's preferences are likely to be defined by a
variety of international and domestic factors. Whether the interest in securing
tenure in office will lead to a preference for a particular policy trajectory
depends on the level of home benefits and international effects.26
Domestically oriented producers will demand protection, while
internationally oriented producers will demand free trade. Internationally,
protection at home is a negative since a benefit to producers at home hurts
producers abroad. Other countries may therefore retaliate. Thus, the
executive must take into account the balance of power between domestically
and internationally oriented producers at home and the pressures from
abroad before expressing its preference for or against freer trade.
The executive is likely to have tremendous agenda-setting powers in times
of a foreign exchange crisis. My argument does not focus attention on the
divisions between the executive and the legislature. foreign exchange crisis
renders a divided government less likely since the executive's power to set
the agenda and its ability to make side-payments aids the executive in pre-
empting and dealing with its differences with the legislature.27 Moreover, in
times of a severe foreign exchange crisis, when quick decision-making is of
the essence, it is especially easy for the executive to craft a unified government.
Indira Gandhi was able to get the majority of the votes in the Parliament in
June 1966 despite widespread publicly expressed opposition in the legislature.
Prime Minister Indira Gandhi was chief executive in 1966.28 She was not a
convinced liberalizer nor an ideologically driven person. Her twin objectives
in her early days as prime minister in 1966 were to get out of the foreign
exchange crisis and to consolidate her power.29 The most important factor
that converted Gandhi towards a radical version of ISI was her political
support base. She was most popular within the left in Congress and outside
of it. These were the people who were most opposed to the devaluation package.

15Frankel (1978), India's Political Economy (fn. 18), p. 285.

26Helen V. Milner, Interests, Institutions, And Information: Domestic Politics And International Relations
(Princeton, N.J.: Princeton University Press, 1997), Chapter 2, pp. 241-42.
27Ibid, 103-6, 109-12. For divided government and its implications, see chapter 4.
28 Interview with Jagdish Bhagwati, New York, 14 November 1997; Denoon (1986), Devaluation
Under Pressure (fn. 8), p. 38.
29 Interviews with P. N. Dhar, New Delhi, 29July 1997; Arjun Sengupta, New Delhi, 20 August 1997;
andJagdish Bhagwati, NewYork, 14 November 1997. One story of how dependent Gandhi was on the
support of intellectuals was narrated to me byJagdish Bhagwati. She was very perturbed when K. N.
Raj, the influential vice-chancellor of Delhi University expressed support and then withdrew it.Jagdish
Bhagwati, then a young economist, was in the pro-devaluation camp.

381

This content downloaded from

122.163.42.222 on Thu, 10 Jun 2021 07:22:45 UTC
All use subject to https://about.jstor.org/terms
 Pacific Affairs

Political Opposition

Gandhi became Prime Minister on 19 January 1966 after the death of Lal
Bahadur Shastri on 11 January. Among a variety of factors that propelled
her to the prime ministership, two important ones stand out. First, she was
relatively inexperienced and therefore the least threatening to senior party
bosses. Second, she had an image perceived as soft towards the left, having
supported activities organized by Socialist Forum groups in the late 1950s.
She was very accessible to leaders of the left opposition parties and had been
good friends with people like Bhupesh Gupta and Mohan Kumaramangalam
since her days in London. Gupta and Kumaramangalam subsequentlyjoined
the Communist Party of India.30
Gandhi's socialist image had helped her win the crucial support of
Congress president Kamraj who was reputed to be committed towards socialist
goals. Of 63 politicians interviewed by Michael Brecher, including 36
Congress MPs, 30 ranked Congress president Kamraj first in his commitment
to socialist goals while 20 ranked Gandhi first.3' Apart from Kamraj's
agreement with Gandhi on political goals, he was also satisfied that, being
young and inexperienced, she would pose less of a threat to his position as
president of the Congress party. Kamraj's support was essential for Gandhi
helping convert Gandhi's political appeal into political power. She won 355
out of 526 votes to defeat veteran Congressman Morarji Desai for the prime
ministership.32
Gandhi was just learning to play the premier's role in 1966, and was
therefore particularly sensitive to the way in which members of parliament,
especially those who backed her, reacted to the devaluation package
announced in 1966. The widespread opposition in her ranks turned her
unambiguously in a pro-ISI direction. First, her supporters worried that she was
becoming too independent. Second, those committed to socialist goals were
unhappy that market forces were being unleashed in an uncoordinated way.
Seemingly, servile dependence on foreign aid was viewed with great distrust.
The secrecy with which Gandhi had to proceed with the negotiations
made opposition more likely.33 She had to exclude Congress president
Kamraj, who received his advice from T. T. Krishnamachari, a committed
socialist and the previous finance minister. Neither could she confide her
plans to Morarji Desai, whom she had defeated to become prime minister in
1966, nor to Commerce Minister Manubhai Shah, who ran an empire based
on export subsidy. The devaluation package being a pro-market move, she
could not rely on her old friends in the left either. The result was widespread
political discontent among her political supporters.
Even senior Congressmen like Kamraj, who had propelled Gandhi to the

30Frankel (1978), India's Political Economy (fn. 18), pp. 289-90.

31 Ibid., p. 290.
32Ibid., pp. 290-91.
33Denoon (1986), Devaluation UnderPressure (fn. 8), p. 47.

382

This content downloaded from

122.163.42.222 on Thu, 10 Jun 2021 07:22:45 UTC
All use subject to https://about.jstor.org/terms
 India's Aborted Liberalization - 1966

prime ministership quietly opposed the devaluation move. Kamraj's top aide,
R. Venkatraman, characterized the situation as "politically unwise and
economically unsound."34 T. T. Krishnamachari (ex-finance minister),
Manubhai Shah (commerce minister), and Morarji Desai had all expressed
unhappiness. Shah is reported to have said that the devaluation had been
the biggest mistake since independence and hereinstated export subsidies
by mid-August 1966.35 T. T. Krishnamachari was not convinced the Bell Report's
recommendation to devalue the rupee and he was forced to resign as finance
minister in December 1965. Aid distribution was conditioned upon devaluation,
and was therefore within the purview of his finance portfolio. Krishnamachari
had delayed action on the Bell Report while he was finance minister.36
The left, represented by the Communist Party of India (CPI) and the
Communist Party of India - Marxist (CPM), took the most vocal positions
against the devaluation package, but criticism was not limited to these two
parties. The more moderate socialists (PSP: the Praja Socialist Party; SSP:
Samyukta Socialist Party) and the right-wing nationalists (JS: Jan San
joined the bandwagon. Everyone sang in chorus that it was pressure that
made India bend. They expressed pessimism about export expansion due
to devaluation and also that domestic inflation could be checked. I will
provide here a sample of this vehement opposition.
The case for external pressure was made in telling terms across the
ideological spectrum. Parliamentarians had not forgotten that Planning
Minister Asoka Mehta had openly told the Parliament on 17 February 1966:
" There is no question, as far as the government is concerned, of considering
the question of devaluation."37 Noted parliamentarian Hiren Mukherjee of
the CPI clarified this point with great force. He declared before the Parliamen

It should be common knowledge here that the decision to force India

down to her knees had been made by the cloak and dagger aid givers
of America long ago. The so called Bell Mission .. had reported at the
end of 1964, but was for a while given a short shrift. Then the World
Bank called in its ally, the IMF, which put the screw on when it got a
chance to do so over the repayment of IMF standby credits ... Finally,
a note was sent to members of the Congress party which said: 'Action
on devaluation could not be postponed as all further aid negotiations
hinged on it.'38

Bhupesh Gupta (CPI) recollected that former Finance Minister T. T.

Krishnamachari had reported to him the pressure he had been subjected to

3 K Sundaram, "Political Response to the 1966 Devaluation - 2," Economic and Political Weekly
(Bombay) vol. 7, no. 36 (19 September 1972), p. 1883.
35Denoon (1986), Devaluation Under Pressure (fn. 8), p. 49.
36Denoon (1986), Devaluation Under Pressure (fn. 8), pp. 64-65.
37"Answers To Some Questions In Lok Sabha Regarding Devaluation - February 17, 1968", in L.
M. Singhvi (1968), Devaluation of the Rupee (fn. 11), p. 260.
38"Lok Sabha Debates," vol. 57, columns 1653-54.

383

This content downloaded from

122.163.42.222 on Thu, 10 Jun 2021 07:22:45 UTC
All use subject to https://about.jstor.org/terms
 Pacific Affairs

before his resignation.39 Other leading parliamentarians such as Ram

Manohar Lohia (SSP), Atal Behari Vajpayee (JS), A. K. Gopalan (CPM),
Banka Behari Das (PSP), Frank Anthony (independent), andJ. B. Kripalani
(independent), all reiterated this point.40
Second, the argument that there would be no significant trade benefits
from devaluation was picked up from the intellectual debate.4' Mukherjee
(CPI) reminded the House of the Commerce Ministry Report of 1965-1966,
where it had been argued that devaluation would not benefit trade. Gupta
(CPI) pointed out that only 18 to 20 percent of India's exports require subsidy
and might therefore benefit from devaluation. Moreover, the export target
(after devaluation) of Rs. 80 trillion was not any greater than the Rs. 51
trillion target before devaluation. Das (PSP), S. N. Dwivedi (PSP), andJ. B.
Kripalani (independent) raised matter of the inelasticity of traditional
exports. Das also contended that if import controls could not bring down
imports, neither could devaluation.
Third, there was near unanimity that prices had risen due to increased impor
prices owing to devaluation.42 The Congress tried to counter these charges by
suggesting that these rises were due to seasonal variations and the continued
impact of drought, but these arguments did not deter the opposition.
The only opposition party whose reaction ranged from ambivalence to
support was the free enterprise Swatantra Party which had close links to
industrialists. Perhaps the most open support within the Swatantra Party
came from M. R. Masani who is reported to have said:

If devaluation constituted a first step in a policy of economic realism in

place of the doctrinaire policies pursued by the Congress Government,
it would have some desirable results in boosting the export and
promoting the inflow of foreign capital.

Among the other major spokespersons of the Swatantra party, N. Ranga was
ambivalent on this issue while N. Dandekar was sympathetic under the
circumstances.43

Evidence of Political Necessity Driving the Rupee Devaluation

There is evidence to suggest that Gandhi was responding to external pressure

rather than implementing a well-designed indigenously generated policy
package.John Lewis, the director of USAID in 1966, mentions three instances

31 Sundaram (1972), "Political Response to the 1966 Devaluation - 2" (fn. 34), p. 1889.
40Ibid., pp. 1889-90.
41Ibid., pp. 1890-91.
42 Ibid., p. 1891.
43For M. R. Masani's reaction see: "Round-Up of Reactions," in L. M. Singhvi (1968), Devaluation
of the Rupee (fn. 11), p. 222. For the reactions of N. Ranga and N. Dandekar, see Sundaram (1972),
"Political Response to the 1966 Devaluation - 2" (fn. 34), p. 1891.

384

This content downloaded from

122.163.42.222 on Thu, 10 Jun 2021 07:22:45 UTC
All use subject to https://about.jstor.org/terms
 India's Aborted Liberalization - 1966

that lend credibility to this contention. First, he was surprised that Pitambar
Pant, a powerful member of the Planning Commission, accepted not only
the liberalization measures but also the devaluation deal. Lewis notes:

He would have anticipated my surprise at finding the country's

prototypical central planner in such a pro-market posture. Even though
Pant is reported to have listened carefully to Jagdish Bhagwati's
eloquent interventions in the internal debates, it is unlikely Pant took
the stance he did because of the persuasiveness of his young
neoclassicals. Rather, for him the main issue still was Plan scale; for
the fourth plan to have the size he thought minimal would require
major, indeed, increased, foreign assistance; and, as we have seen, in
the autumn of 1965, with the replenishment of IDA, the country's
second largest donor in doubt, aid from the largest donor, the US,
had been on hold since spring and doubly held up since the outbreak
of Indo-Pakistani hostilities in September."44

Second, Lewis notes that L. K.Jha, a secretary close to the prime minister
at the time of the crisis, provided confirming testimony to the pressure thesis
twenty-one years later. To quote Lewis once again:

When, in the course of a 1986 conversation, I asked him about the sources
of the two great reform initiatives of the sixties,Jha was rather chauvinistic
on the subject of agriculture; agricultural reform, he insisted, reflected
mainly Indian ideas and initiatives. But when I asked about liberalization-
cum-devaluation, he laughed merrily. 'Oh that', he said, 'that was what
George Woods told us we had to do to get aid. "I

Third, Gandhi was ambivalent about the execution of the policy package
just days before the devaluation was announced before Parliament. In May
1966, she approved the agreement between World Bank resident George
Woods and India's planning minister Asoka Mehta. In early June, Gandhi
called on some senior Congress leaders for discussions, pretending that the
matter was still up for debate. Congress president Kamraj was outraged and
insisted on a formal consultation with the leadership of the party. At this
stage, Gandhi wavered on the implementation of the devaluation package.
It was on the insistence of B. K. Nehru, the Indian ambassador to the U.S.,
that the die had been cast as far as the aid-cum-devaluation deal was
concerned. Gandhi finally decided to go ahead with the devaluation
announcement before the Parliament on 6June.46

Capital's Acquiescence

Indian industry acquiesced to the devaluation package, but a large segment

44Lewis (1997), India's Political Economy (fn. 8), p. 135.

45Ibid., p. 136.
46Ibid., p. 141. See especially footnote 7 on page 141.

385

This content downloaded from

122.163.42.222 on Thu, 10 Jun 2021 07:22:45 UTC
All use subject to https://about.jstor.org/terms
 Pacific Affairs

of industry was hurt. There was much disparity between the public statements
and the internal concerns within the FICCI, the major industry association
representing domestic capital in India at that time. The small trading
associations were either ambivalent or critical of the devaluation package.
The tea producers and the Goa Mineral Ore Exporter's Association were
the most positively disposed towards the devaluation package. The Associated
Chambers of Commerce and Industry (ASSOCHAM), representing foreign
capital, was rather quiet.
The FICCI had evolved into the most important industry association
during this period. It had close links with India's nationalist movement and
had often supported its concerns. Mohandas Gandhi, the father of the Indian
National Congress, had addressed the Fourth Annual Convention of the
FICCI on 7 April 1931. In that address, Gandhi sought to involve the
commercial classes in the mainstream of the nationalist movement. He told
members of the Federation:

I cannot forget the services rendered by the commercial classes, but I

want you to go a step further. I want you to make the Congress your
own and we would willingly surrender the reins to you. The work can
be better done by you. But if you decide to assume the reins, you can
only do so on one condition. You should regard yourselves as trustees
and servants of the poor."47

Early presidents of the Federation, such as Sir Purshottamdas Thakurdas

and G. D. Birla, had turned down invitations from the viceroy to sit on a
consultative committee of the Round Table Conference. At other times, the
Federation had openly opposed British rule in India.48
The FICCI had worked in close cooperation with the government of
independent India to position itself as the major industry association by
1966. The FICCI had 170 members in 1965, including 49 chambers of
commerce, 39 trade associations, and other industry associations. In addition,
366 associate members included banks and insurance, shipping and
manufacturing firms. Its concerns represented both industry and trade. Its
resources had increased from Rs. 131,423 in 1947 to Rs. 1,395,270 in 1966.
The Federation was the spokesman of big business in the country.49
The FICCI's public reaction was different from its private concerns. A
prominent member and future president (in 1967), L. N. Birla made a radio
broadcast favouring the devaluation but casting doubts about export duties
to tax windfall profits. Being close to the government, the FICCI also placed

47 Mohandas K. Gandhi, "Address to the Fourth Annual Session of the Federation," in H.

Venkatsubbiah, Enteiprise and Economic Change: 50 Years of FICCI, (New Delhi: Vikas Publishing
Private Limited, 1977), p. 171.
48 Stanley A. Kochanek, Business And Politics In India (Berkeley, Los Angeles & London: Universit
of California Press, 1974), pp. 162-65.
49Ibid., pp. 170-73.

386

This content downloaded from

122.163.42.222 on Thu, 10 Jun 2021 07:22:45 UTC
All use subject to https://about.jstor.org/terms
 India's Aborted Liberalization - 1966

advertisements in the newspapers supporting the devaluation.50 Within the

FICCI, however, the devaluation was treated as an admission of policy failure.
Finance Minister Sachin Choudhury, who attended a meeting of the FICCI's
committee in June 1966, conceded that the devaluation was an extreme
step that was absolutely necessary. In return for devaluation, the Federation
asked for freer imports of raw materials and components, adjustments in
export duties, export assistance, and larger rupee finance. Prime Minister
Indira Gandhi urged the president of the Federation, Ramanbhai Amin, to
treat the devaluation episode as an established fact. She also stressed the
need to create a proper political climate as various forces were pulling in
different directions.5'
In a letter dated 23 June 1966, the secretary general of the FICCI, G. L.
Bansal, urged Commerce Minister Manubhai Shah to consider the need for
export assistance consequent on devaluation. Bansal sent similar letters to
Asoka Mehta (planning minister), to I. G. Patel (economic advisor) and
Bhoothalingam (secretary in the finance ministry) and to L. K.Jha, who was
a secretary to the prime minister.52 The devaluation was supposed to reduce
special need-based export assistance, but the FICCI was seeking this assistance
in a variety of areas. First, Bansal urged easier access to foreign exchange
and finance, preferably under generous rules provided by the National
Defense Remittance Schemes. Second, easier access to raw materials and
components-based imports were suggested. Third, it was urged that
preference be given to exports of goods with lesser import content such as
processed foods and certain types of chemicals. Fourth, there was the matter
of the scale and type of import entitlements; greater leeway was urged on
both counts. Fifth, more assistance was sought for trade with areas from
which India earned foreign exchange rather than for those with which India
had rupee trade.
A number of small industry associations were opposed to the devaluation.53
B. D. Somani, president of the All-India Manufacturers Organization,
expressed concern that projects with a substantial import content that had
been committed would lead to a spiraling of prices. He urged export
incentives for non-traditional exports. R. C. Shah, president of the All-India
Importers Association, asserted that devaluation would not solve the
fundamental imbalance in India's imports, which were one-and-a-half times
its exports. These imports were driven by the needs of defense and
development and were therefore not easy to adjust with exports. K. K. Sheth,
president of the All-India Exporter's Chamber, andJ. H. Doshi, president of

5"Denoon (1986), Devaluation UnderPressure (fn. 8), p. 68.

51Venkats-Lbbiah (1977), Enterprise and Economic Change (fn. 47), p. 139.
5 FICCI, Correspondence and RelevantDocuments Relating to Important QuestionsDealt with by theFederation
during the Year 1966 (New Delhi: Federation House), pp. 51-55.
53 "Round-Up Of Reactions: Trade and Industry," in L. M. Singhvi (1968), Devaluation of th
(fn. 11), pp. 224-28.

387

This content downloaded from

122.163.42.222 on Thu, 10 Jun 2021 07:22:45 UTC
All use subject to https://about.jstor.org/terms
 Pacific Affairs

the All-India Association for Industries, both expressed skepticism about

increased exports, given the inelastic nature of the demand for them. G. D.
Somani, president of the Cement Manufacturer's Association, was skeptical
that the withdrawal of export incentives plus the imposition of heavy export
duties would nullify any of the export-friendly effects of the devaluation
package. A. K. Rungta, vice-president of the Federation of Indian Mineral
Industries, was skeptical about the role of the State Trading Corporation.54
He contended that if the State Trading Corporation ate up the benefit of
the devaluation, this would have a demoralizing effect on industry.
Surprisingly, foreign capital was quiet. The ASSOCHAM, the apex body
representing foreign capital, a role that the FICCI played for domestic capital,
had been a strong proponent of economic liberalization. However, it was
rather quiet during the devaluation episode. In a recent volume discussing
ASSOCHAM's history as a liberalizer, I found the devaluation episode
conspicuous in its absence.55 The annual reports for the years 1966 and 1967
did not even mention this development.56 David Denoon, an authority on
the crisis episode, thinks that ASSOCHAM's dismay was driven by the fact
that MNC executives lost valuable salary as a result of the devaluation.57
The Indian Merchant's Chamber, a member of the ASSOCHAM with
influence in the Western region around Bombay, was more direct in its
opposition. P. A. Narielwala, an ex-president, was critical of the devaluation
on the grounds that it would lead to inflation and reduce the price of Indian
exports abroad. Its vice-president, Dr. R. C. Cooper, asserted that the
devaluation was a halfhearted measure and a more judicious policy would
involve devaluation plus export incentives. He also contested the idea that
devaluation would bring import substitution to an early end by making
imports dearer.58
Two groups were overwhelmingly favourable towards devaluation.59 B. C.
Ghosh, a leading tea planter, was of the opinion that devaluation would
boost India's tea exports to the UK, the U.S.A. and Australia. The devaluation
would neutralize the special advantages that countries like Sri Lanka enjoyed
because of better shipping facilities. Ghosh did not think that the export
duty of Rs. 2 per kilogram of tea would affect India's exports. Second, M. S.
Talaulicar, president of the Goa Mineral Ore Exporters Association, opined

54 The State Trading Corporation was responsible for all exports of sugar, tanned hides and silver
in India. It acted as a canalizing agency responsible for the export of certain goods. Other similar
agencies were the Minerals and Metals Trading Corporation, the Steel Authority of India Limited,
Projects and Equipment Corporation, Tea Trading Corporation, etc. See Nitish K Sengupta, Government
and Business (New Delhi: Vikas Publishing, 1987), p. 378.
55 Partnership For Progress: The ASSOCHAM Stowy 1920-1995 (New Delhi: ASSOCHAM, 1995).
56ASSOCHAM: Forty-Seventh Annual Report: being thatfor theyear ended 31st October 1966 (New Delhi).
ASSOCHAM: Forty-Eighth Annual Report: being that for the year ended 31st October 1967 (New Delhi).
57Denoon (1986), Devaluation Under Pressure (fn. 8), p. 68.
58"Round-Up Of Reactions: Trade and Industry", in L. M. Singhvi (1968), Devaluation of the Rupee
(fn. 11), pp. 224-28.
59 Ibid., p. 228.

388

This content downloaded from

122.163.42.222 on Thu, 10 Jun 2021 07:22:45 UTC
All use subject to https://about.jstor.org/terms
 India 's Aborted Liberalization - 1966

that the devaluation would boost mining exports. According to Talaulicar,

about three-fourths of the extra earnings resulting from devaluation would
go to the producer. This would render 400 idle iron ore mines in Goa
economically feasible.
The vast majority of Indian industry was therefore opposed to the
devaluation package. Yet, the apex organization, FICCI, offered valuable
public support to the ruling party. The ASSOCHAM remained quiet. The
crisis produced this preference in favour of acquiescence to devaluation
despite interests in perpetuating the pre-devaluation status quo. A preference
in favour of the status quo would be even more debilitating for Indian industry
at the time of the foreign exchange crisis. Import substituting industrialization
required financing to purchase imports, which would not be forthcoming
from external donors if India did not devalue its currency. Thus, in the short
run, acquiescence to devaluation was preferable to industry rather than
opposition to it.

Organized Labour: Divided

The announcement of the devaluation package in June 1966 aroused

opposition within the left-sponsored trade union movement. The Communist
party-backed All India Trade Union Congress (AITUC)was most vocal in its
denouncement of the policy change. S. A. Dange, the general secretary of
the AITUC noted:

The imperialists have failed to dislodge our independence and make us

walk into their camp in two crises of 1962 and 1965 border wars. They
do not hope to stage a military coup like in Ghana and Indonesia.. Hence
they are trying economic blockade, hoping to conquer India by an
economic coup or financial takeover.. .The devaluation move was blatantly
denied in the parliament and deceitfully carried out behind its back,
when it adjourned. This is just what is called a CoUp.60

Satish Loomba, the AITUC's secretary in 1966, in an article entitled

"Devaluation -A Shameful Act of National Betrayal" published in the AITUC's
journal, Trade Union Record, took a radically critical position on the devaluation
package.6' First, he contended that after the devaluation, one dollar would
buy more Indian goods, resulting in a decline in India's terms of trade.
Second, the duty on exports would drive down the export incentive that
would have accrued to the exporter due to devaluation. Third, manufactured
exports would suffer since the advantages owing to devaluation would be
overshadowed by the increased costs of imported components. Fourth, the
contention that increased imports through non-project aid would lead to

G "Downl with Devalued Bankrupt Government," Trade Union Record (New Delhi: AITUC)
1966, p. 1.
6 Satish Loomba, "Devaluation - A Shameful Act of National Betrayal," Trade Union Record (New
Delhi: AITUC), 2OJune 1966, pp. 1-2. See also AITUC's statement on page 2.

389

This content downloaded from

122.163.42.222 on Thu, 10 Jun 2021 07:22:45 UTC
All use subject to https://about.jstor.org/terms
 Pacific Affairs

greater utilization of installed capacity was called into question. There were
other bottlenecks to capacity utilization such as shortages of electricity, water
and raw materials. Moreover, whether or not the quantum of non-project
assistance would materialize was still doubtful. Fifth, invisible trade covering
air and shipping freight, insurance and banking, which involved dependence
on foreign corporations, would require more foreign exchange reserves.
According to Loomba, a variety of factors would directly hurt worker
interests. First, a larger quantity of goods exported would leave fewer goods
for the home market and therefore, internal scarcity would drive up prices.
Second, consumer goods that involved import substitution would cost more
and rising prices would reduce the real income of workers. Third, the
statement by the IBM chief that devaluation would render economical the
manufacture of computers in India was deplored in no uncertain terms.
Computers were viewed as man-eating machines that would devour thejobs
of working people. The general secretary of the AITUC, S. A. Dange, warned
that the next move by the government would be the sellout of public sector
enterprises to multinational corporations (MNCs). Mr. Dange therefore
urged the two million workers of the country to unite themselves in order to
act against this possibility.62
Industrial strike activity increased after 1966.63 In that year, 1.4 million
workers were involved in 2,556 disputes causing a loss of 13.85 million working
days. In 1967, there were 2,815 disputes involving 1.5 million workers causing
a loss of 17.2 million workdays. States where communist parties were the
strongest, West Bengal and Kerala, saw the highest level of labour militancy,
with 5.9 million working days lost in West Bengal, and 2.3 million in Kerala.
The strikers took issue with two important concerns.64 First, labour unions
had been opposing automation in the work place. The National Labour
Commission's (1966-1968) recommendation that automation had to be
rationalized according to the needs of the workplace met with severe
resistance. The anti-automation movement of the employees of the Life
Insurance Corporation reached its peak in the 1967-1969 period.
Second, the Essential Services Maintenance Act (1960) was promulgated
to check strike activity among central government employees. The Central
Industrial Security Force was also set up to restrict labour militancy. The All-
India State Government Employees Federation coordinated the opposition
to these moves by the central government. There was a major strike on 5
January 1967. Again, on 19 September 1967, 2.5 million central government
employees went on strike. The demands were largely restricted tojob security
and a higher wage. The central government countered these moves through

62 S. A. Dange, "After Devaluation, Next Move Of Congress Government Is: Sell-Out Of State
Sector," Trade Union Record (New Delhi: AITUC), 5July 1966, pp. 1-2.
63 Sukomal Sen, Working Class of India: History ofEmergence and Movement 1830-1990 (With an over
up to 1995) (Calcutta: K P. Bagchi & Company, 1997), p. 394.
6 Ibid., pp. 389-93.

390

This content downloaded from

122.163.42.222 on Thu, 10 Jun 2021 07:22:45 UTC
All use subject to https://about.jstor.org/terms
 India 's Aborted Liberalization - 1966

the Essential Services Maintenance Act under which striking workers could
be imprisoned for six months, or fined Rs. 1000, or both. About 48,000
temporary employees'jobs were terminated and the total number of people
arrested or prosecuted crossed the 10,000 mark.
The AITUC (communist), the Hind Mazdoor Sabha (socialist) and a
variety of unions unconnected with the Central Trade Unions supported
the strike. However, the Congress-backed Indian National Trade Union
Congress [INTUC] and the National Federation of Indian Railwaymen
opposed it. The United Front government in Kerala headed by the
Communists refused to take action against striking employees in that state
despite pressures from the central government. Subsequently, 6 million state
and central government employees observed 19 August 1969 as Anti-
Victimization Day.
Labour was divided on the issue of devaluation. Labour unions in India
are very politicized organizations.65 The Communist party of India was
vociferous in its denunciation of the devaluation and took the lead in
organizing labour protest. The Congress-backed INTUC, however, remained
relatively silent throughout the period.

Conclusion

The foreign exchange crisis of 1966 occurred at a time when Prime

Minister Indira Gandhi was not convinced about the benefits of devaluation.
Gandhi had just become prime minister in 1966 with support from the left
within and outside Congress. Being practical and not particularly swayed by
ideological concerns, Gandhi understood the quid pro quo of direly needed
foreign exchange in return for the devaluation of the rupee. Subsequently,
her political supporters opposed this move. Since Gandhi was the chief
executive behind the 1966 devaluation package, it is reasonable to code the
executive in 1966 as being pro-ISI.
Industry had predictably turned towards favouring the devaluation
package in the short term. The FICCI, representing domestic industry with
a major interest in import substitution made a variety of public
announcements supporting devaluation. It even advertised in newspapers
supporting the finance minister's speech of 6 July 1966. The ASSOCHAM,
which represented foreign capital, kept quiet. Yet the FICCI, the ASSOCHAM,
and a variety of industry organizations were internally concerned about the
consequences of devaluation. This supports the hypothesis that industry's
support for liberalization through acquiescence was just a short-run
phenomenon inspired by the shortage of foreign exchange. It was driven by
an effort to continue import substitution in the long run, rather than by an

5 Pravin Sinha, "Indian Trade Unionism at Cross-Road," Indian Journal of LabourEconomics vol. 3,
no. 37 (1994), pp. 772-73. I also interviewed Mr. Sinha in New Delhi on 19 August 1997.

391

This content downloaded from

122.163.42.222 on Thu, 10 Jun 2021 07:22:45 UTC
All use subject to https://about.jstor.org/terms
 Pacific Affairs

internal drive to seek international competitiveness.

Organized labour was divided. It was not acquiescent to devaluation in
the same way as industry. I have described how the left within the labour
movement completely denounced the devaluation package. While strike
activity did not directly address the issue of devaluation, the number of such
episodes increased in 1967. But the Congress-backed INTUC and its allies
did not support this activity with the same vigour. When 2.5 million central
government employees joined the national strike on 19 September 1967,
the INTUC and its ally, the National Federation of Railwaymen, refused to
join the strike. The reason labour's behaviour deviated from short-run
acquiescence to liberalization was due largely to the highly politicized nature
of trade unions in India, which reflect the interests of the parent party. Leftist
parties and their trade unions protested while the Congress-supported Indian
National Trade Union Congress kept quiet.
A foreign exchange crisis at a time when the executive orientation was in
favour of import substitution produced a temporary retreat to trade
liberalization. The momentum of trade liberalization could not be sustained
after the foreign exchange situation improved. The short-lived trade
devaluation of 1966 therefore illustrates the inability of the donors to pressure
policy change in the absence of a political will in its favour. Trade and invest-
ment liberalization must therefore appeal to the executive and gain domestic
political support to sustain itself in a large developing country like India.

Centre for Policy Research, New Delhi, March 2000

392

This content downloaded from

122.163.42.222 on Thu, 10 Jun 2021 07:22:45 UTC
All use subject to https://about.jstor.org/terms