Indira Devalues The Rupee: A Gamble That Paid Off

Six months after becoming Prime Minister, in June 1966, Indira Gandhi took a decision that spelt almost certain political suicide. She devalued the Indian Rupee as India was facing an economic crisis. Among her many critics were members of her own party.

Indira’s decision was seen as a shocking sellout – a mortgaging of India’s independence. But she made this bold move as the country faced a Balance of Payments crisis and a severe drought following the 1965 war against Pakistan.

On top of runaway inflation and severe food shortages, the country’s foreign exchange reserves were depleted. India had been running trade deficits – that is, higher imports than exports. This had been managed by foreign aid since 1947.

But this aid was cut off by the US in 1966, after the 1965 war with Pakistan. The World Bank asked India to devalue the rupee as a condition to resume aid, along with insisting that India also liberalise imports in order to receive aid and loans.

Indira was promised additional food supply and $900 million in non-project aid by American President Lyndon Johnson in return for devaluation. Indira agreed to do this during a trip to the US. It was a huge risk.

On 6th June 1966, Indira called a surprise Cabinet meeting and the decision was taken to devalue the Indian rupee because the IMF board was to meet a few hours after the Cabinet met in New Delhi, to approve the new exchange rate. The rupee was devalued by around 57%!

From Rs 4.76 to the US dollar, it fell to Rs 7.50 to the dollar. Indira was accused of being a lackey of Western powers when she announced the devaluation, making her critics (most from her own party) more vocal when the promised US aid did not materialise.

Indira hadn’t consulted K Kamaraj, Congress president and leader of the powerful ‘Syndicate’ before she took the decision, which left him furious. He felt such a decision wouldn’t go down well with the people during the 1967 general election. But Indira remained undaunted.

She addressed the nation and underlined the economic crisis India was facing. With this decision taken, Indira now took on her critics and foes. She embarrassed the US on the world stage by condemning the relentless bombing of Vietnam.

Indira travelled to Moscow and issued a joint statement with the then Soviet Union, criticising the US’s war in Vietnam, bringing the Soviets closer to India. At home, she took on the Syndicate, split the party and won the elections for the Congress in 1967.

Indira Gandhi’s decision to devalue the Indian Rupee remains a highly debated topic even today. But she had little choice. What’s more important is how the course of India’s modern history was changed by one tough decision.

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