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IG as a precursor to Thatcher and Reagan. First, a little background. People forget that IG, as a new PM, took the advice of experts and liberalizers, incl. Bhagwati to accept the Washington proposal for reforms in 1966, including a massive devaluation. @IrvingSwisher @RajaKorman
Following that came what IG Patel dubbed the Great Betrayal by the Aid India Consortium and Washington. Without the promised aid and facing blowback from the right and the left in India and arm-twisted by JBJ over food shipments, she took the sharp turn left.
That interregnum culminated in the Garibi Hatao campaign of 1971. But by 1973, upper echelons of Indian policy circles had begun to realize that the old model was no longer working in the words of P.N. Dhar, secretary to Prime Minister Indira Gandhi.
In fact, V.K.R.V. Rao, the doyen of Indian economists, who had founded Delhi School, Institute for Economic Growth, wrote a book, “Inflation and Economic Crisis,” in 1973 which highlighted the challenge and provided a roadmap for solving the crisis. Rao called for a medicine-mix
to tackle inflation, which included stringent monetary and credit controls, curbing the fiscal deficit, wage freezes, increased imports to ease supply constraints, and increased exports to relax the BOP constraint. The book became the basis of the government’s policies in 1974.
In 1974, facing spiraling inflation, the government presented an interim budget in July 1975, just a few months after the initial budget. The interim budget, designed by Chief Economic Advisor, Manmohan Singh, and supported by P.N. Dhar, called for drastic measures to curb
inflation, mandating compulsory deposit by all salaried employees of any wage increases won through collective bargaining as well as one-half of all dearness allowances, imposed compulsory deposits of 4 to 8 percent of income for those earning above Rs. 15,000 per annum, and
ceiling on dividends. The government’s fiscal policies were framed with the aim of sharply reducing deficit financing. To this end, the 1974–75 budget curbed not only non-developmental expenditures but even development expenditures. Not even food subsidies were spared:
The budget for 1974–75 entailed a reduction in food subsidies well below the level of fiscal 1973–74. The RBI did its part, hiking rates to 11% and increasing the SLR and margins on advances. Additionally, the RBI indirectly controlled credit growth by not accommodating banks’
needs and allowing call money rates to soar above 30%. The impact was dramatic. Real broad credit growth plunged by nearly 13% by August 1974—a number that was unprecedented then and has never been approached thereafter. On the revenue account, the government surplus increased by
two percentage points of GDP. To put things in perspective, the worst real credit growth since then has been -5.5% in 1980; real credit has never contracted since 1991! On the revenue account, the government has never run a surplus since 1981!
The magnitude of the austerity imposed is unimaginable today in India and in most democratic setups. Apart from tight fiscal and monetary policies, the government took another major rightward shift in terms of pro-business attitude.
Industrial strikes had risen explosively from 1965, dealing a crippling blow to productivity. The festering conditions ultimately reached a head in 1974 when railway workers under the leadership of George Fernandes called a strike in 1974. The government used its full might
to ruthlessly crush the strike. More than 50,000 workers were arrested, along with the top leadership of the strike. Another 17,000 workers were fired from their jobs. The strike lasted from May 8 to May 27, 1974. Amidst the strike, the government carried out the first nuclear
test on May 18, which many alleged was a ruse to deflect attention from the draconian policies. The operation’s name, Smiling Buddha, was ironic in more ways than one. It is interesting to note that the number of workers involved in strikes peaked in 1973.
The government used the Emergency to further entrench the rightward shift. Strikes were basically outlawed during Emergency. Although there was a surge after Emergency was lifted, it never reached the 1973 peak. picture h/t @pseudoerasmus
