Indira Gandhi broke away from Nehru’s economic model with managerial takeover of a private shipping company

India and Bilateral Investment Treaties
Refusal, Acceptance, Backlash
Book Excerpt 

In order to understand Indira Gandhi’s economics, it is critical to understand her politics briefly. In the 1967 general elections, the Congress party received a major setback. Although it managed a majority on its own, the total number of seats it won in the Lok Sabha (the lower house of the Indian Parliament) came down to 283 from 361 in the 1962 general elections. Due to this electoral setback and other reasons, Indira Gandhi altered her economic approach to win back support.95Sunil Khilnani. 2016. Incarnations: A Hisotry of India in 50 Lives. India: BBC and Penguin, pp. 385–6 (hereinafter Khilnani, Incarnations). She consciously adopted the ‘language of socialism’ (or more appropriately the language of populism), which she believed was the only language the general masses wanted to hear.96Khilnani, Incarnations. This radical leftward shift led to differences between the members of the Congress party leading to a split in the party in 1969.97Chandra, Mukherjee, and Mukherjee, India since Independence, p. 459. Post 1969, Indira Gandhi could remain in power only with the help of communist parties and some other regional parties, which, in turn, heightened her radical leftward shift in her policies.98Chandra, Mukherjee, and Mukherjee, India since Independence, p. 459.

Like a true populist she didn’t have much faith in institutions (judiciary, free press, etc.) that, in any liberal democracy, perform the critical role of imposing checks on abuse of public power by the executive. She believed in speaking directly to the electorate. She coined populist slogans like ‘garibi hatao’ (remove poverty) to capture the imagination of the general population. In order to strengthen her populist appeal, Indira Gandhi even went to the extent of amending the Consutution. The 26th Constitutional amendment to abolish privy purses—constitutionally guaranteed stipends to the rulers of India’s former princely states—is a case in point. True to her populist instincts she justified reneging on this important constitutional promise99See Arvind P. Datar. 2013. ‘Who Betrayed Sardar Patel?’, The Hindu, 19 November. in the name of creating equal rights for all citizens. The fact that this constitutional amendment was brought about after the Supreme Court had declared the de-recognition of all princely state rulers, attempted through a Presidential order, by Indira Gandhi’s government in 1970 illegal,100H. H. Maharajadhiraja Madhav Rao v. Union of India on 15 December, 1971 AIR 530. speaks volumes about her respect for institutions.

The populist and socialist rhetoric she adopted paid her rich electoral dividends as she handsomely won the 1971 general elections.101Chandra, Muherjee and Mukherjee 459, Khilnani, 386–7. Unlike Nehru, who believed in decentralization and evolving consensus through democratic means, his daughter was a polarizing and an authoritarian figure. She believed in centralizing power. This tendency to centralize power reached its pinnacle when Indira Gandhi imposed national emergency in the country in 1975 supsending civil and political liberties—the same liberties that people of India had obtained after a long freedom struggle against the British.

During this entire period, India took a more conscious shift towards protectionism based on inward looking economic policies.102Kumar, ‘Liberalisation and Changing Patterns of Foreign Direct Investments’, p. 1322. Also see Palit,‘India’s Foreign Investment Policy’, pp. 6–7. Unlike Nehru’s pragmatism, Indira Gandhi made a decisive shift towards adopting socialist economic policies guided by a heavy dose of populism. This included going on a nationalizing spree. Her nationalization campaign started with the managerial takeover of a private company called Jayanti Shipping Company in 1966103The Jayanti Shipping Company (Taking Over of Management) Act 1966. followed by complete acquisition in 1971.104Jayanti Shipping Company (Acquisition of Shares) Act, 1971 For political reasons, she nationalized banks in 1969.105I.G. Patel. 2002. Glimpses of Indian Economic Policy: An Insider’s View. New Delhi: Oxford University Press, p. 135. See Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970. Also see Rustom Cavasjee Cooper v. Union of India, AIR 1970 SC 564 (hereinafter Cooper v. Union of India) popularly known as the Bank Nationalization case. In fact, nationalization of banks was part of her socialist agenda laid down in the ten-point programme in 1967, aiming at redistribution of income. It also included nationalization of insurance, curbing monopolies, and imposing urban land ceiling.106Shruti Rajagopalan. 2016. ‘Constitutional Change: A Public Choice Analysis’, in The Oxford Handbook of the Indian Constitution, Madhav Khosla, Sujit Choudhry, Pratap Bhanu Mehta (eds), p. 136. Oxford: Oxford University Press. True to this programme, as Shubhankar Dam so lucidly writes,107Shubhankar Dam. 2015. Presidential Legislation in India. Cambridge: Cambridge University Press, pp. 76–8 (hereinafter Dam, Presidential Legislation in India). from 1966 till 1976, Indira Gandhi’s government passed as many as 20 ordinances,108Dam, Presidential Legislation in India, p. 77. later enacted as legislations, nationalizing a host of private sectors such as coal mines,109Coking Coal Mines (Nationalisation) Act 1972; Coal Mines (Taking Over of Management) Act, 1973; Coal.
Mines (Nationalisation) Act, 1973. Also see Sanjeev Coke Manufacturing v. Bharat Coking Coal Ltd, 1983 AIR 239.
copper,110Indian Copper Corporation (Acquisition of Undertaking) Act 1972. textiles,111Sick Textile Undertakings (Nationalisation) Act 1974. Also see Minerva Mills Ltd. & others v. Union Of India & others, 1980 AIR 1789. wagons,112The Burn Company and Indian Standard Wagon Company (Nationalisation) Act, 1976. iron,113The Indian Iron And Steel Company (Acquisition Of Shares) Act, 1976. and cotton.114The Laxmirattan and Atherton West Cotton Mills (taking over of management) Act, 1976. Also see National Textiles Corporation (South Maharashtra) Limited v. Tamil Nadu Co-operative Marketing Federation Ltd., AIR 1998 SC 2658.  Arvind Panagariya rightly describes this period as a phase where socialism struck with vengeance.115Panagariya, India, pp. 47-67.

Add your email ID below if you want to send you periodic newsletters about recently published excerpts.

As part of this socialist plan of redistribution of income, another development in this period was the enactment of the 25th constitutional amendment Act to keep adequacy of compensation outside the jurisdiction of courts. Thus, there was clearly an attempt not just to nationalize private business like banks but also to ensure that adequacy of compensation was outside the judicial scrutiny of courts. Finally, in 1978, the 44th constitutional amendment Act robbed ‘right to property’ of its fundamental right status and made it a constitutional right as part of Article 300A of the Indian Constitution.

While the Nehru government had nationalized only life insurance and left out general insurance, Indira Gandhi nationalized general insurance in 1972, purportedly to serve the needs of the economy better and to prohibit concentration of economic wealth in the hands of a few.116General Insurance Business (Nationalisation) Act 1972. See Section 2 of the Act. Under the General Insurance Nationalisation Act, 52 foreign insurer companies were nationalized.117Jain, Nationalisation of Foreign Property, p. 237. Also, just before this nationalization, the 25th Constitutional Amendment Act was enacted that substituted the word ‘compensation’ in Article 31(2) with the word ‘amount’ and it expressly ousted judicial review of the adequacy of compensation. This amendment was enacted specifically to overturn the Supreme Court ruling in the bank nationalization case118Wahi, ‘The Fundamental Right to Property in the Indian Constitution’. that held that the court has the power of judicial review in cases where compensation offered for expropriation was illusory119Wahi,‘The Fundamental Right to Property in the Indian Constitution’. See Cooper v. Union of India. As Jain writes, subsequent to these amendments, some foreign investors were not happy with the compensation given by the Indian government120Jain, Nationalisation of Foreign Property, p. 237. Another major sector that was nationalized during this phase was oil.121The Esso (Acquisition Of Undertakings In India) Act, 1974; The Burmah Shell (Acquisition Of Undertakings In India) Act, 1976; The Caltex (acquisition of shares of Caltex oil refining (India) limited Act, 1977. This impacted three foreign oil companies—Burmah-Shell, ESSO, and Caltex.122The Esso (Acquisition Of Undertakings In India) Act, 1974; The Burmah Shell (Acquisition Of Undertakings In India) Act, 1976; The Caltex (acquisition of shares of Caltex oil refining (India) limited Act, 1977. Saumitra Chaudhury. 1977. ‘Nationalisation of Oil Companies in India’, Economic and Political Weekly 12(10): 437–44. According to Jain, compensation given to these companies was based on mutual negotiations.123Jain, Nationalisation of Foreign Property, p. 239.

As part of this broader economic strategy based on socialistic, populist, and nationalistic criteria, the receptive attitude towards foreign investment, that India exhibited during Nehru’s time, also started to change in the late 1960s. Under Indira Gandhi’s leadership, India started adopting a hostile policy towards foreign investment. This was evident in the fourth five-year plan document that said:

[I]t is necessary to subject every proposal for foreign collaboration to fairly rigid tests. Import of foreign know-how particularly in sophisticated industrial fields would continue to be required. Even here, it would be essential to make simultaneous efforts for the adaptation of such know-how through indigenous effort and to improve on it to avoid the need for future purchases.124Government of India. 1970. Fourth Five-Year Plan 1969, Chapter 14,, 18 July.

For these purposes, a new agency called the Foreign Investment Board (FIB) was set up to deal with all foreign investment or collaboration cases with up to 40 per cent equity.125Kumar,‘Industrialization, Liberalisation and Two Way Flows of Foreign Direct Investment’, p. 3225; Panagariya, India, p. 60; A.V. Desai. 1993. ‘Output and Employment Effects of Recent Policy Changes’, in Recent Developments in Indian Economy Uma Kapila (ed), p. 124. Delhi: Academic Foundation. Proposals with more than 40 per cent equity were to be screened by a cabinet committee.126Kumar, ‘Industrialization, Liberalisation and Two Way Flows of Foreign Direct Investment’, p. 3225. To assist the FIB, a list was drawn up of industries and products where foreign investment may be allowed or not permitted.127Desai, ‘Output and Employment Effects of Recent Policy Changes’, p. 124. Kumar, ‘Industrialization, Liberalisation and Two Way Flows of Foreign Direct Investment’, pp. 3229–30; Panagariya, India, p. 60. Restrictions were imposed on FDI proposals that didn’t involve transfer of technology.128Kumar, ‘Industrialization, Liberalisation and Two Way Flows of Foreign Direct Investment’, p. 3230. The government also imposed restrictions on renewals of foreign collaboration agreements.129Kumar, ‘Industrialization, Liberalisation and Two Way Flows of Foreign Direct Investment’, p. 3230.

Some new laws that imposed controls on private businesses was also enacted. For example, in 1969, India enacted a Monopolies and Restrictive Trade Practices Act, which gave the government sweeping powers to regulate big businesses.130Panagariya, India, p. 60; N. Nanda. 2009. ‘The Indian Growth Story: Myths and Realities’, Journal of Asian and African Studies 44(6):750 (hereinafter Nanda, ‘The Indian Growth Story’). Tata Engineering and Locomotive Co. Ltd. v. The Registrar of the Restrictive Trade Agreement (1977) 2 SCC 55; Mahindra and Mahindra Ltd. v. Union of India (UOI) and another (1979) 2 SCC 529. It had an adverse impact on the growth of industry since it defined monopoly in terms of size131Section 2(d) of the MRTP Act defined a ‘dominant undertaking’ as an undertaking which, by itself or along with interconnected undertakings produces, supplies, distributes or otherwise controls not less than one-fourth of the total goods that are produced, supplied or distributed in India or any substantial part thereof. irrespective of the effect on the market and even if the size and market share of the firm concerned were small by world standards.132Nanda., ‘The Indian Growth Story’, p. 740. Also see Aditya Bhattacharjea. 2002. ‘Trade, Investment and Competition Policy: An Indian Perspective’, in India and the WTO Aaditya Matto et al. (eds), pp. 203–04. Washington DC: World Bank and Oxford University Press. Similarly, India enacted a new Patents Act in 1970 which abolished ‘product’ patent in foods, chemicals and drugs; thus, only patents relating to the methods or processes of manufacture of such substances could be obtained.133See Section 5 of the Indian Patent Act 1970 now omitted by the 2005 amendment. For more on this see Shamnad Basheer. 2005. ‘India’s Tryst with TRIPS: The Patents (Amendment) Act, 2005’, Indian Journal of Law and Technology 1:15.

As Panagariya argues, these restrictions begun to choke off the inflow of foreign investment and technology to India.134Panagariya, India, p. 61. Further damage to foreign investment came with enactment of the Foreign Exchange Regulation Act (FERA) in 1973.135On FERA 1973, see S. Chaudhary. 1979. ‘FERA: Appearance and Reality’, Economic and Political Weekly 14(16):734 (hereinafter Chaudhary, ‘FERA: Appearance and Reality’); Panagariya, India, p. 61. Foreign Exchange Regulation Act greatly tightened the regulatory regime on foreign capital in India.136P. Agrawal. 2002. ‘Economic Impact of Foreign Direct Investment in South Asia’, in A Handbook, Nernard Hoekman, Aaditya Mattoo, and Philip English (eds), pp. 119–120. Washington, DC: World Bank. The law required all non-bank foreign branches and companies incorporated in India that had foreign equity share in excess of 40 per cent could do business in India only if they obtained permission from the RBI.137Panagariya, India, p. 61. This permission was granted by the RBI only if foreign branches and companies diluted their foreign equity share to 40 per cent or less than that.138Panagariya, India, p. 61; Kumar, ‘Liberalisation and Changing Patterns of Foreign Direct Investments’, p. 1322. However, some foreign investments, such as companies operating in high-technology sectors or companies engaged in manufacturing and exporting 60 per cent or more of its output, were not subject to the 40 per cent rule.139Kumar, ‘Liberalisation and Changing Patterns of Foreign Direct Investments’, p. 1322; Panagariya, India, p. 61. As a result of this law, a large number of foreign companies such as British Paints (India), Reckitt and Colman, Godfrey Philips, Cadbury India, Otis Elevator, etc., diluted their stake.140See Chaudhary, ‘FERA: Appearance and Reality’, p. 737, which gives the list of companies that diluted their stake. Companies that didn’t dilute their stake to 40 per cent or less or didn’t fall in one of the exceptions to the 40 per cent rule were not given ‘national treatment’, that is, treatment equal to domestic investment.141Industrial Policy 23 December 1977, Department of Industrial Development, Ministry of Industry. Also see Section 29 of FERA. Two leading American corporations, IBM and Coca Cola, were asked by the RBI to stop their operations in India for failing to comply with FERA.142Chaudhary, ‘FERA: Appearance and Reality’, p. 734. Also see Kumar, ‘Liberalisation and Changing Patterns of Foreign Direct Investments’, p. 1322; R. Nagraj. 2003. ‘Foreign Direct Investment in India in 1990s’, Economic and Political Weekly 38(17): 1701. Also see I.J. Ahluwalia. 1991. Productivity and Growth in Indian Manufacturing. New York & Oxford: Oxford University Press; Arvind Virmani. 2005. ‘Policy Regimes, Growth and Poverty in India: Lessons of Government Failure and Entrepreneurial Success!’, ICRIER Working Paper No 170 (hereinafter Virmani, ‘Policy Regimes, Growth and Poverty in India’). Foreign Exchange Regulation Act also led to 52 other firms winding up their operations in India.143Chaudhary, ‘FERA: Appearance and Reality’, p. 734. As a result, of these regulatory measures strangulating foreign investment, the FDI stock in India increased marginally from Rs 9,160 million in March 1974 to Rs 9,332 million in March 1980.144Kumar, ‘Industrialization, Liberalisation and Two Way Flows of Foreign Direct Investment’, p. 3230. Some commentators have argued that during the time of national emergency imposed in 1975 by Indira Gandhi, there was a slight change towards encouraging foreign capital to participate in Indian industry. See V. Hewitt. 2008. Political Mobilisation and Democracy in India: States of Emergency. New York: Routledge. Also see S. Shin. 2014. ‘FDI in India: Ideas, Interests and Institutional Changes’, Economic and Political Weekly XLIX: 66 (hereinafter Shin, ‘FDI in India’). The Gross Domestic Product growth rate of India fell to a miserable 2.9 per cent in 1965–79145National Accounts Statistics of India, Central Statistical Organization. as against a respectable 4.1 per cent from 1950–65.146National Accounts Statistics of India, Central Statistical Organization.

Buy this book at Amazon.