The Nehruvian Regime and the Crisis of 1965–66

The Nehruvian policy regime was focused on industrial development and self-reliance. The state channelized its resources towards the development of key infrastructural and heavy industries through the public sector. It institutionalized the planning mechanism to ensure coordination with private industries, protection from foreign competition, and subsidization of imports. The focus on developing a self-reliant heavy industry-intensive form of capitalism came at the cost of reduced public investment in the agricultural sector. Further, the lack of redistributive policies under the Nehruvian government translated into increasing rural inequality, as the gains in the sector were made by the landowning classes. The alarming aspect of Nehruvian policies – especially one aiming for self-reliance – was its heavy dependence on foreign aid. External assistance increased from INR 6 crore in 1955–56 to INR 822 crore in 1966–67, which translated into 90 percent of the BOP deficit being funded by foreign aid (Figure 3.1).

The crisis of 1965–66 was a consequence of the development trajectory followed under Nehru and was indicative of the instabilities within the choice of policies. The crisis was itself triggered by a spectacular fall in agricultural production and private consumption due to two extensive droughts in 1965– 66. India, having lost an expensive war with China and amidst another crucial one with Pakistan, did not have the resources to import food without serious consequences to budgetary surplus. It was at this crucial juncture that the USA government started negotiating conditions tied to its PL 480 aid program. In the meantime, India had no other choice but to import food grains to compensate for the losses caused by the drought; lower supply led to higher agricultural prices and, consequently, unleashed crippling inflation upon the lower-income classes in the country. These imports severely damaged India's BOP position and undermined the state's effort to maintain an overvalued currency to protect imports. At this crucial juncture, Nehru passed away, creating a leadership void in the INC and providing the opportunity for multiple vested-interest groups to struggle for control. The crisis had not only destroyed the dynamics of the Nehruvian policies but also created the conditions for political change. In the next section, I will argue that the policy changes in the Indira Gandhi regime were an outcome of conditions created by the crisis of 1965–66.