How did Indira Gandhi destroy the ‘Indian Economy’?

The 50-year curse on Indian economy

Photo by Markus Winkler on Unsplash

Indira Gandhi is India’s first women prime-minister who is the daughter of India’s first prime minister Jawaharlal Nehru.

Ms Gandhi is considered a revolutionary who has faced some of the most uncertain political times in India’s history.

The two hallmark policies of her tenure are this:

i) Land ceiling act: Restriction of agricultural holding per family to not more 50 acres

ii) Bank Nationalisation: The private banks were all nationalized and bought under control of the government.

These two policies have been so popular at that time, the country’s poor have voted her back into power with a good majority multiple times.

Millions of poor who never owned a piece of land suddenly became landlords overnight and sort of achieved status that would seem impossible to their parents and grandparents.

Because of the artificial ceiling, the rich landlords with 1000s of acres were forced to part with up to 90% of their holdings at throwaway prices. This was achieved with the ruthlessness and brute force of government power ( which affected few families that I personally know ). The result of this brutal takeover of private property was almost instant, the very next year agricultural productivity hit rock bottom, India imported food grains in large quantities ( from USA) for the first time in its entire history.

The banks that have lent millions of rupees to landlords lost 80–90% on their loans as the prices of the underlying lands fell which meant 1000s of small banks started going under. As banks started going under millions of depositors lost their life savings. All this chaos laid the foundation for enough political will to nationalize even the best-lobbied Industry of the economy — Banking.

Ms Gandhi with a stroke of a pen, unified and nationalised 1000s of small and big banks into roughly 14 national Banks. This move was so popular that even the opposition parties lauded her. The poor farmers were happy coz they were finally getting loans, the middle class were happy coz they were getting cushy government jobs which paid them guaranteed salaries and regular bribes. The well-connected businessmen were happy as their political connections could now pay off big.

The most important customer of banks — the hardworking entrepreneur was left-out ( this is one of the biggest reasons why India’s still lacks a strong entrepreneurial ecosystem to this day)

When you hand power to the power-hungry politicians, they look for more power, they look for uncontrolled and unaccountable power. Ms Gandhi has overseen one of the biggest shifts in the Indian economy and its bureaucracy. Government jobs became one of the biggest job-creator for the middle class.

The Aftermath:

Stealing from well-off to pay the poor is not new, its the same old formula that Kings and queens have been using from millennia, but for the power-hungry politicians who have less long term incentive ( like the monarchs) compared to huge short-term payoff, this instinct goes into hyperdrive. These politicians want to keep that power at all costs and in a democracy that means, keeping the poor as happy as possible, as they are your largest voter base ( in a poor country like India).

The 70s are considered as one of the worst episodes of Indian economy, the GDP growth slowed or stopped, the rupee crashed hard, India lost its stature in the world.

Because of the artificial land ceiling, hard-working farmers who made profits had no incentive to keep innovating as the profits they earned couldn't be invested to buy more farmland, which meant the entrepreneurial talent slowly but surely left agriculture for other industries. This meant the productivity in agriculture never took off like in the developed countries, this coupled with reckless lending of nationalised banks to farmers has created a vicious debt-cycle which has since become the greatest vote-bank tactics of all the politicians since.

The 70s and 80s saw the rise of some of the worst criminal enterprises in the country as there was heavy bureaucracy in handling most aspects of the economy. The Rupee was crashing so hard that the government decided to control imports to arrest dollar loss. Gold imports were controlled by levying huge import duties ( of nearly 150% at its peak), this created a market for thriving gold-smuggling and associated criminal enterprise ( gold smuggling forms the plot lines of many Indian movies from this era ). Instead of letting the invisible hand of ‘market forces’ dictate the economy the very visible hand of politicians controlled everything resulting in one economic disaster followed by another.

In 1991, the state of the Indian economy was so bad, that the country was left with just enough dollars to import 1 month worth of Oil, this was the straw that broke the camel’s back. The Indian political elite lost in their power mania and superegos now had to approach the IMF with a begging bowl. The IMF having given billions of dollars previously, was not so carefree this time. This time IMF demanded a strict reform regime to grant “Dollar Loans”, in the end, it was the IMF that was the saviour of Indian Economy.

IMF made it clear that it was time India allowed ‘Market forces’ to take over instead of the centrally planned economy. The then prime minister Mr PV Narasimha Rao enacted reforms to meet the terms laid out by IMF in return for the loans that were desperately required to run the economy. Mr Rao is now hailed as some sort of economic genius for kick-starting Indian entrepreneurial spirit.

If Mr Rao is indeed the genius for allowing market forces to take over, one wonders who is the Idiot responsible for taming them in the first time, this question is conveniently never asked or discussed by any politicians.

The Market reforms of the 90s meant, various import duties were abolished, starving many criminal enterprises overnight ( and subsequently lesser and lesser films made on organized mafia).

Karma is a Bitch

Forward to 2020, India now has the world’s highest NPA ( non-performing loans aka bad loans ) to asset ratio at 15% and total NPA of worth $200 billion. ( )

Public banks run by bureaucrats have no incentive to give loans to the good-businessmen and keep low NPAs and they have all the incentive to hand loans to the Bad-guys who can bribe them ( the industry standard kick-back for granting loans is around 2–3% sometimes even higher if the underlying asset is of bad quality).

Now, every financial guru agrees ‘The great experiment of Bank Nationalisation is an utter failure’ that continues to cause deep distress to the Indian economy. However, no political party is ready to take up the responsibility for this mess created in the 70s.

Turning over to agriculture, the efficiency of Indian agriculture is sub-par at the best with techniques that at least 30–40 years old. Decades of massive schemes, freebies, loan waivers means farming is a heavily centrally controlled activity, with massive incentives for the politicians to keep it at its current state instead of improving it so as to reap political gains.

Because of massive government intervention and limited land holdings, the return on farming is usually much lower than bank rate, for this reason, no new capital enters this industry. Anyone with growth ambitions usually leave agriculture and look for allied industries like poultry or fisheries as there’s isn't significant Govt intervention.

Indian govt has easily pumped 100s of billions of dollars over the course of the last 50 years, yet a typical Indian farmer is never self-sufficient to stand on his feet. Like a gambling addict, Indian farmers never come out of debt trap only to be rescued every time, at the cost of you guessed it ‘The humble -Taxpayer’.

Parting thoughts

If you belong to the Indian middle class, this should be your wake up call. Getting a cushy comfortable govt job should not be the end goal of your kid’s life. when too many people choose the ‘low-risk’ alternative, economy ends-up in shatters.

India is the currently world’s largest supplier of migrants both high-skilled and low-skilled. Indian’s parents suffer from some of the worst emotional heart-breaks when their kids settle down in a developed country only to visit them once in two years( As you guessed, this is the on-going theme in Indian cinema today).

But again, karma is a bitch, this the price you pay for not worrying about your country for 50 years.



Data Scientist, NLP Enthusiast, Blockchain Evangelist..

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