INTRODUCTION xxi

managing agencies were generally firms which had had a financial,

rather than an industrial, character; he also noted the critical point
that rather than using the banking system, these agency firms often
invested surplus cash in hundis (traditional forms of negotiable instru-
ments through which prospects of earnings were of a greater order). 2 3
However, neither of these insights underlies his analysis. Vera Anstey
also remarked on the shortcomings of managing agencies, and men-
tioned the charge that the surplus funds of firms were often cornered
by shroffe (indigenous bankers) who were also their managing agents,
but as the points were made in the course of acknowledging a litany
of accusations made against them, she was not compelled to address
this issue. 24 Much later, Brimmer characterized the Indian managing
agencies as 'primarily financial in character'; at about the same time,
the situation was described in more detail, but once again in a foot-
note disassociated from the analysis in the text:

This [class of business leaders] is a new class of financiers, who have no

traditions, except those of sperulative finance and usury. Some of them
earned their fortunes on the stock exchanges and commodity markets. But
their spread of activities includes sowcari (village money lending), sarafi
(urban indigenous banking and money-lending combined), dalali (inter-
mediary finance, mostly on the stock exchange, bullion, and commodity
markets), &c.. .25

Th.ere is recognized here the distinction between industrial capital

on the one hand, and merchant (trading) or usury (moneylending)
capital even when in ownership, control, and operation of industrial
enterprises, on the other.
Trading ot moneylending activities, empirically distinct from manu-
facturing, had, of course, been identified. However, the critical distinc-
tions between these forms of existence of capital, when in ownership of
industrial enterprises have generally been omitted from analysis. The
ownership of a diversity of enterprises implies an obvious diversity of

23 Lokanathan (193s; 301, 303, 315). Managing agencies and their role in permitting
unfettered business operations under the legal protection of limited liability are
discussed in later chapters.
24 Anstey (1942: 114-15, 273-5, 501-5).
25 Brimmer (1955: 558); Rangnekar (1958: 123-4, fn 4).
 CHAPTER SIX

Private Industry and the Second Five-Year Plan

The Dalmia-Jain and Mundhra Episodes

PROTECTING INDUSTRY FROM PREDATORY CAPITALISTS

In early 1955, at its annual session held at Avadi, near Madras, the
Indian National Congress passed a resolution declaring its aii:n to take
India towards a socialist pattern of society. Even before this resolu-
tion, it was becoming apparent to British interests operating in the
form of managing agencies that the halcyon days of their unhindered
business activities were not likely to last much longer. Although they
supported a determined effort to retain the managing agency system
which ultimately continued for the next 15 years, repatriation of capi-
tal was clearly a major preoccupation.1
In the middle of 1954, the Dalmia Group attempted to use this
moment of vulnerability by attempting to buy a substantial block
of shares in one of the major British managing agencies in Uttar
Pradesh-the British India Corporation (BIC). Although this effort
failed, a year earlier, the Dalrnia Group had provided evidence that
the managing agency system enabled financial manipulations that
even the most demanding financial analyst could not fault on legal
grounds. 2 It was a Dalmia financial company, Bharat Insurance, that

1As discussed in Chapter 5.

2 'Proceedings against Messrs Dalmia-Jain Airways Ltd and other Dalmia's
Concerns' typewritten, undated, unsigned note, C.D. Deshmukh Papers, Subject file 1.
 PRIVATE INDUSTRY AND THE SECOND FIVE-YEAR PLAN

was subject to scrutiny by a specially appointed professional audi-

tor. On the basis of his report, a change in management was rec-
ommended by the relevant authority, the controller of insurance.
However, the group appealed for a rehearing of their case with the
government and, finally, the matter was resolved by a method that left
the Dalmias in an advantageous situation) There were four charges
made against the firm: first, that the company transmitted large funds
from time to time to Ramkrishna Dalmia's son-in-law, Shanti Prasad
Jain, and the Dalmia Cement and Paper Marketing Company for the
ostensible purpose of investment, but really in order to allow them to
make illegal use of the money; that government and other approved
r securities supposedly to be held under the Insurance Act were never
actually bought; that large investments were made in related Dalmia
enterprises at inflated prices; and that property was bought from
other Dalmia firms, also at inflated prices. Of these charges, the first
two were the most critical in that they alleged a straightforward diver-
sion of funds. However, precisely because of the leeway for financial
manipulation that the managing agency system provided, they could
not be proved. In effect, Dalmia's only penalty was the requirement
that they buy back from Bharat Insurance valuable urban property
(the Times of India building in Mumbai) within 10 years at the same
price at which it had been sold.
At the end of the following year, a representation made by the
employees union of the Times of India and Allied Publications alleged
that benami share transfers had taken place from Ramkrishna
Dalmia to Shanti Prasad Jain. By this time the government, frustrated
by five years of attempts to pin down the mechanisms through which
the Dalmia Group's financial manipulations were undertaken, had
begun to consider the option of an enquiry under the Commissions
of Enquiry Act.
After the failure of even the Income Tax Investigation Commission,
it had dawned on the government that its own concerns of safeguard-
ing its sources of revenue were directly linked to issues of shareholder
democracy, that is, to the manipulations made possible by the man-
aging agency system. Without the legally prescribed disclosure of

3 Letter no. 853-PSF /54 dated 21 April 1954 from the finance minister to Jawahadal
Nehru, JN Papers, File no. 298, pp. 83-6.
120 FORGING CAPITALISM IN NEHRu'S INDIA

the operational results of firms, it was impossible for investigators

to trace the means by which company managements could manipu-
late records, set up dummy directors, and transfer funds from pub-
licly held companies to the promoter's closely held companies. While
auditor's reports occasionally provided evidence of these practices,
the provisions of civil law, when invoked to identify and collect con-
cealed income, could be challenged. The only control on corrupt prac-
tices was through shareholders' vigilance, but while company man-
agement could win over cantankerous elements amongst them, the
bulk of shareholders were inclined to be apathetic. Thus, sharehold-
er's interests and government revenues could be better protected by
changes in company law which would require greater disclosure of all
operational results. Although the commission of enquiry would not
meet either the shareholders' or the government's purposes directly
or quickly, the public would be educated about the kinds of manip-
ulations that managements engaged in and it would equally allow
the government to identify the precise ways in which company law
required to be changed.4
The essential feature of the devices that the Dalmia Group used
was that of interlocking of companies, clearly through the mechanism
of the managing agency system.5 Thus, Dalmia-Jain Airways, a major
company in the group, was amalgamated with Dalrnia-Jain Aviation
after it had suffered major losses due to mismanagement. Records of
the company were subseq\lently destroyed through a board resolution
at which only three board members, all Dalmia employees, were pre-
sent. Dalrnia 'Cement ;md Paper Marketing Company, entirely owned
by Ramkrishna Dalmia; was used as the clearing house of the group,
with all speculative, profits accruing to Dalmia while losses were
transferred fb other .group companies. Dalrnia's personal expenses
were also debited to the company. Shriyans Prasad Jain (Shanti
Prasad Jain's brother) was appointed to a tax-free salary of Rs 4,000
per month and shortly thereafter, when this appointment was terrni-

4 JN Papers, File no. 392, pp. 248-9, letter no. 0117-PSF/55 elated 17 October 1955
from the finance minister to Jawaharlal Nehru. Nehru's concurrence with the proposal
to institute a Commission of Enquiry is in the same file, p. 250, in his letter no. 1945-
PMH/55 also dated 17 October 1955.
5 JN Papers, File no. 443, p. 80, letterno. 0365-PSF/56 dated15 May1956 from the
finance minister to Jawaharlal Nehru.
 PRIVATE INDUSTRY AND THE SECOND FIVE·YEAR PLAN 121

nated, a compensation of Rs 7 lakh was paid to Jain. The Shapurji

Broacha Mills and the Madhowji Dharamsi Manufacturing Company,
both profitable and well-established firms, were cornered by Dahnia,
and his closely held companies made sales agents for them. When
these arrangements were ended, a total of Rs 114 lakh was paid as
compensation by the Mills, which accrued to the selling agents. The
decision to terminate the selling agencies and authorize the payment
of compensation was taken by two directors, .both Dalmia employ-
ees. Ultimately, the Mills were taken into liquidation. Funds of Bharat
Insurance were placed at the disposal of Shriyans Prasad Jain and
r. though they had been given for investment in shares and securities
they were used to acquire or to retain control over other companies.
The general pattern appeared to be the same in all companies of
the group. Funds were not used for the purpose for which the firms
had been established and for which public subscriptions had been
enlisted.6 They were invested in other companies of the group. As
these shares were not dividend-paying, the funds were available free
of interest. After a few years, the shares would be transferred to the
closely held group companies as a security for loans, and an agree-
ment would be reached between debtor and creditor companies that
the loans would be repaid without interest, in· a number of yearly
instalments. Sometimes the loans were adjusted against compensa-
tion payable to the closely held firms to terminate their agency agree-
ments.
The point was that taken by themselves, and isolated from the chain
of events in the group as a whole, many of the actions appeared to be
within the letter of the law, or at worst, trivial offences.? It was then
considered essential to probe into the affairs of the group as a whole
and obtain an overall picture of the state of affairs within the Dahnia
Group and the ways in which the investing public had been duped by
the opportunities to appropriate public funds that the interlocking of
the group companies had provided. However, given that the powers of

6 JN Papers, File no. 443, p. 79·

7 As early as 1949, the memorandum of the Bombay Shareholders' Association
had pointed to the Dalmia-Jain Group, and to other similar cases, and demanded an
ordinance to prevent interlocking of companies. See Bombay Shareholders' Association
(1949: 206-n).
122 FORGING CAPITAUSM IN NEHRU'S INDIA

a commission of enquiry were limited to those of a civil court, it was

proposed to modify the rules of procedure. to give the commission
powers similar to the Income Tax Investigation Commission. 8
The Dalmia-Jain Group was self-evidently not the only group
which was known to have evaded taxes on a gross scale. To take two
of the most obvious ones, as described in Chapter 4, there had been
protracted correspondence over the Birla Group, in particular, their
operations in West Bengal where the state government was unwill-
ing to concede that the failure of efforts to identify evidence of widely
surmised malpractices required deeper investigation using innova-
tive means. More spectacularly, in what the Central Board of Revenue
described as the biggest case of concealment in income in the history
of tax collection, the board of Tata Sons, the managing agents of Tata
Iron and Steel, were directly accused of conniving in enormous con-
cealment of taxable income.
The crux of the argument of this book, however, is that these were
straightforward cases of managing agents using loopholes available
in accounting practiceS' to lower the degree of taxable income charge-
able to firms in th,eir control. This practice, however reprehensible, is
a normal characteristic of capitalist enterprise and the cat and mouse
features of the attempts by the revenue authorities to identify the prac-
tices by which evasion is concealed a standard component of actual
political life, and t>f fiction.9 What made the Dalmia-Jain practices
qualitatively different was that they represented in quintessential form
the unreconstructed activities of merchant capital and usurer capita1:
operating through the legal forms of joint-stock enterprise and the
institution 'of the managing agency. AB the examples of their opera-
tions briefly outlined earlier show, they are characterized by a total
absence of concern for industrial accumulation through manufactur-
ing operations. Their utility lay in the possibilities of access to cen-
tralized blocs of capital, subscribed by a dispersed and managerially

8 Letterno. 0365-PSF/56 dated15 May1956 from the finance minister to Jawaharlal

Nehru, JN Papers, File no. 443, p. 78. Nehru's concurrence with the procedure
suggested is in the same file (Letter no. 1172-PMH/56 dated 16 May 1956, p. 81).
9 Pages 9 and 39 of the petition by Shanti Prasad Jain quoted by Homi Daji, MP,
in the course of the Lok Sabha debate on the motion, Re: Report of the Commission of
Enquiry into Dalmia-Jain Companies, on 6 May 1963. col.14030 of Lok Sabha Debates,
1963, vol. XVIII.
 PRIVATE INDUSTRY AND THE SECOND FIVE·YEAR PLAN 123

ineffective group of shareholders; the image the firms had earned as

profitable and dividend-paying companies, for whom raising further
resource would not be difficult; and the safeguards oflimited liability,
which ensured that speculative and extralegal operations remained
within financially manageable bounds for their owners.
Given the vast array of economic offenses requiring the attention
of the finance ministry, from political economy considerations, it was
the correct decision to focus and examine Dalmia-Jain operations.
This would enable the identification and prohibition of the parasitical
operations of merchant capital in joint-stock industrial enterprises.
The momentousness of the step was shown by the decision after
approval in principle by the cabinet to refer the matter to a cabinet
subcommittee so as to enable the examination of the terms of refer-
ence, with the recommendations to be referred back to the cabinet.10
Significantly, it was decided that this subcommittee was to be chaired
by the home minister, G.B. Pant, with the ministers of defence,
works, housing and supply, food and agriculture, legal affairs, and
V.K Krishna Menon, then without a portfolio, as members. The com-
position of the sub-committee is an indication of the seriousness with
which the matter was to be taken. After two meetings of the subcom-
mittee, the cabinet approved the terms of reference of the commis-
sion in November 1956.11
However, while it is true that the home minister was probably the
most appropriate choice, his proclivity to treat corporate misconduct
benignly was displayed almost 20 years earlier. In a discussion of the
amendments to the Companies Act in the Central Legislative Assem-
bly, Pant had attempted to narrow the grounds on which a managing
agent could be removed. This was opposed by the law member who
asserted that the shareholders had the right to dismiss managing
agents on any number of grounds and that limiting this would not

10 Minutes of the meeting of the cabinet held on Wednesday, 25 July 1956 at 5.30
pm, Case no. 180/39/56 on 'Alleged Mismanagement of a large number of Dalmia
Group of Concerns', JN Papers, File no. 457, p. 353.
u Letters nos 1702-PMH/56 dated 5 August 1956, and 1707-PMH/56 dated 6
August 1956 from Jawaharlal Nehru to Shah, and letter dated 5 August 1956 from S.P.
Jain to Jawaharlal Nehru in JN Papers, File no. 462, pp. 42, 132, and 141, respectively.
Minutes of the meetings of the subcommittee are in JN Papers, File no. 467, pp. 68-70
and File no. 470, pp.m-13. The cabinet approval is in JN Papers, File no. 486, p. 120.
124 FORGING CAPITALISM IN NEHRU'S INDIA

be in their interests. 12 It may be of note that Krishna Menon did not

attend either of the subcommittee meetings. Also, neither Nehru
nor M.C. Shah, minister in charge of revenue and civil expenditure,
were informed of the first meeting, though Shah, at Nehru's urg-
ing, was present at the second meeting. Soon after the cabinet meet-
ing establishing the subcommittee, a Lok Sabha question asked for
a confirmation' of this fact, which was followed by a letter to Nehru
from S.P. Jain. In this, he declared that after the split that had taken
place in 1948, there was no such entity as the Dalmia-Jain Group.
The Sahu Jain Group, which he was now in charge of, had no links
with Dalrnia. Consequently, he wanted an opportunity to explain that
he was apprehensive of the undeserved adverse publicity that the
investigation would entail. Nehru instructed Shah to meet Jain and
hear his case.

THE MUNDHRA CASE: SHARE SPECULATION

AS A FINE ART
A year later Haridas Mundhra, who had successfully obtained control
of British firms in the Calcutta area in the tea industry and engineer-
ing firms such as Jessop and Company, also wrested control of BIC.13
Expressing his anxiety at the ability of Mundhra to do as he pleased
right under the nose of the Government oflndia, T.T. Krishnamachari,

12Bombay Shareholders' Association (1949:149).

13 Starting in the tea export trade, Mundhra kept both the sales proceeds and
profits in sterling in London, and used that to raise further finance in India. Gradually,
he began buying British Indian companies such as Jessops, Richardson and Cruddas,
Duncan and Stratton, the Brahmaputra Tea Company, and the Oslers Electrical
Concerns, apart from a few collieries. However,
the main appeal which he has-as a, potential purchaser-in the British market is
his preparedness to refrain from general interference with the internal workings of the
companies he buys ... at least one big insurance company in the United Kingdom is
prepared to support him ... it is difficult to see how he has been able to do all that
he has without the knowledge of the U.K. exchange control authorities. The support
which the U.K. exchange banks give him would necessarily mean at some stage
or other a guarantee with the head offices of the exchange banks for Mundhra's
loans in India and for that purpose some kind of approval or acquiescence by U.K
exchange contrr~ would be necessary. [Emphasis mine.] (Letter no. 084/PSF/55
dated 21 September 1955 from the finance minister to Jawaharlal Nehru, JN Papers,
File no. 385, pp. 116-17.)
See also India (1958a, 1958b) and Free Pr~s Journal (1958).
 PRIVATE INDUSTRY AND THE SECOND FIVE·YEAR PLAN 125

minister for commerce and industry, asked C.D. Deshmukh, finance

minister, to have procedures examined which would allow the govern-
ment to examine the bona fides of an acquirer of any large block of
shares in a company whose capital and other assets were valued at Rs
20 lakh or more in then current prices.14
Mundhra's large-scale acquisitions had reached the stage where
they had attracted the attention of the US newsmagazine Time. A
message, presumably about Mundhra and probably intercepted by
the revenue intelligence authorities was forwarded to Jawaharlal
Nehru who, mystified by the then unknown name, also wrote to C.D.
Deshmukh to ask whether there was any material in the finance min-
istry about Mundhra's origins.15 Deshmukh's reply, sent three days
later, was full of information, and given the importance of Mundhra
to later events, is worth examining in detail.16 Mundhra was, accord-
ing to Deshmukh's information, a 'self-made man', though as sub-
sequent details show, with a considerable network of support, both
in Marwari business circles and amongst the tea export traders.
With finances of Rs 50 lakh each provided by the firm of Bansilal
Abhirchand of Nagpur and Vallabhswami, a Vaishnavite guru from
Rajasthan, he started with tea exports before the Second World War,
subsequently building up his capital base in Britain by retaining both
the sales proceeds and profits there. 17 With this collateral, he was able
to gain further resources in India, buying up not only Jessops but also
Richardson and Cruddas, Duncan and Stratton, some collieries, the
Brahmaputra Tea Company, and Oslers Electrical concerns. His most

14 Secret letter D. 0. no. 349-CIM/55 dated 23 August 1955, TIK Papers, Subject
file 8(B), p. 16.
15 Secret letter no. 177-PMH/55 dated 18 September 1955, JN Papers, File no. 384,
p.190.
16 Secret letter no. 084/PSF /55 dated 21 September 1955, JN Papers, File no. 385
pp.116-17.
17 Rai Bahadur Bansilal Abhirchand's firm had come to the notice of the Central
Provinces Banking Enquiry Committee, which submitted a report in 1929-30. At that
time the Abhirchand firm was the only indigenous bank in the province. It had eight
branches in the province and seventeen outside. Although not operating under the
Companies Act, it transacted business like modern banks, with payment by cheques.
However, unlike banks, it also engaged in trade and advanced loans against the security
of immovable property. The Central Provinces Banking Enquiry Committee 1929-1930
Vol I: 98, quoted in Levkovsky (1966: 231).
 FORGING CAPITALISM IN NEHRU'S INDIA

recent acquisitions were the Assam Tea Company and BIC. Through-
out 1954 and 1955, Mundhra was in touch with large shareholders in
the Assam Tea Company, and the resulting share price fluctuations
were remarked on by the British financial press. The existing board
of directors, as a defensive measure, had created a large number of
shares worth one shilling each, with v9ting rights equivalent to the
existing pound valued shares. Mundhra had been trying to obtain for-
eign exchange to finance the purchase of these shares, but Deshmukh
claimed that his officials had been instructed not to allow foreign
exchange outgo on this account:
In the case of BIC, although Mundhra had bought a small num-
ber of shares, the McRobert Trust owned the controlling block and
Mundhra had worked hard to persuade the trustees in England to sell
their holdings to him. The Singhania Group, which already held a
substantial number of shares, was prepared to buy Mundhra's block if
he was unable to persuade the McRobert Trust. With this, the Singha-
nias would have gained control. However, Deshmukh wrote, that very
day's edition of the Statesman newspaper had reported that Mundhra
had succeeded in his effort, on condition thc!-_t he, in tum, did not sell
off. Mundhra's own managing agency, the S.B. Industrial Develop-
ment Company Limited: managed many of his acquisitions in name,
but his main appeal as a potential buyer in the British market lay in
his preparedness to refrain from detailed interference in his managed
companies.
Mundhra had extensive support. One large British insurance com-
pany, at least, was behind his acquisitions. Even with all this, Desh-
mukh noted, and with his reputed 'phenomenal' luck, he could not
have succeeded without the knowledge of the British exchange control
authorities. British, exchange banks would have required a guarantee
from their head offices in London before extending loans to him in
India and this could not be provided without approval or acquiescence
of the exchange controllers. What was clear was that Mundhra had
very satisfactory arrangements with the exchange banks and large
overdrafts against the shares he lodged with them.
By the mid-195os, Mundhra's wealth (presumably his personal
assets) was reputed to be about 1-1.5 crore. Apart from the Vaishnavite
guru, Mundhra was also rumoured to have access to the resources
commanded by Shanti Prasad Jain, chairperson of the Punjab
 PRIVATE INDUSTRY AND THE SECOND FIVE-YEAR PLAN

National Bank. He was also a 'bull' operator both for the shares of
companies under his control and for those he wished to acquire. He
was reputed to have a 'thoroughly dishonest attitude', and the judge
who had disposed of one of his appeals concerning income tax matters
in 1954 had gone so far as to record that, given Mundhra's past record,
he would have used his discretion to refuse any writ filed by him.18
From Krishnamachari's and Deshmukh's accounts, it appears that
at least three of the Marwari business groups, Dalmia, Singhania, and
Mundhra, with the support of a fourth business interest, S.P. Jain,
were vying to gain control of major firms involved in the tea, textile,
c and engineering industries, in the vacuum created by the repatriation
of British interests. There were several points of concern here. First,
whatever the failures of the British managing agencies, there was a
vast difference between their professionalism and that of the Indian
groups who were engaged in taking them over.19 In fact, the differen-
tial quality of industrial management that the British and Indian man-
aging agencies represented went beyond any normal range in capa-
bilities. The Indian firms were either representative of trading and
speculative capital (Mundhra) or, as in the other two cases of Dalmia
and Singhania, they represented capital accumulated through trade
and usury, painfully attempting the transition to industrial capital, a
transition made doubly difficult because of the constraints placed on
industrial investment by the very recently concluded colonial period
of India's history.
The consequences of such a pedigree were well described by
Bettelheim. 20 Basing his analysis on the Reserve Bank of India (RBI)-
conducted All India Rural Credit Survey of 1951, he argued that an
overlooked feature of the effect of the high rates of return to rural

18 Remark made by Justice S.R. Tendo1kar while disposing of an appeal by

Mundhra in an income tax case, quoted by C.D. Deshmukh in bis letter to Jawaharlal
Nehru (Letter no. 084/PSF /55, 21 September 1955, JN Papers, File no. 385 p. 116).
19 Brinimer (1955= 55~).
20 BettelheinI (p. 76) quotes the Majority Report of the Indian Central Banking
Enquiry Committee (p. 99), which stated in 1931 that ' ....commercial banks ... occupy
a significant place in the financial superstructure that is available to the village
moneylender, the urban moneylender, the indigenous banker and the trader in
agricultural produce'. Given that all the major groups had large-scale commercial banks
within their fold, the link between ' ....big monopoly and financial capital with rural
moneylending capital' was quite apparent to BettelheinI (p. 78) (BettelheinI 1971: 74-9).
128 FORGING CAPITALISM IN NEHRU'S INDIA

moneylending capital was the drain on urban capital stocks. This

differential was the cause of a continuous drain on newly formed
industrial capital, taking it not only into financial and commercial
operations, but also into the rural areas. This led to a situation where
capital accumulated in the industrial process was degraded into an
accumulation of debts-an extraordinary transformation of capital
into income in the hands oflandlords and previous debtors.
Even if this flow could be reduced (by, for instance, the creation of
the State Bank of India with an extended network of rural branches),
there was the second point of concern for the State. This lay in the pre-
dilections of these businessmen: rather than using their accumulated
capital in greenfield investments, they were engaged in the takeover
of existing companies. This practice enabled them to evade evolution
into industrial capitalists. Finally, and perhaps most dangerously, stock
market operations, explicitly visible in the case of Mundhra, were driv-
ing the stock market forward and encouraging other businessmen to
similarly engage their resources in speculation on the markets.
The entire plan of industrial development which the Second Five-
Year Plan was to lay out was threatened by these activities of private
capital. The 1948 Industrial Policy Resolution, soon to be replaced by
the more clearly focused resolution of 1956, had laid out new indus-
trial areas which were open for fresh investment by the private sector.
It was within these bounds that private resources were expected to be
channelled. For the representatives of merchant and usury capital,
however, widespread forms of pre-industrial capital-the traditional
textiles, sugar, and'other light industry-were the preferred area of
activity. With capacity jn 'large-scale cotton mills limited by the policy
measures designed to- increase handloom production, acquisition
of existing firms in textiles, tea, and engineering, the last assured of
market demand by planned expansion of public sector activity, were
far more attractive, being known quantities with production processes
well understood and demand assured.
It was these considerations that led T.T. Krishnamachari to address
tht finance minister qnly a,. couple of months later on the inexplicable
boom in the stock market. 21 Curiously, the beginning of the boom

21 Secret letter dated 26 October 1955, copied to Jawaharlal Nehru on the same
date. ITK Papers, correspondence with Jawaharlal Nehru 1955, pp. 145-6.
 PRIVATE INDUSTRY AND THE SECOND FIVE-YEAR PLAN 129

seems to have coincided with announcement of the 'Socialist Pattern

of Society', implying, perhaps, that the stock market realized that pri-
vate industrial profits were going to rise in the foreseeable future.
However, Krishnamachari was apprehensive about the degree of
appreciation in share prices, which was qualitatively of a higher order
as compared to worldwide trends. Such an increase would mean, as
earlier mentioned, that fewer resources would be available to take
up shares in new companies floated in order to establish industrial
capacities in areas hitherto untapped. Krishnamachari suggested that
measures should be explored to channel investments into these newer
areas, possibly by asking banks through the Reserve Bank of India to
discontinue lending for investments in shares of existing companies.
It was not only British interests which were contemplating repat-
riating their holdings in India. In a letter to T.T. Krishnamachari,
G.D. Birla explained the mysterious circumstances by which he was
approached by 'quite an important' man, who, coming straight to the
point, wished to know whether Birla would be interested in buying
out Neville Wadia's holdings in Bombay Dyeing, the major textile mill
in Bombay. 22 The deal was to include the managing agency which
would be transferred to the Birla Group. From the trend of Birla's
letter, it appeared that he was expected to show an interest and name
a suitably inflated price, which would then be used to bargain with
the Calcutta or Ahmedabad buyers who were reputed to have offered
double the then Bombay Dyeing share price of Rs 500. Birla report-
edly advised the intermediary that if the Ahmedabad offer came from
Kasturbhai Lalbhai, that should be accepted as that would offer the
prospect of far better management than would be provided by the
Calcutta aspirers. Birla ended his letter by saying that he felt sorry
at the prospect of industrialists selling off their interests. Birla men-
tioned Haridas Mundhra, Chiranjilal Bajoria, and Shanti Prasad Jain
as likely buyers who would pay a 'fancy' price but who were not,
presumably, in his estimation, industrialists. He also expressed the
politically correct statement that at the age of 62, he wished only to
create employment opportunities and wealth, neither of which could
be realized by buying an existing company. This then was the defining

22 Personal and confidential letter dated 17 February 1956, ITK Papers,

correspondence with G.D. Birla, pp. 33-5.

130 FORGING CAPITAUSM IN NEHRu'S INDIA

element of an industrialist, at least in that early period of industrial

development in India.
Foremost amongst the capitalists whose outlook did not accord
with those of industrialists were the jute mill owners of Bengal. T.T.
Krishnamachari had remarked, nearly three years earlier on the Mar-
waris being 'notoriously indifferent to the efficient working of the
industrial apparatus, mechanical as well as human'.23 This was in
one of the earliest expressions of concern about the consequences
of British interests selling out to the Marwaris. This was a colour-
ful yet acute portrayal of the attitudes of representatives of merchant
and usurer capital to issues of industrial management, plant mainte-
nance, and modem systems of industrial relations. As Nehru noted,
even B.C. Roy, chief minister of West Bengal, and no 'socialist' ideo-
logue, had spoken rather strongly about the jute mill employers and
felt that steps should be taken to make them behave. 2 4 This was pre-
sumably a reference to their cavalier attitude, along the lines of absen-
tee agrarian landlords, towards laws regulating labour conditions in
their plants.
To summarize the situation as it appeared to the Government of
India at the beginning of the Second Five-Year Plan, businessmen
who had accumulated large funds through grey areas of economic
activity had found that the stock market, buoyed by the prospects of
high returns to industrial investment, was a source of high short-term
returns. Simultaneously, established British industrialists and even
some Indian ones, whether motivated by fatigue or uncertain pros-
pects within a controlled economy, were keen to liquidate their stock
market-based assets. There was then. the prospect that well-estab-
lished and well-managed firms would fall into the hands of unknown
figures, some of whom had the reputation of being adventurers. 2 5
Apart from their own proclivities on the stock exchange, their manip-
ulation of the market through insider trading was proving a lure to

23 Secret letter No. 1001/CIM/53 dated 24 November 1953 from T.T.

Krishnamachari to Jawaharlal Nehru, JN Papers, File no. 216, p. 92.
24 Letter no. 605-PM0/56 dated 17 November 1956, to Khandubhai Desai, labour
minister, JN Papers, File no. 489, p. 34.
25 Deshmukh in his letter to Jawaharlal Nehru referred to Mundhra as someone
willing 'to take risks-and heavy risks involving his personal fortune too.. .' (Secret
letter no. 084/PSF/55 dated 21 September 1955, JN Papers, File no. 385, pp.116-17).
 PRIVATE INDUSTRY AND THE SECOND FIVE-YEAR PI.AN 131

other capitals which might have been invested in new enterprises.

With ambitious plans for private investment, the Government of
India could not be indifferent to these phenomena.

SOCIAL ENGINEERING THROUGH FISCAL POLICY

Even before he became finance minister in September 1956, Krishna-
machari was playing an important role in introducing innovative
ideas into Indian fiscal policy. After a meeting with Nicholas Kaldor
in March 1956, he wrote to Jawaharlal Nehru mentioning that he
agreed with Kaldor that the existing taxation system took no account
of human factors and presumed that by increasing the rate of tax the
desired redistribution would take place.26 He also emphasized that
Kaldor's proposals, with which he was familiar, having read his book
on expenditure tax and his minute of dissent to the Bri!ish Royal
Commission on Taxation, formed parts of an integrated scheme and
could not be introduced piecemeal. However, given the novelty of the
scheme, Krishnamachari felt that considerable propaganda efforts
would be necessary, both with MPs and within the Congress. He
asked Nehru ifhe was agreeable to have a meeting in the Lok Sabha,
to which Nehru agreed. 2 7
Two months later, when a .group of Congress MPs submitted
a memorandum on taxation policy, a copy was sent to Krishna-
machari. 28 The substance of their argument was that with the adop-
tion of the 'socialist pattern of society' 2 9 (by both the Congress and
the Lok Sabha), the recommendations of the Taxation Enquiry Com-
mission had been made obsolete. So the proposal to tax basic items

26 Secret letter D. 0. no. 96-CIM/56 dated 15 March 1956, TIK Papers,

correspondence with Jawaharlal Nehru 1956, pp. 38-9.
27 Confidential letter no. 115-0M0/56 dated 15 March 1956, TIK Papers,
correspondence with Jawaharlal Nehru, 1956, p. 40. It was presumed by both that C.D.
Deshmukh, the titular finance minister, would be consulted only as regards the details
of the meeting.
28 Members of Parliament's letter dated 27 April 1956, to ~e prime minister
enclosed with Jawaharlal Nehru's confidential letter no. 1180-PMH/56 dated 16 May
1956, TIK Papers, correspondence with Jawaharlal Nehru, 1956, n.p.
29 The actual resolution referred to a 'socialistic pattern'. The distinction is
important as there was opposition within the Congress to the full-blooded term
'socialist', but these MPs, on the left politically, probably wanted to assert themselves.
132 FORGING CAPITALISM IN NEHRU'S INDIA

of consumption in use by the poor, so as to raise resources for the

Plan, was not valid. The group presented a list of items which they
indicated should not be taxed, but measures taken to ensure stable
prices prevailed despite resort to measures of deficit finance. For this,
not only price controls, but also a system of buffer stocks in strategic
locations had to be established. The resources foregone because of the
exemptions on tax of these basic items could be balanced by increas-
ing taxation levels of the higher income groups, whose income and
wealth would necessarily increase with a 'high pressure development
programme' .3°
Concerned by the implications of these trends in economic ideol-
ogy, the World Bank took the opportunity of Krishnamachari's for-
mal appointment as finance minister to deliver a few home truths.31
Emphasizing that it was his conviction that India's interest lay in giv-
ing private enterprise, both Indian and foreign, every encouragement,
Eugene Black, president of the World Bank, disparaged the intrusion
of ideology into policy matters. He singled out the Industrial Policy
Resolution in this regard, and argued that the targets for public sec-
tor investment were far too large. The deficit financing necessary to
support this investment were sure to lead to unacceptable inflationary
pressures and create financial instability. As far as external finances
were concerned, the bank wanted a change from the existing policies
that discouraged exports of textiles and vegetable oils to the active
support of these and other traditional exports.3 2

30 The quoted phrases are from a letter written by u members of Parliament to

the prime minister, 27 April 1956, enclosed with Jawaharlal Nehru's confidential letter
no. 1180-PMH/56, 16 May 1956, TIK Papers, co~espondence with Jawaharlal Nehru
1956, n.p.
· 31 Letter dated 5 September 1956 circulated with Plarming Commission Circular
No. PC/CDN09/1/56 dated 1 October 1956, distributed widely within the Planning
Commission, JN Papers, File no. 477, pp. 5-8.
32 In fact, in December 1956, a committee of secretaries set up to make
recommendations for increasing exports identified sugar, cotton, vanaspati,
groundnuts, and salad oil as commodities for special attention. There was opposition
to exporting groundnut oil from the ministers in charge of agriculture, food, and
commerce and consumer industries. 'Recommendations of the Committee of
Secretaries for Increasing Exports', Ministry of Finance, Department of Economic
Affairs, and, enclosure to secret letter dated 28 December 1956 from T.T.
Kri"'shnamachari t'o Jawaharlal ijehfu, JN Papers, File no. 498, pp. 94-8. Chakravarty
(1989: 16) claims that.in, the case of.cotton textiles, exports were not encouraged not
 PRIVATE INDUSTRY AND THE SECOND FIVE-YEAR PLAN

Reiterating the bank's willingness to support India's plan, Black

cautioned that the quantum of aid would necessarily depend on
India's success in attracting foreign investment (phrased as ' ...
external financial assistance ... [which did not entail] ... fixed foreign
exchange commitments'). A specific area of policy reform, with which
the letter ended, noted that Indian reliance on the expansion of the
rail network, while welcome, should not ignore the importance of
road and coastal shipping, a problem of transport 'which has particu-
larly engaged the attention of the Bank, as well as of your own Gov-
ernment and of private interests throughout India'.
The impact of this letter was evident a short time later, when the
cabinet met to consider the subject of the financial resources required
for the Second Five-Year Plan.33 The terse minutes merely recorded
that after consideration of a finance ministry paper bn the subject,
there was broad agreement on the approach. However, it was decided
that for the time being only the three proposals of a capital gains tax,
an increase on tax rates on dividends, and ·controls on companies'
reserves were to be implemented.
This was certainly a retreat from Kaldor's integrated scheme. How-
ever, the significance of the controls on the use of reserves by com-
panies needs to be emphasized. From the 1930s, observers had noted
the tendency of managing agencies to use these reserves as cheap
sources of finance for a variety of purposes, with the concomitant that
depreciation reserves were perpetually inadequate to meet replace-
ment costs, particularly at times of technological change, or even of
unusual levels of inflation.34 Ensuring that reserves not intended to

because of considerations of maximizing internal supplies but because of the regional

concentration of the industry and the political issue of supporting particular groups of
industrialists at the expense of others. If this was also true of vegetable oils, another
regionally concentrated industry, this would amount to a serious indictment of the
political management skills of the cabinet. It is significant that in an undated note in
1957, Krishnamachari suggested to the commerce and industry, food and agriculture,
and steel, mines, and fuel ministers that distribution and export organizations should
be established on a statutory basis for the sugar, textiles, cement, and iron and steel
industries (TIK Papers, correspondence with Jawaharlal Nehru 1957, pp.17-19).
33 Meeting of the cabinet held on Thursday, 15 November 1956 at 9 am, Financial
Resources for the Plan, Case no. 308/66/56, JN Papers, File no. 488, p. 204.
34 See, for instance, Samant and Mulky (1937: 167).
134 FORGING CAPITALISM IN NEHRU'S INDIA

be utilized for upgradation of plant and equipment would not be eli-

gible for tax rebate was an important step in social engineering, dis-
couraging non-industrial forms of utilization of company resources.
Another controversy that erupted at this time was that created by
the resignation of the RBI governor, B. Rama Rau.35 The substan-
tive issue was the government's proposal to increase the stamp duty
levied on money market transactions. The RBI felt that the large
increase in stamp duty, a 'fiscal measure with monetary implications'
in Krishnamachari's words, infringed on the prerogative of the bank
to determine monetary policy. Apart from the government's action,
Rama Rau was also incensed at the characterization of the bank as a
department of the government and offended at Krishnamachari's per-
sonal behaviour towards him. Nehru supported Krishnamachari, and
various commentators have noted and generally deplored the era of
subordination of the RBI to the government that this episode inaugu-
rated. What has not been remarked on is the fact that this institutional
subordination was the expression of the primacy given to industrial
policy over monetary policy.36 As a measure of social engineering,
this was even more critical than the controls on reserves. Basing him-
self on the empirical results of the RBI's All India Rural Credit Survey,

35 The Reserve Bank's view of these developments is in Balachandran (1998:

715-24). While this account is largely framed as an account in interpersonal and inter-
institutional issues, later, on pp. 729-30, Balachandran comes close to the present
discussion, although it is framed in a Keynesian-cum-structuralist-cum-'modernist'
versus monetarist policy perspective. The present account is also based on the
following documents-JN Papers, File no. 494: Secret and immediate letter no. 2816-
PMH/56 dated 6 December 1956, from Jawaharlal Nehru to T.T. Krishnamachari, p.
157; Secret letter no. G.8-300/56 dated 10 December 1956, from B. Rama Rau to H.M.
Patel, enclosing Secret memorandum no. B-34, Memorandum to the Central Board
Implications of Certain Provisions of the Finance Bill, 1956 dated 10 December 1956,
pp. 172-6; Letter dated n December 1956, from T.T. Krishnamachari to Jawaharlal
Nehru, p. 177; Secret letter no. 689-PM0/56 dated 12 December 1956 from Jawaharlal
Nehru to B. Rama Rau, pp. 307-8. Also JN Papers, File no. 498, Secret letter no. G.8-
311/56 dated 29 December 1956 from B. Rama Rau to Jawaharlal Nehru, pp. 102-8 with
enclosure 'Extract from the statement by Shri B. Rama Rau, Governor, Reserve Bank of
India, at the Bank Annual Report Discussion (25 September 1956) on p. 101.
36 It is significant to note in this context that thirty-five years later, the Economic
Survey of the Ministry of Finance for 1992-3 noted explicitly a reversal of this situation:
henceforward, industrial policy would be complementary to trade, fiscal, and exchange
rate management policies.
 PRIVATE INDUSTRY AND THE SECOND FIVE-YEAR PLAN 135

Bettelheim had remarked on the large difference between the interest

rates in the urban money markets and those in rural moneylending
(the bank rate rose to a maximum of about 5 per cent in 1958 as com-
pared to agricultural moneylending rates of between 25 per cent in
Bihar and 40 per cent and above in Bengal, Orissa, and Himachal).37
The tightness of the money market and requests for steps to ease con-
trols were one, constantly repeated, theme in all of G.D. Birla's cor-
respondence with Krishnamachari.38 Shrewdly, he linked the market
conditions affected to the difficulties it created in financing industrial
expansion plans.39

THE MUNDHRA EPISODE

The resignation of T.T. Krishnamachari from the finance minister-
ship in early 1958 was the culmination of three developments that
evolved concurrently, but were distinct in their historical signifi-
cance. The first was the actual sequence of events that led to Jawa-
harlal Nehru accepting Krishnamachari's resignation. This has been
detailed in the public record, in the open proceedings of the M.C.
Chagla Commission of Enquiry and notably, in G. Balachandran's
account in the volume of the history of the RBI authored by him.4°
The second, little noticed, is the way in which the 'Mundhra episode'
was media-managed with the encouragement, if not at the behest, of
industrial interests who found that the controls established as part
of the industrialization drive accompanying the Second Five-Year

37 Bettelheim (1971: 82-3).

38 See, for instance, his letter dated 28 February 1956 (in which he mentions that
he had voiced the same concern in an earlier letter), TIK Papers, correspondence with
G.D. Birla, pp. 36--7; see also, letter dated 8 June 1957 where the money market is
mentioned twice with reference to MundhJa's increasingly serious 'fix'; letter dated 8
June 1957 from G.D. Birla to T.T. Krishnamachari, TTK Papers, correspondence with
G.D. Birla, pp. 78-80.
39 In asserting that Krishnamachari's controls on the use of reseives needed to
be relaxed, he warned that a collapse of the MundhJa edifice would further aggravate
the tight money situation. Fresh share issues by Tata Steel and Indian Iron and Steel
required substantial resources for the call money to be payable, and Birla argued that
investment prospects in both public and private sectors were being jeopardized by the
reseive deposit scheme. Letter dated 8 June 1957, TTK Papers, correspondence with
G.D. Birla, n.p.
40 Balachandran (1998), Appendix D, The Bank and the MundhJa Affair'.
 FORGING CAPITALISM IN NEHRU'S INDIA

Plan made serious and unacceptable inroads in private capitalist deci-

sion-making. These were felt to be of an order that justified, in their
minds, a multi-pronged political response, as will be seen. The third
development, involving social engineering, was a concerted effort to
push the bearers of merchant and usurer capital towards industrial
capital norms. It will be argued that it was an uneasy coalition formed
by opponents of each of these developments that coalesced and led to
Krishnamachari' s resignation.
In May 1957, as large quantities of shares of the Mundhra firms
were held by commercial banks in the country, including the State
Bank of India (SBI) and several exchange banks, H.V.R. lengar, gov-
ernor of the Reserve Bank had convened a meeting to take concerted
action to prevent a sudden or haphazard unloading of these shares on
the market.41 However, this meeting was abortive and by June 1957,
Mundhra was in serious trouble. He had approached G.D. Birla for
help in liquidating a part of his holdings, but Birla felt that with the
tight conditions in the monev market no one would be prepared to
' '!'!
buy the shares. Birla suggested tl].at Mundhra should meet Krishna-
machari ;tnd ask for his aq~ce.42 By this time, the Punjab National
Bank, ,which had beep&Sfommodating Mundhra, was pressing him
to repay and Birla 'fel,t that Mundhra risked losing control of Turner
Morrison.
• I
Following a further meeting between the SBI, life Insurance Cor-
poratio~ (LIC),,and T.T. Krishnamachari in June, it was decided that
UC would attempt to reduce the pressure of the market by buying
a large block of Mundhra's shares. The proposal was conceived as a
short-term measure to maintain share prices in the market but this
step proved incapabl~ of restoring confidence in the share market.43
Later in the year, SBI and LIC, both with very heavy stakes in
the matter, had reviewed the situation and, in consultation with
Krishnamach::i.ri, had agreed that SBI should take urgent action.44 In
November 1957, it was the tum of H.V.R. lengar, then governor of

41 Secret note' by D.L. Mazumda:r; dated 5 December 1957, U.O.D. No. 1600/
SCLA/57 dated 6 December 1957, TIK Papers, Subject file. 21, p. 51.
42 Letter qated 8 June 1957, TIK Papers, correspondence with G.D. Birla, pp.
78-80.
43 Secret note by D.L. Mazumdar, TIK Papers, Subject file 21, p. 50.
44 Secret note by D.L. Mazumdar, TIK Papers, Subject file 21, p. 51.
 PRIVATE INDUSTRY AND THE SECOND FIVE-YEAR PLAN 137

the RBI, to report to Krishnamachari. lhe managing director of BIC

was reported to have confided to Sachin Chaudhuri, member of the
SBI's Calcutta local board, that in payment for dues from Mundhra's
mills, BIC had received Richardson and Cruddas shares. lhese shares
had been supposedly held by the Punjab National Bank which had
sold them. However, confidential enquiries with the bank showed
that the endorsement for transfer had been forged; the shares nei-
ther belonged to the bank nor had they transferred them. lhe man-
aging director of the BIC had lodged the shares in safe custody and
Mundhra was now demanding that they be returned. Although both
the SBI and the UC were taking steps to ensure the security of their
,;: advances and investments in Mundhra's various firms, Iengar felt
that the time had certainly come to stop Mundhra in his share cer-
tificate forging orgy.45 Iengar followed with another letter two days
later, informing Krishilamachari that the managing director of BIC
had also lodged the share transaction form with the SBI, with an RBI
lock installed for double protection. In the meantime a large block of
Mundhra's shares pledged to the Punjab National Bank were offered
for sale because Mundhra had not been able to pay his dues and his
cheques were not being honoured. It was uncertain how many of
these shares were forged.46 _
Events moved quickly after this. On 5 December, Iengar wrote to
say that UC and SBI would jointly present a petition asking the court
to appoint a manager for Richardson and Cruddas and BIC, which
were to be taken possession of under the hypothecation agreement
they had entered into. 47 A criminal case was to be filed concerning the
forged shares in the possession of the Punjab National Bank. Finally,
an investigation under the Company's Act was to be initiated into the
affairs of all the Mundhra companies. In his secret note, D.L. Mazum-
dar, then Secretary, Department of Company Affairs, added that LIC
was also keen to change the management of Jessop and Company
and was seeking the cooperation of other large shareholders, Punjab

45 Secret letter D.O. no. G.8-309/57 28 November 1957 TIK papers Subject file
21, pp. 29-30.
46 Secret letter D.O. no. G.8-317/57, 30 November 1957, TIK Papers, Subject file
21, pp. 35-6.
47 Secret letter D.O. no. G.8-329/57. 5 December 1957, TIK Papers, Subject file
21, pp. 37-8.
 FORGING CAPITALISM IN NEHRU'S INDIA

National Bank and the engineering firm Bum, Brathwaite, Jessop

and Co.48 If this cooperation did not materialize, UC wished to take
action under the Companies Act with its 20 per cent shareholding,
but it was felt that no minority shareholder could bring about a quick
and non-disruptive change in management. Mazumdar also reported
that he was informed that at the time when UC came to Mundhra's
help in June 1957, no special powers of intervention had been sought
from Mundhra, so that if the situation did not improve, UC could
decisively intervene in company management. In the event, before
the Mundhra case became a cause celebre, the Department of Com-
pany Law, SBI, UC, and RBI had agreed on the takeover through
court action of the management ofBIC and Richardson and Cruddas,
police action against the share forgeries, and an investigation into the
affairs of the Mundhra companies by the Department.49
In the context of the controversy over the LI C purchase of the
Mundhra shares, whether the ~hares should have been bought from
Mundhra himself, or, whether Krishnamachari or H.M. Patel brow-
beat the chairperson and managing director of UC to buy these shares
against their better judgenienl:, tlie' most critical factor seems to have
fallen by the wayside. This wa~ emphasized by a comparison of the
two notes written by D.L. Mazumdar, secretary of the Department
of Company Law.Administration in September 1957 and the second
in Decem~er i957. The first was addressed to Jawaharlal Nehru, at a
time whett'Krishnamachari was in the United States.5° Pointing out
that the ~pare purchases by UC seemed not to have had any lasting
resultsr with the share prices continuing to fall, Mazumdar suggested
twb options J:o the government. The first was an investigation into
the affairs of the Mundhra Group under provisions of the Compa-
nies Act; the second was action against the management of specific
companies of the gioup for.contravention of articles defining sound
principles 'of corporate, governance. Mazumdar suggested that any
process of formal investigation would be long-drawn-out, subject to
judicial scrutiny, and would be detrimental not only to the 'interests
of investors but also of employees and, indeed, of production as such'.

48 Secret note by D.L. Mazumdar, TI'K Papers, Subject file 21, pp. 53-4.
49 Secret note by D.L. Mazumdar, 1TK Papers, Subject file 21, p. 56.
50 Secret and Priority note, U.O.D. no. 1390/SCLA/57 dated 18 September 1957, JN
Papers, File no. 587, pp. 273-4.
 PRIVATE INDUSTRY AND THE SECOND FIVE-YEAR PLAN 139

As for action against specific companies, the department was consid-

ering feasible action.
Curiously, the note did not suggest the takeover of at least those
companies in the group in which the SBI had a decisive stake through
the hypothecation agreements accompanying the loans advanced to
both the BIC and Richardson and Cruddas, a step that was taken finally,
three months later. Similarly, the provisions under the Industrial Devel-
opment and Regulation Act (IDRA), allowing action by the government
in the public interest, were not considered at any time. According to
Mazumdar, it was the evidence of Mundhra's widespread use of forged
share certificates which made the governor of the Reserve Bank feel
that urgent action was demanded. It was also the combined resolve of
the RBI, SBI, and LIC that led to the agreement by Krishnamachari in
late November of these initiatives to gain managerial control.
What is being suggested is that in a long-term historical perspec-
tive, the issues that gained public attention at the time of the Mundhra
episode were irrelevant. The question that needs to be asked is why
these steps could not have been taken earlier. The conventional rea-
sons offered, both by the commissions ofenquiry and later commenta-
tors, of a short-term nexus between Mundhra as an individual and the
Congress Party's requirements of funds for the 1957 elections seems
inadequate.51 As has been mentioned, Mundhra had long-standing
connections with the British exchange banks and even with the Brit-
ish Government. The significance of the reluctance ofMundra's cred-
itor banks to take combined action to protect their own interests at
the meeting called by the RBI governor in May 1957 has already been
noted. Also, there was the marked reluctance of the Punjab National
Bank, which, together with the LIC, was a major shareholder in BIC,
to initiate police action even when it was discovered that the share
certificates it held as surety were forgeries. It will be recalled that the
then chairperson of the bank, Shanti Prasad Jain, was one of the per-
sons under scrutiny in the Dalmia Jain case. What is then suggested
is that action to divest Mundhra of control of his companies, until
a stage was reached where action became imperative, was actively

51 See the views of the Vivian Bose Board of Inquiry, quoted by Balachandran
(1998), Appendix D, 'The Bank and the Mundhra Affair', pp. 803-4. See also the issue
of the Salivati Newsletter, published from Bombay, vol.1, no. 25, 27 December 1957, JN
Papers, File no. 580, p. 66.
 FORGING CAPITALISM IN NEHRU'S INDIA

discouraged because Mundhra belonged precisely to the category of

short-horizon businessmen who were so entrenched in the political
economic nexus that presided over at least a significant part of the
Indian political economy.
If this was indeed so, then a more promising area of enquiry is
raised by the brief mention of the controversy surrounding Mundhra
in the Salivati Newsletter, a broadsheet published from Bombay and
evidently in the lmow of Bombay share market gossip.52 According
to this account, in March 1957, the Union commerce minister was
alerted by the chief minister of Uttar Pradesh to the accumulation of
stocks at the BIC mills and the imminent threat of closure of the mills
leading to unemployment of 20,000 workers.· After a visit to Luc-
lmow and discussions with the chief minister and Mundhra, Union
government officials advised Mundhra to reduce the labour force by
dismissing a section of workers. He was also offered financial help,
but after the refusal of the National Industrial Development Corpo-
ration, the SBI, and the exchange banks to advance further funds,
attention was to focus on LIC. According to the Salivati Newsletter's
sources, between four and six members of the Union cabinet were
in favour of extending financial help to Mundhra and, quite contrary
to the predominanJ view that the financial improprieties were the
result of a series of ill-considered and unsound directives issued by
Krishnamachari, it was held that actually he was guilty of an inability
to withstand the pressure from his cabinet colleagues and was merely
an instrument in the decision that LIC would purchase the shares.53

OPPOSITibN TO THE SOCIALIST PATTERN:

THE FORUM OF FREE ENTERPRISE AND THE
DEMOCRATIC RESEARCH SERVICE
Almost simultaneously with the adoption of the resolution on the
socialistic pattern of society in January 1955, and its endorsement by

52 Salivati Newsletter, published from Bombay, vol. 1, no. 25, 27 December 1957, JN
Papers, File no. 580, p. 66.
53 It is significant that Balachandran gives some credence to the opinion that
Krishnamachari's decision to deny anyxnowledge of the LIC deal at the public hearings
conducted in the course of the Chagla Commission was on the advice of the home
minister, G.B. Pant (Balachandran 1998: 802).
 PRIVATE INDUSTRY AND THE SECOND FIVE-YEAR PLAN 141

the Lok Sabha soon afterwards, Bombay businessmen began to voice

their dissatisfaction with the trend in economic policies. As a result,
the government agreed to a series of consultations with major figures
in the industrial field. In 1955, the major concern was the Compa-
nies Act, and a meeting was held with the Congress president, U.N.
Dhebar, Morarji Desai, chief minister of the then Bombay state, G.D.
Birla, J.R.D. Tata, and Gujarmal Modi amongst others. The discussion
began with a general discussion about the socialist pattern. While
both Tata and Modi were very gloomy and felt that the future held
out little hope, Birla and some others took the line that adaptation
to changing conditions and acceptance of major policies laid down
by the government was essential if private industry was to function
properly. Ultimately, both Tata and Modi, though probably not wholly
convinced, toned down their criticism.54
By February 1956, with the imminent announcement of the new
Industrial Policy Resolution, the feelings of apprehension were quite
apparent to G.D. Birla, who reported the mood at a lunch hosted
by Tata. Birla's attempt to inject some optimism apparently entirely
failed.55 Led by the Tata Group these misgivings materialized in the
Forum of Free Enterprise.5 6 According to its manifesto, which was
published in the Bombay edition of the Times of India in July 1956,
the forum was to be a non-political and ·non-partisan organization,
disseminating authoritative information to educate public opinion
on the achievements of private enterprise, and the manner in which
it could contribute to the economic development of the country.57 It
called for support from those in service, profession, agriculture, trade,
and industry. However, in its far-flung effort to explain the purpose
of its establishment, A.O. Shroff, one of its chief organizers, clari-
fied that the forum would have its political activity in the shape of

54 Confidential letter no. 353-PM0/55 dated 18 August 1955 from Jawaharlal Nehru
to C.D. Deshmukh, JN Papers, File no. 371, p. 194.
55 Personal letter dated 28 February 1956, from G.D. Birla to T.T. Krishnamachari,
TIK Papers, correspondence with G.D. Birla, pp. 36-7.
56 Kochanek (1974) discussed the Forum of Free Enterprise in some detail. See
pp. 204-8. A.D. Shrofl's presentation reported in 'Minutes of the Meeting of the
Departmental Heads of Tata Companies convened by the Chairman on the 23 April
1957', TTK Papers, Subject file 10, pp. 13-15.
57 Top secret note, 'Forum of Free Enterprise', undated, JN Papers, File no. 485,
P· 97a.
 FORGING CAPITALISM IN NEHRU'S INDIA

organizing public opinion against the government's economic policy,

including the threat of nationalization implicit in the takeover of the
airlines, the Imperial Bank, and the life insurance sector. The 1956
Industrial Policy Resolution was responsible for creating apprehen-
sions in businessmen's minds, as also in the minds of middle class
investors.58 M.R. Masani, founder of the Democratic Research Service,
spoke more explicitly at Bangalore: lovers of freedom, he said, should
be alert enough to shift their fire and their aim from one source of the
centralization of power and privilege to another.59 In his opinion, the
social forces represented by industrial management, trade, organized
labour, the professions, industrial proprietors, and religion could pro-
vide the checks and balances necessary to curb power. Morarji Vaidya,
president of the Indian Merchants' Chamber, in an article in the Times
of India criticized both the nationalizations, but extended the basis for
opposition by referring to the 'attitude' adopted by the State Trading
Organization. 6o Further activity was reported: contact was established
in the course of five meetings in July 1956 with 120 trade organizations
in Bombay, with 50 members of parliament in Delhi in September
1956, with members of the Mysore Chamber of Commerce and the
Indian Institute of Culture at Bangalore, also in September. 61 Meetings
in Calcutta were.lrel~ with 'prominent citizens, with the Upper India
Chamber of Commer<;e.in Kanpur, and the Gujarat Chamber of Com-
merce in Ahmedabad.Finally, an All India Essay contest was organized
for students.on.the subject "Free Enterprise and Economic Progress"',
and, under the.auspices. of the magazine Trend, a meeting for women
was held at the Taj Mahal hotel, where the audience was reminded that
as consvmers of qomestic goods, they provided adequate regulation of
the industry, thereb)! making state regulation superfluous.
So as to. make. the aim of the forum plain beyond any doubt,
according to another intelligence report, A.D. Shroff, speaking to the

58 A.D. Shroffs speeches·in Calcutta to a group of businessmen in September

1956 and, in Bombay, to the Commerce Graduates Association in October 1956. Top
Secret note, '.Forum of Free Enterprise', undated, JN Papers File no. 485, p. 97a.
59 Top secret note, 'Forum of Free Enterprise', undated, JN Papers, File no. 485.
60 Top secret note, :Rorum of Free.Enterprise', undated, JN Papers, File no. 485,
p.96.
6i Secret note, 'A note on the "Forum of Free Enterprise"', undated, JN Papers,
File no. 492, pp. 34-9.
 PRIVATE INDUSTRY AND THE SECOND FIVE-YEAR PLAN

Commerce Graduates Association in October 1956, referred to the let-

ter from Eugene Black, president of the World Bank, to T.T. Krishna-
machari, criticizing the direction of recent economic policy. Black was,
according to Shroff. a 'real and sincere' friend of India. By December
1956, the ambitions of the sponsors of the forum, perhaps fortified by
the response to their campaign, had extended to the overtly political.
Japan Singh, an MP of the Jharkhand Party, was approached to gain
his support for the candidatures of M.R. Masani, A.D. Shroff, H.P.
Mody, and Leslie Sawhney, J.R.D. Tata's brother-in-law, in the 1957
parliamentary elections from the Jharkhand area of Bihar. 62 Tulsidas
Kilachand, another industrialist-MP, had joined the 'Tata crowd' who
,; were simultaneously in touch with N.C. Chatterjee, extending sup-
port to fifteen candidates in constituencies where the Hindu Mahas-
abha and Jan Sangh had a political base. The Democratic Research
Forum and the Forum of Free Enterprise, having collected Rs 10 lakh,
were in need of more money. A political attache in the US Embassy,
' ...working directly under the orders of Mr. Allen Dulles .. .'(director
of the CIA) had offered considerable finandal assistance from secret
service funds. 6 3
Apart from the broader relevance of these developments to India's
political trajectory and the increasing pressures towards modifying
economic strategy, by April 1957, it was clear that the immediate target
of attack was T.T. Krishnamachari. H.V.R. lengar informed Krishna-
machari of a conversation he had had with Shroff. 64 To a query about

62 It is interesting to note that it was G.D. Birla who suggested to H.P. Mody, in
February 1956, that if he wished to contest the Lok Sabha election, he should stand
from an area near Jamshedpur, rather than from Bombay. Personal letter dated 28
February 1956, from G.D. Birla to T.T. Krishnamachari, TTK Papers, correspondence
with G.D. Birla, p. 36.
63 Personal note by M.0. Mathai dated 1 December 1956, JN Papers, File no.493,
p. 29. Nehru sent the substance of this note to U.N. Dhebar, Congress President, in
his secret letter (no. 676-PM0/56 dated 6 December 1956, File no. 494, p. 121). In a
secret note to the secretary general of the ministry of external affairs written on the
same day (to which, significantly, he attached a copy of Mathai's note), he suggested
that at the impending talks with the US Government 'some general reference might
be made to these reports of American funds being offered for election purposes here'
(File no. 494, p. 103).
64 Strictly personal letter dated 4 April 1957, TTK Papers, correspondence with
H.V.R. Iengar, p. 10.
 FORGING CAPITALISM IN NEHRU'S INDIA

whether Shroff was aware that he was doing a great deal of injury
by the reckless manner in which he was attacking the government,
Shroff immediately turned the conversation towards Krishnamachari
personally, and to his supposed open hostility even to any legitimate
criticism of his policies. While reiterating that Shroff's idiosyncrasies
were well known to Krishnamachari, Iengar warned that the broader
intent of Shroff's criticism was being shared with some of his col-
leagues in the cabinet. This aspect of Shroff, of allowing bitterness
towards policies affecting him in relation to unrelated areas of gov-
ernment's functioning, was noted by Nehru too.65

'RIGHT REACTION' WITHIN AND OUTSIDE THE

CONGRESS: KRISHNAMACHARI'S EXIT, RE-ENTRY,
AND THE BATTLE REJOINED
After the presentation of the 1957 budget, it seemed as if the cam-
paign to create a fear psychosis amongst the middle class had reached
such proportions that Nehru, while strongly reiterating his support
for the fiscal measures, had to warn Krishnamachari of the prevailing
current of opinion. 66 Almost simultaneously, Krishnamachari was
told by the old established Congressman and the then governor of
Bombay State, Sri Prakasa, of his own misgivings about the budget
proposals. 67 Sri Prakasa specifically pointed towards the opportuni-
ties for harassment, nqt only directed at businessmen but also to the
middle class who would, reportedly, be required to maintain records
of expenditure. In the fortnightly report that state governors were to
send to the president, Sri Prakasa elaborated his concerns, a copy of
which he sent to Krishnamachari. On his part, Nehru pointed out
that it was the business of government, without sacrificing its princi-
ples, to carry every shade of opinion with it. He emphasized that even
when a policy was opposed by clearly sectional interests, it was impor-
tant t6 ' ....hurt, ... [the individuals involved] ... as little as possible, that

65 Secret letter no. 585-PMH/59 dated n March 1959 to Fazl Ali, governor of
Assam, JN Papers, File no. 676, p. 257.
66 Secret and personal letter no. 1357-PMH/57 dated 2 August 1957, JN Papers,
File no. 543, pp. 137-8.
67 Secret and personal letter dated 1June 1957, 1TK Papers, correspondence with
Jawaharlal Nehru, 1957, pp. 80-7.
 PRIVATE INDUSTRY AND THE SECOND FIVE·YEAR PLAN 145

is, to put it ... [crudely, to deal with the problem] ... in a politician's
way'. Not only had the Congress party in the Lok Sabha to be taken
along in support of these measures, but the people generally. 'Run-
ning down' of the propertied classes, though often justified, ended in
demoralizing not only them, but also the large middle class and even
the lower middle class.
In his reply to Nehru's letter of warning about the currents of oppo-
sition created by the 1957 budget, Krishnamachari made an astute
point. 68 While agreeing that all the major moulders of public opinion
in the press were sharply critical of the fiscal measures proposed, Birla
,; was singled out as a friend. But even 'he feels hurt because the pros-
pect of running the type of business as he has been doing in the past
will not be possible in the future'. While Birla could adjust to the new
circumstances, other businessmen, presumably deeply enmeshed in
the usurious, speculative, and commercial modes of operation could
not easily do so. According to Krishnamachari, Birla was thus tom
between his loyalty to the Congress (his friends) and to his 'clan'-this
latter breed ofbusinessmen.69
Where Krishnamachari's shrewdness seems to have failed him was
in his unwittingly creating an alliance between Birla's 'clan' and the
modem Bombay-based supporters of the Forum of Free Enterprise.7°
While the former reacted to his measures of social engineering, the
latter objected to the institution of controls that, in their opinion,
impinged on their sources of authority and power. Together, they cre-
ated the situation that forced Krishnamachai's exit from the cabinet.
After the 1962 elections, Nehru offered a re-elected Krishnamachari
any cabinet post of his choice except finance (held by Morarji Desai
after a briefinterval following Krishnamachari's resignation in 1958).
In a bitter letter to Nehru, Krishnamachari claimed that it was Morarji
Desai who had played a major role in ensuring a situation in which
his resignation became inevitable. His charges were formidable:

68 Nehru's secret and personal letter no. 1357-PMH/57 dated 2 August 1957, JN
Papers, File no. 543, pp. 137-8. Krishnarnachari's secret letter no. 344/FM/57 dated 3
August 1957, JN Papers, File no.543, pp. 192-4.
69 Kochanek (1974), dealing with the situation within the Federation of Indian
Chambers of Commerce and Industry (FICCI) in the rnid-196os, has an interesting
discussion on the size ofBirla's 'clan' (pp.17o-g3).
70 Kochanek (1974) has discussed these differences on p. 216 and pp. 220-2.
 FORGING CAPITALISM IN NEHRU'S INDIA

....you are a mature politician and the Prime Minister of a great country.
In the course of the discharge of your obligations, therefore, it does hap-
pen that you might have to walk over the corpses of your friends. I realize
it might be necessary & I for my part have no grievance. But I cannot be
a good friend and unilateral though it might be I consider myself to be
one ... if I did not tell you that you do wrong. It is for you to decide whom
you are keeping as helmsman of the economic affairs of this country. You
will appreciate also that I cannot serve in any ministry charged with some
economic mission with the present FM as economic director. There are two
angles to it-one personal and the other a matter of principle. Mr M[orarji]
D[esai] had a fair share in the launching of the campaign against me when
I was F[inance] M[inister]. I know more of it after I left. His minions in
the Lok Sabha & outside did the dirty work. You knew that he brought
Moulana [Abul Kalam Azad] into it at one stage. He suborned the loyalty of
officials whom I had trusted & even specially favoured by offers of prefer-
ment and made them give false testimony before the [first Vivian] Bose
Commission. His agent[,] a journalist at the time[,] lobbied with the UPSC
and got rewarded as news editor in A[ll] I[ndia] R[adio]. The nasty speeches
in the discussion on Bose's report etc. were made by his agents-known
to be such to all members of the Lok Sabha. On the public issues he was
the apostle [of] all that I was against. The Finance Ministry has become a
veritable paradise of the vested interests these last few years. My tax mea-
sures were drastically amended & such that remain have been made dead
letters administratively.. .! hear that the Central Board of Revenue has been
asked to prepare a paper supporting a scheme to abolish the wealth tax &
expenditure tax. Tax evasion during these four years has gathered momen-
tum and officers are afraid' of Bombay vested interests ... The Swatantra
Party against which you have been fighting,is not really led by Rajaji [C.
Rajagopalachari) but by the big guns of industry & trade and the FM &
another in your cabinet are their firm supporters. At the appropriate time
they would change the band wagon ... .71

The message of this ,emotional outburst was clear. the era of social
engineering through innovative fiscal measures was over and private
enterprise would increasingly set the terms on which it wished to
negotiate with the government.

71 Handwritten letter dated 24 March 1962, TTK Papers, correspondence with

Jawaharlal Nehru 1962, pp. n-14.