The 1966 Devaluation

By 1966, less than two decades after independence, two wars, with China and Pakistan respectively, and prolonged droughts had ravaged the fledgling Indian economy. The much-needed foreign aid was conditional on devaluing the Indian rupee, but the dominant socialists within the Indian National Congress party and government resisted any such move. What followed was a tragedy of missteps marking India's first (failed) attempt at liberalisation.


June 1962

RBI rules out devaluation

In an internal study, the Reserve Bank of India rules out devaluation. It finds that a devalued rupee may make India's exports more attractive, but quantity restrictions on manufactured products will prevent any increase in exports. And, given the prevalent belief that demand for Indian exports does not vary with price change, the government will lose revenue.

7-11 September 1964

World Bank offers conditional aid

World Bank President George Woods offers aid to India's Finance Minister T.T. Krishnamachari on the condition that India devalues the rupee. Krishnamachari is offended and vows not to comply with the World Bank condition.

17 February 1965

India's foreign exchange reserves are at their lowest since independence

India's economic mismanagement draws scrutiny from foreign donors. Foreign exchange reserves fall to their lowest since independence. India is on the verge of breaching the reserve requirements set by donors. A last-minute transfer of confiscated gold helps India evade the breach.

June 1965

US terminates PL480

India is dependent on support from other countries to meet food supplies. The US unilaterally terminates food aid at a time when India needs it the most. Western countries and the Aid-India Consortium make use of India's situation to dictate economic policies. This further weakens the India-US relationship.

17 July 1965

Indian Finance Minister denounces devaluation

The IMF and the World Bank, once again, make it clear that aid is conditional on devaluation. In response, Krishnamachari — over a radio broadcast — publicly vetoes devaluation. The negotiations reach an impasse.

August 1965

Bell Report also recommends devaluation

Bernard Bell, head of the World Bank Mission to India, submits his report, which is the basis of negotiations for aid between India and international donors. An important recommendation, once again, is to devalue the rupee and conduct trade reforms.

December 1965

Indian Finance Minister resigns

Krishnamachari's vow to not devalue the rupee proves untenable, and he is forced to resign. This signals a change in India's position. Prime Minister Lal Bahadur Shastri is ready to devalue, and bring in some reforms for foreign exchange management, but he dies in early January. A political and leadership crisis ensues.

24 January 1966

Indira Gandhi becomes Prime Minister

In the battle for the top job, Indira Gandhi defeats the front-runner Morarji Desai and is sworn in as Prime Minister.

May 1966

Run on India's foreign exchange

In a sudden turn of events, India's foreign exchange cover drops by almost 65% in a span of three weeks. Cornered and out of options, India finally prepares a package of import liberalisation, export promotion and, most importantly, devaluation.

5 June 1966

Arm twisted to devalue

Indira Gandhi compels her cabinet, and the socialist veterans of the Indian National Congress, to back rupee devaluation as the way forward. The rupee's value is brought down by 57%. In return, India is promised US $900 million a year for 3 years.

August 1966

Pre-devaluation Schemes brought back

Within two months, Commerce Minister Manubhai Shah, who was always staunchly against the devaluation, reinstates pre-devaluation interventionist schemes such as export subsidies and import replenishments. He believes that devaluation was India's biggest mistake and decides to reverse trade policies unilaterally. This receives strong support from the socialist factions dominating Indian politics.

November 1966

Donors renege on aid promises

The first aid tranche of US $900 million comes in after a significant delay. Simultaneously, India's exports decline and debt obligations rise. Donors reduce the next tranche to US $600 million. India faces another drought. Recession and food shortages follow. India can no longer keep pace with its efforts to liberalize.

July 1967

Status Quo resumes

Within a year, the World Bank notes that devaluation has failed in liberalising the economy. India returns to its socialist status quo: continues awarding import licenses to exporting firms, and makes collaborations with foreign firms like IBM and Coca-Cola contingent upon export contributions. Unconvinced, policymakers double down on a protectionist regime.

May 1968

Devaluation, a failure

The Aid-India Consortium gives India just US $642 million, instead of the remaining US $1255 million. Due to multiple reasons - complex relationships within the Congress party, with foreign governments, disagreements among technocrats - devaluation fails to bring aid or economic freedom to India.


Learn more about the people who made it happen.

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The unsuccessful attempt at liberalisation fuelled further belief in socialist policies, and moved India closer to the USSR. It also underscored ideas such as self-reliance, and pushed India towards near-autarky, unleashing a series of nationalisation policies aimed at strengthening the protectionist regime and birthing the commanding heights period of the Indian economy.