Half-eaten dinners in Delhi, dashes to D.C., and many houses divided. This is the story of India’s failed 1966 devaluation.

Shortfall by Prakhar Misra; Illustration by Jerusha Isaac for

In September 1964, the world was worried about India’s balance of payments situation. The World Bank and International Monetary Fund were having meetings in Tokyo, and IMF’s Managing Director, Pierre-Paul Schweitzer, broached the topic with India’s Finance Minister, T.T. Krishnamachari, known to most as TTK. The IMF was discreet, but there was something about the manner in which Schweitzer conveyed his concern that ticked off TTK. Participants at the meeting recall that TTK “exploded” at Schweitzer.

To put it mildly, TTK had a mind of his own. In the late 1920s, he'd founded a general goods distribution agency called the TTK Group. (It started selling its famous pressure cookers under the brand name ‘Prestige’ in the mid-1950s.) Then, in the late 1940s, he’d been one of the most vocal members of the Constituent Assembly. His worldview was informed by competitiveness: he used to say that “a Finance Minister who wanted to do something had to be aware that there were man-eaters on the streets of Delhi.” [1]

TTK’s first stint as finance minister was between 1956 and 1958. When he started his second stint in 1964, things were looking bleak for India. Since independence, the backbone of the country’s economic policy was the centralised Five-Year Plan. The Second Plan, meant for the years 1956 to 1961, depended heavily on deficit financing to fund heavy industrialisation. To establish industries, India needed to import capital goods like machinery, iron, and steel. Almost a quarter of the total allocation of the Second Plan was to be financed by India’s foreign exchange reserves.

The only way to generate foreign reserves was to export more. That made trade liberalisation essential for India. But the government had swerved off this path in 1956 to pursue import substitution, which meant producing domestic versions of goods that needed import. But since it needed raw materials to set up those industries in the first place, India continued to import more than it exported, and its trade balances were net negative. Since its disastrous war with China in 1962, defence expenditure had skyrocketed. It was enough to make any finance minister’s bad temper permanent.

The reserves alone did not suffice. India had to also rely on external aid, much of which was provided by the Aid-India Consortium, comprising some developed countries and organisations like the World Bank and the IMF. In 1961, India had already drawn $250 million from the IMF.

This was the backdrop to the 1964 Tokyo meetings. Schweitzer was convinced that India needed to liberalise its economic policy. The devaluation of the rupee would help exports and shore up foreign exchange, and would be the cornerstone of this reform. But TTK wasn’t keen—he viewed the demand for devaluation as arm-twisting by Western countries.

And so the battle lines were drawn, not just at the international level but domestically, too. The devaluation eventually did take place in 1966, but not before politicians and economic bureaucrats had split down the middle. Good economics took a backseat to the egos fuelling this fire, and personality clashes determined the outcome of negotiations on which the future of millions of people hinged. India didn’t want to be seen as needing help, and Washington—that is, both the American state as well as the Bretton Woods institutions, the Bank and the IMF—didn’t miss the opportunity to throw its weight around.

Outside economic circles, the 1966 devaluation is now mostly forgotten. But it was a key moment in Indian economic history, because its failure led India down the path of increased state control and regulation in the 1970s and 1980s. Those decades were marked by stagnant growth, the licence raj, and long waiting lists for telephone connections and the homegrown Ambassador car. Ultimately, it would take India’s third devaluation in 1991 to unsettle the stasis.

In the Woods


ssume a loaf of bread costs ₹1 in India, and the exchange rate is $1 for ₹1. If the US wants to import bread worth $10, it can buy 10 loaves. Say India devalues its currency and makes the rupee cheaper: let’s assume $1 can now buy ₹2. The US can now import 20 loaves for the same amount of money. This could potentially make India more competitive in export markets, and earn it more foreign currency to finance its imports. The US is happy because it can buy more for the same amount. In a nutshell, this is how devaluation works.

But TTK didn’t want this to happen. Firstly, the Reserve Bank of India had already considered the devaluation measure in 1962, and advised against it. The Pendharkar Report pointed out that Indian exports faced quota restrictions in developed countries. Even if the rupee became cheaper, countries like the US wouldn’t purchase beyond a certain ceiling, making the entire exercise moot. This report also concurred with a 1958 RBI report, whose authors had concluded that the export lag was due to structural issues in the economy, and not because the rupee was overvalued.

More crucially, perhaps, TTK was wedded to the idea of self-reliance and independence in policy matters. He felt trade had to be minimal because the focus needed to be on domestic production, and that Western nations shouldn’t be allowed to dictate terms to India, which was a young country but one that already had a character of its own.

But the suggestion of devaluation was gradually turning into a clamour. George Woods, president of the World Bank, had also joined in on the act. Woods, a New York banker of “no great pedigree,” [2] had replaced Eugene Black in the role in January 1963. His predecessor had made India a top priority, and Woods was concerned that the support was eating into other priorities at the Bank.

TTK was irritated about India not being treated with dignity by the IMF and the Bank. But India desperately needed the aid. By 1965, defence spending had reduced India’s foreign exchange cover from $1.6 billion to $462 million. Industrial growth dropped from 11 percent in the first quarter of 1965 to zero in the last. The Third Five-Year Plan, which had planned for a surplus of ₹410 crore, ended up in a deficit of ₹652 crore.

TTK had the ear of Shastri, and initially managed to convince him to not go down that path. Most Indian politicians, too, were firmly on the side of TTK.

The impact on the economy was massive. Food production declined, and led to an increase in food imports. In 1965, despite imports, India had the lowest per capita food availability since 1952. Food prices reached their highest levels since independence.

TTK found himself having to accede to one of George Woods’ suggestions: the formation of a commission under Bernard Bell to assess the Indian economy and provide policy recommendations. This report would lay down the conditionalities that the consortium would impose in return for aid. “The stated purpose of the mission was to help the World Bank familiarize itself with Indian conditions,” the Reserve Bank of India’s official history documented, “but Woods’s ‘deeper purpose’ according to the institution’s representatives in Delhi was to ‘establish the faults in Indian planning procedures and Plan implementation.’”

The Alarm Bells


hen Lal Bahadur Shastri became India’s prime minister in 1964, he diverged from his predecessor Jawaharlal Nehru’s economic views in two key respects: he wanted to focus more on agriculture and in the Gandhian tradition, he “disliked controls and the corruption they bred.”

At the time, trade liberalisation had already started unlocking growth in East Asian economies like Hong Kong, Singapore, South Korea and Taiwan. But for TTK, the calculus was different: how could the West ask India to reduce the value of its currency? He had the ear of Shastri, and initially managed to convince him to not go down that path. Most Indian politicians, too, were firmly on the side of TTK.

But there was stiff opposition from key bureaucrats, who were in closer touch with the consortium and knew they meant business. It was a formidable bunch: I.G. Patel, Chief Economic Adviser; S. Bhoothalingam, Finance Secretary; L.K. Jha, Secretary to the Prime Minister; P.C. Bhattacharya, RBI Governor; and B.K. Nehru, India’s Ambassador to the United States.

When Woods visited India in 1965, he doubled down on the devaluation demand. His relations with TTK were frosty, and the trip was more or less a disaster. “The problem was more or less open advocacy of devaluation by the bank,” I.G. Patel wrote, and worse, “More than the merit of the case, the issue was style or manner of advocacy.”

Still, the more pressing problem at the time was Bernard Bell and his Commission. Bell came with quite a reputation: he’d had success in his previous reforms project in Indonesia. Over there, he’d been asked, unofficially, to serve as the “personal economic advisor” to the First Minister, effectively the Prime Minister of the country. [3] But his role in India was different. His Commission comprised teams which would closely study different components of the economy.

Bell’s manner was more abrasive than Schweitzer’s and Woods’ and he made brash demands for data, which didn’t go down well with the Indians, who were more used to the manners of Englishmen. “What could have been a civilised dialogue,” Patel wrote, “somehow turned into a slinging match.”

Bell’s outright and impatient advocacy for devaluation was based on his study of the external sector. (He left other team members to study the domestic components.) He joined Woods in declaring that aid would be conditional on this move. These public pronouncements complicated the position of the Indian bureaucrats: while they saw the logic of the move, they didn’t support how it was being communicated.

Unsurprisingly, Bell wasn’t diplomatic even in private conversation. Things got particularly unpleasant one evening in Delhi, over a drink with Bhattacharya and Patel. Bell declared, supposedly in vehemence, that he was ready to make every other concession except on devaluation.

The Commission, for its part, had been instructed to dig deep in its research. Bhoothalingam, the finance secretary, was exasperated by members’ constant questions on every aspect of the Five-Year Plan. At one point, when discussing the steel production target with a Commission member, he quipped: “My dear fellow, I can guarantee that we will reach the target of six million tonnes even if I have to devalue the tonne!” [4]

Internationally, the perception was building that Indians were arrogant and impervious to sound economic advice, unlike the Pakistanis. At a dinner in Paris, where Patel was attending a consortium meeting in 1964, he was asked how it was all coming along. “Not bad,” he replied, “We were lectured for eight hours and got a billion dollars. Not a bad exchange rate.”

The screws tightened on India when perception turned into policy. In the 1960s, India was living ‘ship to mouth’—only the American ships arriving with grain, under the PL–480 (Food for Peace) scheme, prevented starvation. In June 1965, after the India-Pakistan war, the US unilaterally terminated the scheme. India received 2 million tonnes of grain instead of the promised 8 million. By November 1965, all buffer stocks were exhausted and food price inflation was up by 20 percent. In 1966, only half of the promised 1.8 million tonnes were delivered.

The Americans were applying pressure on India through the IMF as well. In December 1965, India expected to draw $150 million from the IMF. However, it was told that the Fund wouldn’t loan the money unless corrective policy measures were implemented. Alternatively, India reached out to the Chairman of the Board of the Federal Reserve, a friend of Ambassador B.K. Nehru’s, to request a $20 million swap. Ten minutes after agreeing to the modalities, he called Nehru saying it was not possible. “Obviously,” Nehru wrote later, “he had consulted the Treasury and was told not to let personal friendship override government policy.” [5]

A New Year’s Gift


eanwhile, the Indian camp continued to be divided. Shastri was coming around to realising that devaluation was the only way to secure aid but the strong socialist leaning of most politicians and some bureaucrats would come in the way.

On 7 July 1965, the IMF postponed its Board Meeting hoping that India would come back to them, agreeing to the devaluation. Bell “pressed hard for a devaluation” with an explicit threat of cutting off aid. Ten days later, TTK made an unscheduled radio broadcast calling devaluation an “opiate” and “not a solution to India’s problem of living within its means.”

By the time the war with Pakistan ended in September, India’s precarious external position was even worse. Jha and Bhattacharya cautiously broached the topic with Shastri. What went on in those conversations is not clear but it paid off. TTK was fired in December 1965. When they all met in January, Shastri reportedly asked his officials: “How do you like the New Year’s present I gave you?”

TTK was replaced by Sachindra Chaudhuri, a prominent lawyer from Calcutta. He looked like a left-field choice from the outside but his appointment had been influenced by two factors. He would be pliable since he wasn’t a politician—he didn’t have a voter base to protect, and had no previous affiliations with any camps in the party. (He lost his first and last parliamentary election in 1967.) Secondly, he was a good friend of RBI governor Bhattacharya.

After TTK’s firing, it became clear that devaluation was imminent and may be enforced in the first few months of 1966. But in January 1966, Shastri died suddenly. The technocrats had fought hard to convince him to look beyond pride and prioritise India’s economic well-being. Now, everything would have to be redone. The scramble for the top post within the Congress saw Indira Gandhi become prime minister. Party president K. Kamaraj, a committed socialist, and many others supported her because of the perception that she was malleable and could be managed.

D.C. Meetings, Delhi Dinners


ndira Gandhi didn’t carry much baggage about the devaluation question because she hadn’t dealt with the consortium before. When she entered office, she was faced with three options to repair India’s economy and food situation: request left-leaning Soviet and Eastern European economies for aid; sell off India’s reserves and assets to buy food; lean towards the market by liberalising the economy with measures like devaluation.

She consulted prominent economists, including Jagdish Bhagwati, K.N. Raj, D.R. Gadgil and Pitambar Pant. The four bureaucrats—Bhoothalingam, Patel, Jha and Bhattacharya—were giving her regular advice. Before Shastri departed for Tashkent, he had been forwarded a report that supported devaluation. The bureaucrats had been waiting for his decision. Now, it was time for Gandhi to make it.

Among her fellow parliamentarians, only two supported the move: agriculture minister C. Subramaniam and planning minister Asoka Mehta. Both thought that the consortium was justified in demanding economic reforms in return for aid. Additionally, India was planning to ask the IMF for an extension to pay off older loans, and so they felt that it was only fair for the Fund to expect reforms.

After deliberations with a working group comprising the band of pro-devaluation bureaucrats, Gandhi made the decision to devalue by the end of February 1966. The RBI governor was given the authority to tell the IMF that India was ready. B.K. Nehru, flying back to D.C. from Delhi, was given a letter, signed by the finance minister, confirming the decision to devalue. J.J. Anjaria, India’s member to the Fund’s Board of Directors in D.C., also made a commitment to devalue on the instructions of the Indian authorities. In return, he asked for $200 million from the IMF. While a commitment was given, the devaluation hadn’t been executed. The donors had left the decision of when to execute to India.

Finance minister Chaudhuri was at his own residence, having dinner with friends. His pocket carried the speech announcing the devaluation; he was just awaiting orders.

In March 1966, Indira Gandhi accepted President Lyndon Johnson’s invitation to visit the US. The meeting was a success in most part because the US Congress approved a proposal to provide India with 3.5 million tonnes of food. This was on the back of India signing the Rome Agreement in December 1965 and pivoting its agricultural policies as well. [6]

The next month, Asoka Mehta went to the US. He spent 10 weeks there, and ended up negotiating an elaborate deal known as the Woods-Mehta Agreement. It committed India to structural reforms: this included increase in private foreign investment, decontrolling fertiliser production, reducing state-owned industries, and substantially decontrolling imports. He noted that the Bank accommodated the discussions “on the premise, unstated but very clearly understood, that we would devalue.” [7] The new arrangement would give India more than a billion dollars’ worth of aid annually.

The new exchange rate would be decided by the IMF. They wanted to devalue by a higher amount than India was ready—₹10 to the dollar. India took the position of ₹7.15, and finally settled on ₹7.5 to the dollar.

Back home, given the opposition to the move, secrecy was crucial to its success. India wouldn’t devalue for another four months. Only the five technocrats, two ministers and a handful of officials in the RBI and Ministry of Finance knew what had transpired. Kamaraj was kept out of the loop; he was given to relying on TTK for advice. “There is no question, as far as the government is concerned, of considering the question of devaluation,” Mehta said in Parliament in February. A few weeks later, finance secretary Bhoothalingam also took this position at a press conference.

In May 1966, India witnessed a rapid decline in its foreign exchange reserves: from ₹19.13 crore on 6 May to just ₹7.29 crore on 27 May. This, combined with a cable from B.K. Nehru to L.K. Jha, expedited the decision to devalue. If India did not devalue, Nehru noted, it may not receive aid “because her commitment was beyond change.” [8] Gandhi notified the American ambassador, senior Congress ministers, and TTK, who “out of a sense of loyalty said nothing in public until after the decision, though he warned Mrs Gandhi of the repercussions.” [9]

At a cabinet meeting called on a Sunday, the commerce minister Manubhai Shah, who reportedly “ran an empire based on export subsidy,” [10] declared that the 57.5 percent devaluation was too much for him to digest. He was also sceptical of the benefits. India’s primary exports of jute and cotton, he argued, were price inelastic: lowering the price would not increase demand, and so the foreign powers had more to gain from the move than India. At that meeting, key ministers like Sanjiva Reddy, Jagjivan Ram, Y.B. Chavan and Gulzarilal Nanda opposed the move. But Gandhi had already made up her mind.

That Sunday evening, Patel and Jha were to attend a dinner hosted by cabinet secretary Dharam Vir. They kept their appointment to avoid suspicion. Twice, they were called out to receive messages from Bhoothalingam. Finance minister Chaudhuri was at his own residence, having dinner with friends. His pocket carried the speech announcing the devaluation; he was just awaiting orders.

By this time, Anjaria had conveyed India’s decision to Schweitzer. The head of the IMF convened an unscheduled meeting of the Board on Sunday morning, D.C. time. When the Board approved the move, Anjaria called Chaudhuri, who left dinner mid-way and rushed to the All India Radio office. In his speech, Chaudhuri gave 11 reasons for the move—from rising exports to increasing tourism—but none said anything about receiving aid from the Bank or the Fund. [11] Two weeks later, Indira Gandhi told the nation that they hadn’t “acted under any foreign pressure.”

On 5 June 1966, India devalued its currency 57 percent in terms of the dollar, pound and rouble. The world could now buy ₹7.5 for every dollar instead of the ₹4.76 it could purchase only a few hours before.

All chief ministers were apprised of the move. Officials were sent on special planes to explain what had happened and take the states into confidence. Upon reaching, they realised the states couldn’t care less. Cabinet meetings went smoothly over sweets and savouries. It was clear that devaluation was not a political issue. But it would become one in the months to come.

The Backfire


he episode was “like a surgeon opening a patient but not operating,” C. Subramaniam wrote later. The main goal of devaluation was to make exports cheaper and more competitive. It was clear that it had to be accompanied by supporting policies on trade, commerce and industry, which were already compiled in May 1966. This package included “devaluation, import liberalization, elimination of export subsidies, and a greater fiscal discipline.” [12]

But many of these policies to liberalise trade never went through. The secrecy around devaluation had hurt the egos of some of the country’s most powerful political voices: they were in a mood to make things difficult. In some quarters, the ideological consideration was being taken very seriously still—India was a socialist country and liberalisation would not be tolerated. B.K.P. Sinha, a Congress MP, called devaluation a “humiliating necessity.” Deen Dayal Upadhyay, general secretary of the Jan Sangh, felt that there was no justification for the step. “It is neither sound economics nor honourable politics,” he said.

The sense of shame is best captured in the words of Frank Anthony, a senior non-party MP. “On devaluation, our economic arm was not twisted—it was broken—by the Americans,” he said. “Today, we have been made to lick the American boot and after having licked the American boot, we are still being made to wait in the wings abjectly like beggars for the doles the Americans may give us.” [13]

Morarji Desai, who succeeded Chaudhuri as finance minister, wrote about his annoyance—shared by former finance minister C.D. Deshmukh—at not being consulted. Finally, TTK broke his public silence and rebuked the decision: “If I would have continued in office I would have still resisted it. We may export more, but there is a clear risk, after devaluation, of earning less.”

The Opposition was united on the issue. The left parties, the right-wing nationalists and the moderate socialists all claimed to resent the foreign actors who were influencing Indian economic policy. In the Rajya Sabha, the entire opposition voted against the devaluation. Even the laissez-faire Swatantra Party was ambivalent on the issue: the term “schizophrenically positioned” was later used to describe the party’s attitude towards devaluation. [14] “The devaluation of the rupee is the consequence of mismanagement of affairs during the past 15 years and cannot be helped,” its founder C. Rajagopalachari said, “We have to suffer the distress caused by the devaluation.”

Industry, however, was divided. The President of the Indian Chamber of Commerce and Industry welcomed the move, and J.R.D. Tata called it “bitter medicine.” Oddly, the Federation of Indian Chambers of Commerce and Industry supported the devaluation and opposed it behind closed doors. Some industry associations like the All India Manufacturer’s Organization and the All-India Importers Association opposed the move outright.

The government cracked in the face of pressure from within and outside. The changes initiated by Chaudhari were reversed within a few months.

Manubhai Shah reinstated export subsidies by August 1966. Import entitlement schemes—that were meant to further the import substitution strategy—were brought back into play under other names. Trade regulation grew stronger. Onerous obligations were attached to multinational collaborations and quantitative restrictions were strictly enforced. In 1969, a Foreign Investment Board was established to keep a hawkish eye on the money coming into India.

Opponents of devaluation brandished data to suggest how badly the move had backfired. India’s debt obligations rose from $4.8 billion to $8 billion. Between June and December 1966, the country’s exports declined by 15 percent, suggesting that the devaluation had absolutely no price effect on three-fourths of India’s exports. The crop failure of 1966 also added to the issues, leading to loss in agriculture exports and more spending on imported food.

Inflation was getting out of control: in just one year, the Wholesale Price Index rose by 15.4 percent; and food prices were up by more than 25 percent. The fourth Five-Year Plan had to be abandoned, and the economy went on a ‘plan holiday’ for three years. Meanwhile, the value of the rupee did not improve even on the black market: that’s how far-reaching the foreign campaign for India’s devaluation had been.

Now, the ripple effect of economics started extending to politics. The devaluation was seen as a sign of the government’s inability to hold down its policy positions. “Many people, certainly among the articulate groups, felt strongly that India had capitulated to foreigners,” Professor Bhagwati wrote, “and that India had been forced to adopt a measure that was almost certainly inspired by a foreign ideological position and was detrimental to her economic interests.” [15] By “common consensus”—a phrase used in RBI’s official history—the devaluation was deemed a failure. In July 1967, business magnate John D. Rockefeller wrote to George Woods: “The devaluation was a flop; India did not make the policy changes we expected.”

Indira Gandhi travelled to Moscow and, together with the Soviet leader Leonid Brezhnev, issued a communique against “imperialist forces threatening peace.”

To add salt to the government’s wounds, the one big motivator for the move—the aid—also didn’t work out in India’s favour. The first tranche of $900 million, for the year 1966-67, came in after a significant delay. India received only $600 million of the $900 million promised for 1967-68, which, when combined with the drought of 1966, severely compromised India’s foreign exchange reserves. For the next financial year, India needed $1,275 million in aid. Only half of it came through eventually.

The fiasco had short-term and long-term effects. It turned Indira Gandhi against the advice of her bureaucrats. Increasingly, she began relying on her own political acumen and instinct to make policy decisions. Her party split along the lines of those who’d supported the move and those who didn’t. The impact of this was seen in the 1967 general elections, where the Congress’ vote share reduced to 41 percent.

A more enduring change took place in foreign relations. India moved away from US support, and closer to the Soviets. Tensions emerging around the Vietnam War did not help matters. The Soviets agreed to finance a lot of Indian planning, provide technical assistance and even help along India’s space programme. Indira Gandhi travelled to Moscow and, together with the Soviet leader Leonid Brezhnev, issued a communique against “imperialist forces threatening peace.”



y the end of the 1980s, India was hit by another balance of payments crisis, and the question of devaluation was upon the government once again. This time, it was executed in stealth by Prime Minister Narasimha Rao, Finance Minister Manmohan Singh and P. Chidambaram, who was then a minister of state for commerce. The rupee was devalued twice in a planned programme.

Despite the years of suffering, India’s parliamentarians were not amenable to the decision. In what seemed to be a hangover of the 1966 episode, they deployed every move in the book to block liberalisation. The Cabinet tried to disapprove supporting policies, and party members and opposition leaders demanded the resignation of the prime minister and the finance minister.

But the politicians managed to hold their ground this time. They pushed through the trade policies, decontrolling schemes and market-oriented changes that were needed to support the devaluation. The 1991 devaluation was accompanied by what we now call the 1991 liberalisation: the one that opened India to the world like nothing else before.

Prakhar Misra is a Ph.D. candidate at Johns Hopkins University. He is a public policy researcher working on topics of state capacity, political economy, and bureaucratic reforms. More about his work can be found on his website.

Corrections & Clarifications: An earlier version suggested that T.T. Krishnamachari founded TTK Prestige in the 1950s. He had, in fact, established the TTK Group in 1928 but the company started selling pressure cookers under the brand name "Prestige" only in the mid-1950s, under the leadership of his son T.T. Narasimhan. By this time, TTK was wholly involved with politics. We apologise for the error.