The Rise of Goliath

by AK Bhattacharya

  The Industrial Policy Resolution of 1956 thus did not preclude the expansion of the existing privately owned units, or the possibility of the State securing the cooperation of private enterprise in the establishment of new units, when the national interests so required. In addition to having exclusive control over the railways, air transport, arms, ammunition and atomic energy, the government was also of the view that the State must have adequate capacity in these two critical areas of transportation infrastructure—air transport and railways. It, of course, added the proviso that whenever cooperation with private enterprise was necessary, the State could ensure, either through majority participation in the capital or otherwise, that it has the requisite powers to guide the policy and control the operations of the undertaking.

  The nationalization of the coal industry or indeed of general insurance or of oil companies was not mandated by the Industrial Policy Resolution of 1956, and what drove such initiatives under the government in the early 1970s was largely a political calculation. These steps bolstered the position of Indira Gandhi in the Congress party as also in the government. The government narrative was somewhat different to justify the nationalization of the coal industry. The government continued to maintain that the growing demand for coking coal from the steel industry called for a big push to intensify the exploitation of coking coal reserves. However, the government of the day was of the view that the private sector in charge of the coking coal mines did not have recourse to the huge capital resources to make necessary investments to boost production. The government was also a little wary of the reported instances of unscientific mining practices and the poor working conditions of labour in many of the private coal mines. A combination of such factors was cited in support of the government move to go in for coal nationalization.8

  In 1971, coking coal mines were nationalized and two years later non-coking coal mines were also taken over by the government. ‘In October 1971, the Coking Coal Mines (Emergency Provisions) Act, 1971 provided for taking over in public interest of the management of coking coal mines and coke oven plants pending nationalisation,’ stated a note from the ministry of coal.9 By 1973, the government had nationalized all coalmines except those run by the Tata Iron and Steel Company and Indian Iron and Steel Company which were exempted because they were captive suppliers to their own steel plants.

  The government’s explanation for coal nationalization cited two reasons.10 The international oil market had turned volatile, followed by the oil price shock of 1973. This forced the government to re-examine its energy options. A Fuel Policy Committee was set up for this purpose. The Committee’s recommendations suggested, among other things, that coal should be developed as the primary source of commercial energy in the country. The second reason was rooted in the government’s assessment that the existing coal miners, largely in the private sector, were not making the investments in the coal sector critically needed to sustain its growth to meet the rising demand. Steel and mines minister under the Indira Gandhi government, Surendra Mohan Kumaramangalam, justified coal nationalization on the ground of conserving the scarce coal resources of the country by striving to achieve five specific goals: halting wasteful, selective and slaughter mining; planned development of available coal resources; improvement in safety standards; ensuring adequate investment for optimal utilization consistent with growth needs; and improving the quality of life of the workforce.

  There is, however, strong reason to suggest that the manner in which coal nationalization was implemented was reflective more of the Gandhi government’s political expediency than the reasons that Kumaramangalam had cited in his defence of coal nationalization while delivering many of his Parliamentary speeches. Before joining the Congress, Kumaramangalam belonged to the Left, having been a member of the Communist Party of India. He wielded considerable influence over Gandhi and her economic policies. A powerful orator and a strong believer in the idea of nationalization and a socialistic pattern of society, Kumaramangalam joined the Congress in 1967 and remained loyal to Indira Gandhi, when the Congress split in 1969. Two years later, he fought the Lok Sabha elections in 1971 from Pondicherry and won the seat. He became the steel and mines minister soon after his election and held that position till he died in an Indian Airlines air crash in 1973. Kumaramangalam’s stint in the government is also the period when Gandhi had gone into overdrive with her policies on nationalization and increased state control over economic activities.

  While Kumaramangalam had provided detailed justification for coal nationalization, independent researchers found many holes in his arguments. A research paper, written by Rajiv Kumar and published in the Economic and Political Weekly in 1981, argues how the nationalization move could have been triggered by the government’s need to manage a crisis in the coal industry rather than give shape to its socialistic policy goals. And the blame for the crisis in the privately owned coal industry would largely fall on the government’s policies that affected the mining units. The government, after all, had been exercising all kinds of controls over pricing, production, compensation norms and safety measures for the coal mining industry from 1944 onwards. Kumar’s thesis was that nationalization of coal mining was ‘forced upon the government by a complete breakdown of the industry, resulting from a collapse of profitability in the organized sector and its inability to continue mining in the prevalent market conditions. The reasons for such a collapse were the actual causes for nationalisation.’

  The reasoning put forward by Kumar, who is now the vice-chairman of NITI Aayog, the Narendra Modi government’s think tank that replaced the Planning Commission, would give a new dimension to the debate over the nationalization of the coal industry. This argument’s validity, however, does not take away from the political reasons for which Gandhi had gone ahead with nationalization. There is no gainsaying that nationalization was hugely disruptive for the coal industry, which till then was largely in the private sector.

  Once their coking coal assets were taken over by the government, private miners read the writing on the wall and began transferring their plants and equipment outside the purview of their coal enterprises for fear of losing them in the next phase of nationalization. Kumar calculates that the private miners had left a total debt of Rs 300 crore at the time of nationalization of non-coking coal mines in 1973.

  Kumar’s conclusion provided a new perspective to coal nationalization. Contrary to the widely held belief that coal nationalization was part and parcel of Indira Gandhi’s political vision of ushering in a socialistic pattern of society, Kumar’s numbers showed how the move to nationalize actually bailed out private miners, who were already under financial stress. It could be argued that coal nationalization was not just an instrument of Gandhi’s socialism, but a cleverly disguised financial rescue operation to help private coal miners.

  CHAPTER 9

  POLITICS OF ROBIN HOOD

  At around the same time as the coal industry was nationalized, the government initiated yet another move that disrupted domestic as well as foreign companies that may have had some interest in investing in India. On 19 September 1973, the Indian Parliament took two significant legislative decisions. One, it repealed an earlier law, the Foreign Exchange Regulation Act (FERA) of 1947, and passed an amended version of FERA of 1973, with more stringent provisions and wide-ranging powers for law-enforcement agencies, including the ability to arrest chief executive officers, senior officials of companies or even industrialists for violation of the rules under the new statute.

  The 1947 version of FERA had been aimed at imposing controls on the use or dealings in coins, bullion, securities or payments in foreign exchange in a situation where there was a foreign-exchange shortage. However, the enforcement of this law turned out to be lax and, on the basis of a 1972 Law Commission report, the Indira Gandhi government brought in a new and more stringent version of FERA in 1973. It made the RBI the regulator for all transactions in foreign exchange by individuals or companies. Its objective was to con
serve foreign exchange and optimize its use in a situation of shortage. The new law imposed restrictions on a host of transactions, including on import and export of certain currencies, illegal payments in foreign exchange, payment settlements in other countries, holding of immovable property outside India and establishment of businesses in India and acquisition of immovable assets in India by foreigners or foreign entities.

  How disruptive the move was could be gauged from the fact that soon after its enforcement from 1 January 1974, it was mandated that companies would have to bring down their foreign equity to below 40 per cent and those that wished to keep it above that limit must get specific clearances from the RBI. According to estimates, as many as 881 companies had applied to the RBI for an exemption to the FERA norms on a 40 per cent cap on foreign equity, but only 150 companies were allowed to exceed the ceiling. Others had to dilute their foreign shareholdings to below 40 per cent or pull out of the country. By 1977–78, as many as fifty-four companies applied to exit India and nine more followed suit in 1980–81, according to an estimate made by Prithwiraj Choudhury and Tarun Khanna in Charting Dynamic Trajectories: Multinational Enterprises in India.1 While this caused major turbulence for foreign companies that had invested in India, it was a bonanza for many Indian businesses and investors, who used the opportunity to pick up shares of many companies that had to offload their shares in the Indian market to dilute their foreign shareholding and comply with the FERA norms.

  But the overall impact of the FERA move was negative on the business environment in India. Coming as it did just four years after the enforcement of another highly restrictive law on monopolies, it became clear that Indian businesses were receiving a raw deal from a government that was overzealous in asserting its socialistic credentials and helping Gandhi, its leader, secure her hold within the ruling Congress party. To be fair, the roots of the law to curb the concentration of economic wealth grew sometime before Gandhi assumed charge as the prime minister in 1966. In May 1964, the government led by the newly elected prime minister Lal Bahadur Shastri had set up the Monopolies Inquiry Commission headed by Justice K.C. Das Gupta. In his report, Gupta noted how the concentration of economic power in a few industrial houses was a bane for the Indian economy. That report was with the government in October 1965. Shastri, however, took no action on that report.

  After Shastri’s sudden death in January 1966, Indira Gandhi led the government and soon found herself beleaguered by political pressures from the Syndicate, a powerful section within her own party. There was a simultaneous need for her to guide economic policies in a way that could establish her as a pro-poor and pro-people leader at a popular level. This goal was easy to achieve if her policies could be presented as instruments that were tough on big business. On 18 December 1969, the Indian Parliament passed the Monopolies and Restrictive Practices Act that effectively imposed an asset ceiling on industrial houses at Rs 20 crore. Any further expansion by an industry which was already above that cap would be subject to government clearance. Among the other key objectives of the new law were: control of monopolies, the prohibition of monopolistic practices and of restrictive and unfair trade practices.

  Another move that helped bolster Gandhi’s pro-poor and anti-rich image was her government’s decision to abolish the financial benefits that former rulers of provinces and states enjoyed after they had acceded to the Union of India in 1947. These benefits were granted to the rulers and princes of these provinces when the then home minister Vallabhbhai Patel had negotiated with them in 1947 for joining the Indian Union. There were more than 500 such princes and rulers who were granted these benefits, called privy purses, and these were guaranteed under Article 291 of the Indian Constitution. The annual quantum of the privy purses would vary depending on the ruler. For instance, the ex-ruler of Mysore was given an annual privy purse amount of Rs 26 lakh, followed by the ruler of Hyderabad at Rs 20 lakh, the rulers of Travancore and Jaipur at Rs 18 lakh each and the ruler of Patiala at Rs 17 lakh. There were also many other former princes, who would get as low a compensation as Rs 5000 a year.2

  The practice of paying privy purses to the former rulers of these provinces was an easy target for Indira Gandhi to enhance her image as a prime minister who had strong socialistic leanings and who would not hesitate to strike at the roots of royalty and their privileges. Even before Gandhi, attempts were made to do away with privy purses, but its abolition would have required an amendment to the Constitution. Undeterred, Gandhi went ahead and moved a Constitution amendment bill to scrap the system of the privy purses for former rulers and princes in India. She did not succeed the first time. While the Lok Sabha passed the bill, it was defeated in the Rajya Sabha in 1969. Two years later, Gandhi once again moved the bill to abolish privy purses to amend the Constitution and justified the need for such a step to reduce the government’s revenue deficit, which had come under pressure. By the end of 1971, both the houses of Parliament passed the Constitution amendment bill to end the system of privy purses.

  Gandhi had successfully converted what her critics described as a breach of promise made in the Constitution into an action that would seemingly bring about social equity and egalitarianism. Her popularity was on the rise, and her position within the Congress party was almost unassailable. The Statement of Objects and Reasons, accompanying the Constitution Amendment Bill, succinctly captured both her political and social goals behind the abolition of privy purses:

  The concept of rulership, with privy purses and special privileges unrelated in any current functions and social purposes, is incompatible with an egalitarian social order. Government have, therefore, decided to terminate the privy purses and privileges of the Rulers of former Indian States. It is necessary for this purpose, apart from amending the relevant provisions of the Constitution, to insert a new article, therein, so as to terminate expressly the recognition already granted to such Rulers and to abolish privy purses and extinguish all rights, liabilities and obligations in respect of privy purses. Hence this Bill.

  With that law, the 26th Amendment to the Indian Constitution, Gandhi reaped a political benefit from an action that actually annulled a privilege that her father, Jawaharlal Nehru, had granted to more than 500 rulers of provinces in pre-Independence India.

  More Nationalization

  Three more industries were taken over during this phase of Indira Gandhi’s turn towards socialism: General insurance, textiles and the petroleum industry. The ten-point economic policy note that Gandhi had circulated at the June 1967 AICC session had underlined the need for nationalizing the general insurance industry. This was perhaps one of the easier decisions for the Gandhi government to implement. The life insurance industry had already been nationalized in 1956.3 At that point, general insurance was deliberately not nationalized on the ground that it did not have any direct impact on the people and had more to do with business and industry. That thinking, however, changed as Gandhi was battling a new political reality she was confronted with.

  The British had set up the first general insurance company in Calcutta in 1850 and it was known by the name of Triton Insurance Company Ltd. In the following 120-odd years, the general insurance industry spread its roots across the country and there were more than 100 private companies offering general insurance policies to businesses and individuals by the time the Gandhi government decided to nationalize them. That was in 1973. All these companies were amalgamated and grouped into four companies—the National Insurance Company, the Oriental Insurance Company, the New India Assurance Company and the United India Insurance Company. A holding company overseeing all these companies was incorporated in 1972 by the name of General Insurance Company, or GIC.

  A similar exercise was undertaken for private-sector textile mills that had gone sick. The number of such financially insolvent mills rose to 103 by the end of 1972-73 and the government decided to bail them out by acquiring them in the hope that these could be revived and lakhs of jobs saved. By December 1974, the Sick Textile Und
ertakings (Nationalization) Act was notified whose purpose was to acquire and transfer these sick textile undertakings under a newly created state-owned entity. The objective of the law was to reorganize and rehabilitate sick textile undertakings so as to ‘subserve the interests of the general public by the augmentation of the production and distribution, at fair prices, of different varieties of cloth and yarn, and for matters connected therewith or incidental thereto’. The total compensation paid to the owners of these 103 textile mills was estimated at about Rs 46 crore.

  The Takeover of Oil

  The third big nationalization effort initiated by the Indira Gandhi government in this phase pertained to the petroleum industry. Oil companies in India were controlled mostly by American and British companies and their dominance continued till at least the end of the 1950s. The Industrial Policy Resolution of 1956 had clearly indicated that the petroleum sector would be the exclusive preserve of the State and all future expansion and development in this sector would be undertaken by the public sector. However, the domestic oil sector required technical collaboration from Western firms to undertake development on its own. The nature of British and American oil companies was such that India did not expect any technical assistance from them in this area. The option that India exercised was to tie up with the Soviet Union and Romania for developing its oil sector. But collaboration with the Soviet Union in the oil sector did not continue beyond a point, partly because the US companies decided to extend a helping hand and partly because the Soviet technologies had their own limitations in certain sectors of the oil industry. For instance, Soviet expertise in offshore oil exploration and production was far less advanced than that available in the US.