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India's devaluation of 1966: linkage politics and crisis decision-making*

Published online by Cambridge University Press:  26 October 2009

Michael Brecher
Michael Brecher
Affiliation:
Professor of Political Science, McGill University
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Extract

Among India's foreign policy crises since independence the most intense were in the military-security issue-area. Some, like the concentration of Indian and Pakistani forces on the Kashmir and Punjab borders in July 1951, de-escalated without war. Others, like the disputed claims over the Rann of Kutch in the early months of 1965, led to limited military hostilities followed by stalemate. Still others culminated in war with India's principal neighbours - with Pakistan in 1947–9, 1965 and 1971, and with China in 1962. All of these conform to the definition of a crisis along the peace-war continuum:

Type
Research Article
Information
Review of International Studies , Volume 3 , Issue 1 , April 1977 , pp. 1 - 25
Copyright
Copyright © British International Studies Association 1977

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References

page 1 note 1. Brecher, M., ‘Towards a Theory of International Crisis Behaviour: A Preliminary Report’, International Studies Quarterly, xxi (1977)Google Scholar, forthcoming.

page 2 note 1. The 1949 devaluation amounted to 30.5 per cent, altering the rupee-dollar rate from Rs 3.3 to Rs 4.76 for 1 U.S. dollar. It was designed to maintain existing trade patterns, then predominantly with the U.K., by restoring parity in real value with the British pound which had recently been devalued. A major negative consequence for India was the instant reduction - by almost a third - of India's approximately two billion pounds worth of sterling balances, accumulated in London for services rendered during the Second World War.

page 2 note 2. The Council of Ministers comprises Cabinet Ministers (or Members of Cabinet); Ministers of State, some holding autonomous responsibility for a Government Department or Ministry, others assisting a Member of Cabinet; Deputy Ministers; and parliamentary secretaries. Neither Ministers of State nor Deputy Ministers attend regular or special Cabinet meetings, unless invited to do so, usually when a matter under their jurisdiction is on the agenda. The Cabinet, the inner body of the Council of Ministers, has ranged between twelve and eighteen members. For a succinct discussion of the formal and de facto relationship of Prime Minister to the Cabinet and Council of Ministers see Hardgrave, R. L. Jr, India: Government and Politics in a Developing Nation (2nd ed.) (New York, 1975), pp. 60–65Google Scholar.

page 3 note 1. These may be defined as perceived stimuli from the operational (real) environment. The research framework of which ‘inputs’ is a core category is elaborated in Brecher, M., The Foreign Policy System of Israel: Setting, Images, Process, (London, 1972)Google Scholar, ch. 1. In contrast earlier applications of this framework, notably the author's Decisions in Israel's Foreign (London, 1974)Google Scholar, the analysis of the two environments - psychological and operational - is merged in this case study.

page 3 note 2. These were, necessarily, articulated after the secretly-arrived-at decision.

page 3 note 3. According to a senior civil servant, they “had for years been urging me to approach the Prime Minister to fire TTK (T. T. Krishnamachari, then Finance Minister) so that India could follow rational economic policies in this regard”.

page 5 note 1. Bhagwati, J. N. and Desai, P., India, Planning for Industrialisation (New York, 1970), p. 487Google Scholar.

page 5 note 2. Verghese, B. G., ‘The Hour of Decision’, Sunday World: Hindustan Times (New Delhi), iv, 12, 24 Mar. 1974Google Scholar.

page 5 note 3. Op. cit. p. 76.

page 6 note 1. Interview, New Delhi, Apr. 1974.

page 6 note 2. Johnson, L. B., The Vantage Point: Perspectives of the Presidency, 1963–1969 (New York, 1971), pp. 225–7Google Scholar.

page 7 note 1. Report to the President of the International Bank for Reconstruction and Development and International Development Association On India's Economic Development Effort, Vol. 1, Main Report 1964165, Economic Mission Headed by Bernard R. Bell, (1 Oct. 1965), pp. 64–65, 13. The Bell Mission based its recommendations on ten reports on the Indian economy prepared by its members, dealing with agricultural policy, export and import policy, family planning, physical controls over resource allocations, and investment, public finance policy, public-sector manufacturing industries, etc.

page 7 note 2. The Bell Report's ‘advice’, especially devaluation, was known to this writer as early as the winter of 1964–5, when he was engaged in research in New Delhi.

page 9 note 1. This summary of the case for and against devaluation is taken from the admirably succinct discussion in Marwah, op. cit. pp. 300–4. The data are drawn from a dozen publications by Indian economists, bankers, former civil servants, journalists, and economic research institutions, as cited in op. cit. p. 313, n. 11.

page 10 note 1. Reserve Bank of India, Annual Report for the year ended June 30, 1966 (Report of the Central Board of Directors) (Bombay, 1966), p. 1Google Scholar.

page 10 note 2. According to one civil servant, TTK's adamant opposition to devaluation “was based largely (as so-many of his decisions) on personal antipathy - in this case to Mr Woods (World Bank President George Woods)”. Some interviewees mentioned a joint Bank-Fund experts’ visit to Delhi early in 1964 when to the same question noted above, Indian officials replied: “We are selectively dealing with it, by the stiffening of import duties, etc.” Less formally, the World Bank's Representative in Delhi, Benjamin King, and his deputy, Pantalini, had raised the idea of devaluation with their Indian Government counterparts on several occasions earlier.

page 11 note 1. The Hindu (Madras), 18 Jul y 1965, and Asian Recorder, 6–12 Aug. 1965, vol. xi, no. 32, p. 6595Google Scholar.

page 11 note 2. Indian Express (New Delhi), 20 Aug. 1965Google Scholar.

page 12 note 1. That option was very similar to Pakistan's Bonus Voucher Scheme. Introduced in 1959 by Bhutto and designed to boost exports, the system “entitled an exporter to retain a part of the foreign exchange earnings for himself as a bonus. The Government's policy of allowing imports of many scarce items only against these bonus vouchers made the scheme very attractive to the exporter…”. Mukerjee, D., Zulfiqar Alt Bhutto: Questfor Power (Delhi, 1972), p. 38Google Scholar. By 1965 it had become a crutch for Pakistan's exports and had caused serious economic and social distortions. For these reasons the B.V.S. was not favoured by India's civil servants; but selective devaluation of that type was presented as a viable option.

page 12 note 2. Kuldip Nayar also reported that, after the Indo-Pakistani war of Sept. 1965, Shastri informed him that devaluation might be tried - as a last resort, op. cit, p. 77.

page 13 note 1. Cited in Nayar, op. cit. p. 78.

page 13 note 2. Ibid.

page 14 note 1. Lok Sabha Debates (Delhi), third series, vol. 50, no. 4, col. 758, 17 Feb. 1966Google Scholar.

page 14 note 2. Nayar, op. cit. p. 86.

page 14 note 3. Strangely, the Governor of the Reserve Bank of India was not consulted on that technical decision, as he was to remark bitterly after devaluation took effect.

page 14 note 4. Lok Sabha Debates (Delhi), third series, vol. 55, no. 58, cols. 16353–4, 12 May 1966Google Scholar.

page 14 note 5. Ibid. vol. 55, no. 59, cols. 16663, 5–6, 13 May 1966.

page 15 note 1. Interview, New Delhi, Apr. 1974.

page 15 note 2. According to Bhoothalingham, Shah was kept out of the inner circle on devaluation “because he was unreliable”.

page 16 note 1. Op. cit. p. 73.

page 16 note 2. The National Diary (Delhi), vol. iii, no. II, pp. 929–31, period covering 1–15 June 1966.Google Scholar

page 17 note 1. The National Diary, op. cit. pp. 931–2.

page 17 note 2. Statesman (Delhi), 13 June 1966Google Scholar.

page 19 note 1. Patriot (Delhi), 15 June 1966Google Scholar.

page 19 note 2. The Story of My Life, vol. ii (Delhi, 1974), pp. 231–3Google Scholar. Ashoka Mehta acknowledged: “Morarji had a point. None of the three former Finance Ministers was consulted; we slipped up.” Moreover, “we were afraid that TTK might leak it; who would be held responsible?”,

page 20 note 1. Statesman (Delhi), 28 June 1966Google Scholar.

page 20 note 2. Rajya Sabha Debates (Delhi), vol. lii, no. 57, cols. 3103–19, 18 Aug. 1966Google Scholar.

page 20 note 3. Ibid. cols. 3459–67, 22 Aug. 1966.

page 20 note 4. Ibid. cols. 3480–8, 22 Aug. 1966.

page 20 note 5. Lok Sabha Debates (Delhi), third series, vol. 57, cols. 519–27, 26 July 1966Google Scholar.

page 20 note 6. Singhvi, L. M. (ed.), Devaluation of the Rupee: Its Implications and Consequences (for The Institute of Constitutional and Parliamentary Studies, (Delhi, 1968), p. 219Google Scholar.

page 20 note 7. Even Chester Bowles noted the widespread opposition, in his memoirs, op. cit. p. 139. For more extracts from the Rajya Sabha debate on devaluation, on 18, 22, 23 and 25 Aug. 1966 and from the Lok Sabha debate on the economic situation on 25, 26 July, 1–4, 8–12 Aug. 1966, see Singhvi, op. cit. pp. 232–47,

page 20 note 8. Singhvi, op. cit. pp. 94, 97.

page 21 note 1. Ibid. p. 229.

page 21 note 2. Patriot (Delhi), 26 June 1966Google Scholar.

page 21 note 3. Singhvi, op. cit. p. 232. A respected Western specialist on the Indian economy affirmed the critical assessments noted above, soon after the devaluation decision was taken. Bettelheim, Charles, India Independent (New York, 1968), p. 296Google Scholar.

page 22 note 1. Srinivasan, K., ‘Devaluation’, Free Press Journal, 22 July 1966Google Scholar.

page 22 note 2. This and the following comments by business leaders are taken from Singhvi, op. cit. pp. 224–8.

page 22 note 3. A comprehensive bibliography of Indian newspaper articles and comments on devaluation is to be found in Ibid. pp. 267–72.

page 22 note 4. Typical of the ambivalent post-devaluation steps was the lowering of import duties, in percentage terms, from 45 to 27–5 for machinery, 50 to 27.5 for primary raw materials, 70 to 50 for other raw materials and intermediaries, 25 to 15 on agricultural machinery, and from no to 10 for consumer goods; but this was offset by calculating the new duties on the new, much higher, rupee cost of the imports. Moreover, the benefit expected to accrue to exports was neutralized in part by increasing export duties a few months after devaluation.

page 23 note 1. Rosario, J. A., ‘Why Devaluation Failed Exports’, Economic and Political Weekly (Bombay), ii (25), 24 June 1967, pp. 1131Google Scholar,1133–4. See also ‘Exports After Devaluation’, Capital (Calcutta), clvii, 3942, 5 Jan. 1967, pp. 1–2Google Scholar.

page 23 note 2. Ram, Paras, ‘First Year's Balance Sheet of Devaluation’, in A.I.C.C. Economic Review (Delhi), xix, 15 Sept. 1967, pp. 9–13Google Scholar, 31.

page 23 note 3. Kuldip Nayar reported that the Soviets were unhappy with the devaluation decision, that they so informed India's Embassy in Moscow, and that Kosygin told Manubhai Shah early in July that it was a blunder. Further, that Mehta was sent to Moscow to explain the decision. Op. cit. pp. 93, 94, 95. Bhoothalingham expressed scepticism. Mehta did go to the Soviet capital in Aug. “to tie up an aid package” and recalled: “I found a stony silence among them when explaining devaluation and playing down the limits to liberalization of our economy; it was a dialogue between the deaf.” But the aid agreement was finalized. And Soviet military and economic assistance to India increased, perhaps to counter the swing to the West signalled by devaluation.

page 24 note 1. In 1964, soon after returning to New Delhi for his second tour of duty, Ambassador Bowles had proposed an Indo-American Foundation to promote progress in all fields of learning. It was to be organized along the lines of the Ford and Rockefeller Foundations and was to be financed by the enormous sum of rupees accumulated from the sale of American wheat to India over a number of years. This proposal was warmly received by Shastri and, in the winter of 1964–5, a draft agreement had been drawn up. However, it was blocked in Washington for a variety of “bureaucratic reasons”. At the official dinner given in honour of Mrs Gandhi during her visit to the United States in March 1966, President Johnson announced the readiness of the United States to go ahead with the Indo-American Foundation. The President's announcement came as a complete surprise to the Indian public, press and Parliament and was denounced not only by the Left but also by economists and political scientists, many of whom had been educated in the United States. Bowles, op. cit. pp. 135–8.

page 24 note 2. Verghese, B. G., ‘The Hour of Decision’, Sunday World: Hindustan Times (Delhi), iv. 12, 24 Mar. 1974Google Scholar.

page 25 note 1. Khera, S. S., The Central Executive (New Delhi, 1975), p. 296Google Scholar.