She also asked the Economic Affairs Secretary, I. G. Patel to prepare a speech. Patel reportedly told her to exempt foreign banks and to nationalise only the big banks. When he asked her why, he was told, ‘It is a political decision’. The prize? Complete control by her of the Congress party, which has lasted to date via her descendants. Pupul Jayakar, a close confidante of Mrs. Gandhi later wrote in her memoirs that according to Mrs. Gandhi, she had been pushed into it by her adversaries. ‘They drove me to the wall and left me with no other option’, in her words.
The law ministry, too, was involved, obviously. S. K. Maitra was a joint secretary there and he noted that ‘Shri (P. N.) Haksar told me that the Prime Minister has directed that an ordinance for the nationalisation of certain banks be drafted by me immediately.
‘He also instructed me to keep the matter completely secret and told me that I should not disclose my movements to anyone’.
Possibly the most important consequence of this was that the RBI more or less formally lost its power to set interest rates. True, it had never been fully independent in this regard—the bank rate was kept at 3 per cent from 1935 to 1952 even though the RBI had wanted to increase it from time to time. But after bank nationalisation and the resulting dominance of the Finance Ministry over the banking system, the RBI also lost control of what these days is called the transmission mechanism. Indeed, such was the disempowerment of the RBI that when its board met a few days after the nationalisation on July 23, no records were kept of the discussion. The whole meeting was described in a single line: ‘There was a brief discussion on the implications of the bank nationalisation ordinance.’ When the board met again on July 30, L. K. Jha told the members that ‘…the RBI will continue to be responsible for monetary policy and ensuring compliance…by the nationalised banks.’ But this would soon be proved wrong.
A connected issue, which has been re-echoing now for a few years, was of setting up a body that would control these fourteen banks. It was, in a sense, the idea of a holding company but not in the corporate sense. Within a few days of it being suggested in Parliament, it was ruled out because no one really knew what it would entail. Nor did anyone know what to do next. The political purpose had been served and the commercial aspect would be left as is for some time. The banks would now take their orders from the government, not the RBI whose wards they were supposed to be by law.
All that the RBI would do for the next two decades was to exhort them and inspect them but without much power to penalise them. Resources transfer in the country would now happen via the banking system and progressive taxation, which also acquired a new life with the marginal tax rate reaching 97 per cent in 1973 and staying at over 90 per cent through the 1970s.
In 1970, Mrs. Gandhi presented the Budget and this is what she said in conclusion. It is worth quoting … because it laid the framework for economic policy for the next two decades, and perhaps even beyond.
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