What exactly happened when Indira Gandhi devalued the rupee on 6/6/66?

By Sunil Kumar

Throughout the 1950s and the 60s; India had high trade deficits. The Indian rupee had been pegged to the pound sterling for a long time; and even in 1966; a lot of international trade happened in the currency.

1965 was a tough year due to the war with Pakistan. Military spending increased; and the U.S allied with Pakistan; temporarily withdrew foreign aid. Lyndon Johnson; the U.S President after Kennedy; was slow to ship wheat to India; and more commercial interests prevailed in the Western establishment. The rupee was linked with the pound; which in turn; was linked to the dollar. Illustrative fact; on 15 August 1947; one rupee was equivalent to a dollar.

Expecting opposition from most quarters; Indira Gandhi did not inform the then powerful Congress president Kamraj; and made a decision implemented by her finance minister Chaudhari. So; in a move which was widely criticized; Indira’s government devalued the rupee from 4.76 to 7.50; about 57 percent. According to RBI official documents; this was to correct the state of critical disequilibrium in India’s trade situation. There are votaries of both cases in this issue; meaning those who believe the devaluation of the rupee helped the economic situation; and others who argue that it was not a healthy move.

 

Indira Gandhi is elected as the first female P...

Indira Gandhi is elected as the first female Prime Minister of India (Photo credit: Wikipedia)

After the government brought in Gandhian Morarji Desai to replace Sachindra Chaudhuri; some of the criticism stemmed; and Indira Gandhi vigorously implemented a policy of import substitution apart from the abolition of privy purses(to the ex-Indian princes) and the nationalization of banks in 1969. This led to reduction of the deficit to 100 crores in 1970. Due to the green revolution; India was becoming more self-sufficient in food needs; and had to no longer rely as much on foreign imports.

Critics argue that inflation spiked to 6.7% in the late 60s from around 5.8 in the 61–65 period. Also a long-term sustainable impact on India’s external economy did not happen; as it again faced a balance of payments crisis in 1991; the year of Narasimha Rao and Manmohan Singh’s economic reforms. India works on a managed floating exchange rate system since 1993; and was the top destination for FDI in 2015.

PM Indira Gandhi had lost faith in Western promises; and the World Bank’s dithering. Her move was a partial success as import compression happened and exports picked up.

 

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