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Economic Milestone: Devaluation of the Rupee (1966)

With the state of affairs in 1966, the rupee devaluation was unavoidable. Indira Gandhi took all the flak for it

Published: Aug 11, 2014 06:20:07 AM IST
Updated: Aug 7, 2014 04:27:29 PM IST
Economic Milestone: Devaluation of the Rupee (1966)
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Prime Minister Indira Gandhi’s move became very unpopular

On June 6, 1966, in one fell swoop, the Indira Gandhi government devalued the Indian rupee by 57 percent, from Rs 4.76 to Rs 7.50 to a dollar, triggering bitter criticism in the Parliament and media. The people, too, joined in claiming that this was the ultimate “sell-out to America and the World Bank”.

The move, however, was in the offing for some time. Since Independence, India had held the dollar constant at Rs 4.76 in spite of increased trade deficits and a reliance on foreign aid to maintain a constant valuation. The final straw was the wars India fought (with China and Pakistan) and the shock of a major drought in 1965-1966. Each instance increased deficit spending, further accelerating the already severe inflation. Besides, the World Bank, largely funded by the US, fell short of its promised aid inflows to India.

Even though PM Indira Gandhi took all the flak for the move, her predecessor Lal Bahadur Shastri (who died of a cardiac arrest during his trip to Tashkent in early 1966) had set the stage for it. According to former diplomat BK Nehru’s account (in his book Nice Guys Finish Second), Shastri is also said to have “eased out” his finance minister the previous year for opposing this devaluation.

The Indian government took the step to counter soaring inflation, but it turned out to be very unpopular and laid the foundation for distrust between the people and the government. The devaluation had its ramifications abroad as well; Oman, Qatar and the UAE, countries which used the Gulf Rupee (issued by the RBI), were forced to come up with their own currencies.
 
According to Rohit Lamba, post-doctoral fellow at Cambridge-INET at the faculty of economics, University of Cambridge, “Strictly speaking, public perception/reception should not matter for macroeconomic policy. History remembers politicians and policymakers who do the unpopular but economically sound. However, no policy decision is or should be devoid of the politics of it, especially in a democracy. With the state of affairs as they were in 1966, the devaluation was unavoidable. We can argue how we got into that state but that is another debate.”


(This story appears in the 22 August, 2014 issue of Forbes India. To visit our Archives, click here.)

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  • Akshay

    How do we reform our economy and make rupee same as dollar? If we do such thing then what impact we will get ?

    on May 16, 2016