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Robbing a Nation

In the sixth essay in an eight-part series on The Right to Property, we look at how theft was institutionalized under the reign of Indira Gandhi. Earlier essays: OneTwoThreeFour, Five.

Read the rest of the essays here: Seven, Eight.

It is no secret that Indira Gandhi’s tenure was harmful to property rights in particular. However, the damage done to property rights is entwined with three other related, but separate, aspects of her administration: (1) the battle with the judiciary, (2) the war against the constitution, and (3) the Emergency. This essay attempts to parse out the property rights issues from this entanglement during a period of great uncertainty from 1966 to 1978.

The Rise of a New Socialism

Jawaharlal Nehru died in 1964 and the Congress party, and the Syndicate (powerful party and Cabinet members within the Congress), picked Lal Bahadur Shastri as his successor. Indira Gandhi’s name was quickly dismissed as she had not made any mark in politics or public service within or outside the party. Shastri died in 1966 and when the question of succession arose, the Indian National Congress Party president, K Kamaraj, and the Syndicate unreservedly supported Indira Gandhi, who served as Prime Minister for the rest of the term. Many felt this was a strategic move by the party leaders, as it sidelined the headstrong senior statesman Morarji Desai in favour of a timid young woman with no experience, who would be an easily controlled figurehead while the Syndicate was the real power in the party.

Indira Gandhi, however, had other plans. She intended to create a place for herself, and identified herself as a socialist, following her father Jawaharlal Nehru. The Syndicate that dominated the organizational wing of the Congress favoured a dilution of planning and a reduced role of the Nehruvian public sector in the economy. India Gandhi wanted to go farther left in her policies and take an ideological stand that was different from the Syndicate, continue Nehru’s socialist vision, and yet be popular enough to win elections.

An important factor in this decision to ‘go left’ was her Chief Advisor PN Haksar, who encouraged her to embrace socialist ideology. Haksar, a socialist polymath, was educated at the London School of Economics. He was unabashedly pro-state and anti-market in his leanings. Particularly pro-Soviet, he was considered one of Harold Laski’s best students of his generation, and wanted to carry out Laski’s vision in India.

While Haksar’s ideological roots are clear, pre-1967 Indira Gandhi had never identified herself as a socialist. Yet that is the path she chose. The generous interpretation of this move by historians is that she wanted to identify herself with the electorate (which favored socialist policies) in order to get elected. An alternate explanation is that she embraced socialism to increase the public sector and create a position for concentration of power.

In May 1967, she announced the Ten-Point Program, which included policies to seize the commanding heights of the economy. The policy platform included nationalization of banks and insurance, curbing monopolies, land reforms, urban land ceiling, rural housing, and abolition of privy purses –a hugely popular agenda. She followed Haksar’s advice and positioned herself as the ‘real’ socialist relative to Morarji Desai (who was opposed to bank nationalizations) and the Syndicate (which wanted to move away from socialist policies altogether).

Before the government could launch the Ten-Point program, there was the question of whether the government could take property without compensation to execute its socialist agenda. Or, in Nehruvian style, amend the constitution when fundamental rights constrained the states’ ability to expropriate property.

One of the entries in the Ninth Schedule, the Punjab Security of Land Tenures Act, 1953, was challenged on the ground that it deprived individuals of their right to private property. And so began one of the most important judicial proceedings of the time, Golak Nath v State of Punjab (AIR 1967 SC 1643), where the question of the power of the parliament to amend the constitution was heard by an eleven-judge bench. The majority opinion stated that though prior amendments would not be affected, in future, Parliament could not amend the constitution to abridge any of the fundamental rights.

Golak Nath severely curbed the government’s ability to execute the socialist vision, and Indira Gandhi’s desire to concentrate power, and the case marks the beginnings of the war against property rights, the judiciary, the constitution, and eventually against democracy.

Bank Nationalization

The war began with the battle of Bank Nationalization. This was an agenda that set Indira Gandhi apart from other senior colleagues within the party and the Syndicate. It was her first major policy initiative that also set her apart from Nehru’s style of socialism, which was both deliberative and democratic.

In 1969, almost overnight, the Indira Gandhi government nationalized 14 banks with assets over 500 million rupees and brought 54% of India’s bank branches into the public sector. This was done first by an Ordinance promulgated on July 19th, 1969, followed by the government passing the Banking Companies (Acquisition and Transfer Undertakings) Act, 1969, which had retrospective effect from 19th July 1969. The compensation offered for nationalizing banks was trifling compared to the value of the going concerns, and this measly compensation was payable in bonds that matured after ten years.

In a popular radio speech, Indira Gandhi argued, “Control over the commanding heights of the economy is necessary, particularly in a poor country where it is extremely difficult to mobilize adequate resources for development.” She committed the newly nationalized banks to serve the common good and to give credit not only to the rich and big businesses, but also to “millions of farmers, artisans and other self-employed persons.”

Unsurprisingly this nationalization was challenged in the courts. Interestingly, the main challenge came not from the banks themselves, but one of the shareholders of the banks, Rustom Cavasjee Cooper, who claimed his property rights were infringed without just compensation.

The Supreme Court heard the matter in an eleven-judge-bench. In a majority opinion of RC Cooper v Union of India (1970 3 SCR 530) [also known as the Bank Nationalization Case], led by Chief Justice Shah (with Justices Sikri, Shelat, Bhargava, Mitter, Vaidialingam, Hegde, Grover, Reddy and Dua) held the Act void. This judgement was made on the grounds that (1) the Act makes hostile discrimination, preventing the 14 banks from carrying on their business whereas other Indian and foreign banks may continue to carry on business (2) the Act restricts banks from carrying on business under Article 19, and (3) the Act violates the guarantee of compensation guaranteed under Article 31(2) because the compensation is not according to relevant principles. The lone dissent came from Justice AN Ray, who upheld the constitutionality of the Act.

RC Cooper was an important opinion on property rights for many reasons. First, the Court had to navigate a new balance between individual rights and the government’s new brand of socialism. Second, in the rulings from Kunhikoman v State of Kerala (AIR 1962 SC 723), upto Vajravelu Mudaliar v Special Deputy Collector (AIR 1965 SC 1017) (discussed in the prior essay), there was a high degree of inconsistency in the Court’s opinions. The judges in RC Cooper settled many such problematic matters regarding compensation.

Once again, there was the question of public purpose. Since State of Bihar v Kameshwar Singh (AIR 1952 SC 252), the Court had repeatedly showed deference to the legislature on the issue of public purpose. When the actual benefit to the public arising from Bank Nationalisation was questioned, the court once again deferred to parliament on the question of public purpose. The majority opinion said: “Whether by the exercise of the power vested in the Reserve Bank under the pre-existing laws, results could be achieved which it was the object of the Act to achieve was not relevant in considering whether the Act amounted to abuse of legislative power. This court has the power to strike down a law on ground of want of authority, but the Court will not sit in appeal over the policy of the Parliament in enacting a law.”

There are two interesting aspects to this stand of the Court. First, unlike present day benches, in the first few decades the judges were very careful neither to opine on government policy, nor to dictate policy from the bench. The questions under consideration were strictly constitutional. In complete contrast, present day judges legislate from the bench on all matters ranging from the desirability and amount of minimum wage to the height of speed breakers. Second, once again the Court wasted an opportunity to create a doctrine on public purpose. While all sorts of government projects may further public purpose, there must be a higher standard imposed for the directness of public purpose, if the action requires depriving individuals of their fundamental rights. Once can think of different standards depending on which no project may meet the public purpose standard, all projects may meet it, or more likely only some projects meet the standard. However, the standard must be defined.

The judges in RC Cooper conflate two quite separate issues: directness of public purpose, and desirability or feasibility of a policy. There is a wide berth between outlining general guidelines on how direct or indirect the public purpose must be while taking property under Article 31, and actually dictating banking and trading policy. The courts can simply deem a test for public purpose without going into the specifics of whether the banking policy will work or not. It is true that if a policy is not feasible, it is unlikely to benefit the public directly, but all feasible projects do not necessarily further the overall benefit to the general public. This is a core issue that goes to the root of eminent domain power, and once again the Supreme Court failed to develop an extremely important branch of jurisprudence.

Second, there was the issue of compensation. In holding the Act void in R.C.Cooper, the majority judgment of the Supreme Court reasoned, “in all States where the rule of law prevails, the right to compensation is guaranteed by the Constitution or regarded as inextricably involved in the right to property. […] In India, which is a state, the rule of law prevails. Therefore the Constitution of India provides for just compensation.”

My previous essay discussed the development of the courts jurisprudence on compensation. Bela Banerjee (AIR 1954 SC 170) held that as “a just equivalent to what the owner has been deprived of.” The Fourth Amendment attempted to address the problem imposed by Bela Banerjee by eliminating the court’s jurisdiction on adequacy of compensation. Kunhikoman held that in light of the Fourth Amendment, the courts could not question or determine determine the adequacy of compensation. The court reversed itself in Vajravelu where it held that courts may intervene when compensation is illusory, but not when compensation is merely inadequate. Vajravelu was applied once again in Union of India v Metal Corporation of India (AIR 1967 SC 637).

Vajravelu was overturned in State of Gujarat v Shantilal Mangaldas (1969 3 SCR 341) in what is a most confusing judicial opinion on the question of compensation. The court (incidentally Justice Shah who led the majority opinion in RC Cooper) held that compensation by its very nature was incapable of being precisely determined and therefore “just equivalent” or “full indemnification” had no clear definition or connotation. And therefore, no definiteness can be attached to the amounts determined by the legislature, and one can only look at the principles on which compensation is based.

While these different tests were applied inconsistently through this period, in RC Cooper the court reversed itself once again and held that the courts could review compensation when it was illusory and arbitrary.

The main issue concerning compensation in this case was that the nationalized banks had not been appropriately valued while calculating compensation. Some assets were included while others (like goodwill and leaseholds etc) were left out. Further, valuing different assets and aggregating may still not provide the value of a going concern, where the value may be greater than the sum of its parts. The valuation method used by the government only included some of the components of the undertaking, and also provided different methods of determining compensation in respect of each such component. The Court held that this method was “method is prima facie not a method relevant to the determination of compensation for acquisition of the undertaking” because the value of a going concern could be different from aggregating different parts (and in this case, some of the parts were left out of valuation). And therefore, this method could not possibly compensate the owner deprived of his property.

While developing this line of argument for justiciability of compensation, RC Cooper also developed another area of jurisprudence. It provided a very broad definition what came within the purview of property in the context of Article 31(2) takings. The petitioner in this case was not an owner but a shareholder who was deprived of dividends and the value of the shares. Further, what constituted a “taking of property” and therefore must be compensated included goodwill, the premium enjoyed by a successful going concern, etc. This was an important development because the initial cases were mostly regarding the physical taking of property for agrarian reform, and the nuances of property in an advanced industrial economy had not been clearly explored. RC Cooper set the main precedent for such cases.

There was a backlash to Golak Nath and RC Cooper, and it set the ball rolling on a spate of constitutional amendments and battles with the judiciary. Step one was to remove the roadblocks imposed by Golak Nath which constrained the legislature’s authority to amend fundamental rights. The statement of objects and reasons of the Twenty-Fourth Amendment read “expressly stated that Parliament could amend Fundamental Rights as laid out in Part III of the Constitution. The Statement of Objects and Reasons stated: “The Supreme Court in the well-known Golak Nath’s Case … reversed by a narrow majority, its own earlier decisions upholding the power of Parliament to amend all parts of the Constitution including Part III relating to fundamental rights. … It is, therefore, considered necessary to provide expressly that Parliament has power to amend any provision of the Constitution so as to include the provisions of Part III within the scope of the amending power” (emphasis added). Therefore, the Indira Gandhi government amended the constitution in order to further amend the constitution!

Now that it had regained the power to amend fundamental rights, the Parliament continued its assault. To void the majority opinion in RC Cooper, the Twenty-Fifth Amendment was enacted. Its statement of objects and reasons read:

In the Bank Nationalization case [1970, 3 S.C.R. 530), the Supreme Court has held that the Constitution guarantees right to compensation, that is the equivalent in money of property compulsorily acquired. Thus in effect the adequacy of compensation and the relevance of the principles laid down by the legislature for determining the amount of compensation have virtually become justiciable inasmuch as the Court can go into the question whether the amount paid to the owner of the property is what may be regarded reasonably as compensation for loss of property … The Bill seeks to surmount the difficulties placed in the way of giving effect to the Directive Principles of State Policy by the aforesaid interpretation. The word “compensation” is sought to be omitted from article 31(2) and replaced by the word “amount” … The Bill further seeks to introduce a new article 31C which provides that if any law is passed to give effect to the Directive Principles contained in clauses (b) and (c) of article 39 and contains a declaration to that effect, such law shall not be deemed to be void on the ground that it takes away or abridges any of the rights contained in article 14, 19 or 31 and shall not be questioned on the ground that it does not give effect to those principles. For this provision to apply in the case of laws made by State Legislatures, it is necessary that the relevant Bill should be reserved for the consideration of the President and receive his assent. (emphasis added)

Since compensation was no longer in the wording of Article 31, Parliament believed that the matter of compensation and its adequacy were eliminated from judicial challenge. The word ‘amount’ could signify anything and therefore not be questioned for its inadequacy or arbitrariness.

Commanding Heights

Indira Gandhi’s government wanted to implement Soviet style central planning and nationalize means of production, and bank nationalization was simply the first step. In October 1971, the government took over the management of coking coalmines and coke oven plants pending nationalization. The nationalization was done in two phases, the first with the coking coalmines in 1971-2 and then with the non-coking coalmines in 1973. Coalmines were nationalized as being an important input for steel production, which was critical for the success of the Fourth Five-Year Plan. In 1972, Indian Copper Corporation Ltd, was nationalized and made part of Hindustan Copper Ltd and general insurance was nationalized under one of the objectives of the Fourth Five-Year Plan.

In 1968, The National Textile Corporation was incorporated to manage sick textile undertakings, taken over by the government. Starting with 16 mills in 1968, this number gradually rose to 103 by 1972-73. In 1974, all these units were nationalized. Legislation was passed in 1973 to nationalize a single firm, the Alcock Ashdown Company Ltd “for the purpose of ensuring rational and coordinated development and production of goods essential to the needs of the country in general, and defense department in particular.” This was officially the end of rule of law, where legislation was passed targeting individual firms.

In addition to the new industrial policy and nationalization, the government also attempted to further reform the agrarian system and again raised the question of Parliamentary power to amend the Constitution. The government argued that despite land reform measures since the 1950s, the agrarian system remained unequal. It was therefore important to revise existing laws and reduce the ceiling limit on land holdings held by a family. After a conference of all state governments in 1972, various states passed laws and amendments to reduce the ceiling limit, but many of these laws were pending judicial review. Two land management related laws passed by the state government of Kerala were added to the Ninth Schedule by the Constitution (Twenty-Ninth Amendment) Act, 1972.

Once again, the power of the Parliament to amend the Constitution was challenged in the Supreme Court and a constitution bench comprising 13 judges was convened in 1973 for Kesavananda Bharati v State of Kerala (AIR 1973 SC 1461). In its judgment, the Supreme Court formulated the “basic structure” doctrine and held that the amending power of the Parliament could not be exercised in a manner as to destroy or emasculate the basic structure or the fundamental features of the Constitution. The Court enumerated a non-exhaustive list of such features including but not limited to: supremacy of the Constitution, republican and democratic form of government, separation of powers, federal character of the Constitution, etc. However, the right to private property was not considered part of the “basic structure” of the Constitution.

Kesavananda has become much more than a judicial opinion in India. Indian constitutional history is often thought of in pre- and post-Kesavananda terms. It has become a legend in itself, with few scholars having read the massive tome, and most scholars remembering the punchline delivered by HR Khanna protecting an undefined “basic structure” by leaving it unamendable. However, it is very poor on property rights jurisprudence.

The case was originally an issue of takings and management control; and became larger than that the core issue, evolving into a review of Parliament’s ability to amend fundamental rights. In other words, if courts wanted to protect fundamental rights from the assault of Parliament, then they would have to do so by placing property rights within the basic structure doctrine. Further, while this judgement provided a lot of background and thought in its 706 pages, its jurisprudence was sharply divided with the petitioner squeaking through to victory on a 7:6 margin. Nowhere in these 706 pages can one see a sincere attempt to develop jurisprudence on eminent domain power and police power of the state (when both questions were raised in the matter). The only saving grace – the Court held that notwithstanding the Twenty-Fifth Amendment, the courts must question and determine whether compensation is illusory.

Now having acquired the power to legitimately amend the Constitution with the Kesavananda judgment, and given that the right to private property was not basic to the Constitution, the government did not intend to stop its socialist agenda at land reforms. All the legislation nationalizing various sectors such as coal, copper, insurance, textiles, etc were challenged in courts. And post Kesavananda, Parliament was in a position to constitutionally protect these laws through constitutional amendments.

After much litigation, the Indira Gandhi-led government passed the Constitution (Thirty-Ninth Amendment) Act, 1975, to add these controversial acts of legislation to the Ninth Schedule. The reason was that in addition to Article 31, they also violated Article 14 and 19 (which were held to be part of the basic structure).

The Statement of Objects and Reasons of the Thirty-Ninth Amendment stated:

Recourse was had in the past to the Ninth Schedule whenever it was found that progressive legislation conceived in the interests of the public was imperiled by litigation. It has become necessary to have recourse to this device once again now. Between 1971 and 1973 legislation was enacted for nationalizing coking coal and coalmines for conservation of these resources in the interests of steel industry. These enactments have been brought before courts on the ground that they are unconstitutional. So is the case of sick textile undertakings, which were nationalized in 1974. To prevent smuggling of goods and diversion of foreign exchange which affected the national economy, Parliament enacted legislation, which again has been challenged in the Supreme Court and in High Courts. These and other important and special enactments which it is considered necessary should have the constitutional protection under article 31B, are proposed to be included in the Ninth Schedule.

As part of this process, Fortieth Amendment stated in its Objects and Reasons: “Certain Central laws like the Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976, the Urban Land (Ceiling and Regulation) Act, 1976, the Essential Commodities Act, 1955 and certain provisions of the Motor Vehicles Act, 1939 require protection of article 31B.”

Emergency

There was an immediate backlash to the RC Cooper and Kesavananda opinions. Kesavananda was delivered on the last day of Chief Justice Sikri’s tenure. In the aftermath of Justice Sikri’s retirement and the Kesavananda judgment, Justices Shelat, Hegde, and Grover, who were the next in seniority for the position of Chief Justice of India were all superseded and Justice AN Ray was appointed Chief Justice. Ray favored the government in both Kesavananda and RC Cooper, while the others imposed constitutional restrictions on government policy. This was a very new style of functioning in the Indian Republic. Never before had any administration shown such disregard for constitutional rules, democratic institutions, and individual rights.

While property rights and takings without compensation was the main reason for all the litigation; this also manifested itself as a battle between the executive and the judiciary; and a battle between the legislature and the constitution. The question of property rights and developing an appropriate takings jurisprudence was completely lost in these larger issues.

The other reason for passing the Thirty Ninth Amendment was that Indira Gandhi’s power was threatened due to a series of events beginning with the 1971 election that led to the declaration of the Emergency. The Amendment sought three things – to withdraw the election of the Prime Minister from the scope of the judicial review process; to declare the decision of Allahabad High Court, invalidating Indira Gandhi’s election, void; and to exclude the Supreme Court’s jurisdiction to hear an appeal on the matter of the election (Section 4, [Article 329A(3-5)] The Constitution (Thirty-Ninth Amendment) Act, 1975).

The amendment was challenged in the Supreme Court, and the Court declared parts of the Thirty Ninth Amendment to be unconstitutional as it violated three essential features of the Constitution. It destroyed the democratic institution of India, it violated the principle of separation of powers in the Constitution and finally violated the right to equality of status and opportunity by creating a privileged position for the Prime Minister (Indira Nehru Gandhi v Raj Narain AIR 1975 SC 1461).

With the declaration of Emergency, the command-and-control nature of state policy assumed new proportions. The state controlled all aspects of everyday activity from the timings of trains to demographics through forced sterilizations.

It’s important to remember that the constitutional vehicle of the Ninth Schedule was created by Nehru’s government to circumvent the constitutional constraints that prevented land reform. The very same constitutional vehicle was now used to eliminate the jurisdiction of courts from looking into the election, corrupt practices, or the authority of the Prime Minister to circumvent all democratic processes and concentrate power.

However, this was not enough. The Indira Gandhi government, during the Emergency, wanted complete control without any constitutional constraints. And therefore, it set about the most comprehensive and horrific rewrite of the constitution. Though Indira Gandhi had declared emergency and suspended democracy, the government amended the Constitution to legitimize the new regime. A committee led by Swaran Singh was appointed to “suggest amendments to the Constitution of India,” and was the foundation for the Forty-Second Amendment.

The Forty-Second Amendment stated as its Object and Reasons:

The democratic institutions provided in the Constitution have been subjected to considerable stresses and strains and that vested interest have been trying to promote their selfish ends to the great detriment of public good. … It is, therefore, proposed to amend the Constitution … to make the directive principles more comprehensive and give them precedence over those fundamental rights which have been allowed to be relied upon to frustrate socio-economic reforms for implementing the directive principles.

The Amendment declared the supremacy of the Parliament, both above the Constitution and the judiciary. The Fundamental Rights in Part III of the Constitution, which expressly protected the individual from the excesses of the State, were now subject to Directive Principles, or the socialist welfare agenda of the State. The most undemocratic and unconstitutional dictatorship was initiated using the guise of the amendment procedure under Article 368 to provide some legitimacy.

Conclusion

While many believe that it is the deletion of Article 31 in Forty-Fourth amendment in 1978 that deprived Indians of their protection from takings, I would argue that the Twenty-Fifth Amendment did the greatest damage. The reason is that the main pillar of a just takings policy requires that the owners of property are compensated. By its very definition, compensation has to mean an equivalent of the value of property taken. If property can be taken by the state without compensation, and simply any “amount” payable by any means at any time (not cash when the property is taken); then there is no takings policy. Basically, Parliament authorized theft. Anyone’s property can be taken from them, and instead of goons with guns, it is through legislation and state police with guns. While the thieves change, and their criminality is looked upon differently, it is essentially the identical arbitrary action from the property owner’s perspective – the use of coercion, public or private – for expropriation of property

In the process of regaining the power to take property without just compensation, the Twenty-Fifth Amendment also took away the supremacy of fundamental rights. It explicitly stated that laws giving effect to the Directive Principles shall not be deemed void, even if they were inconsistent with fundamental rights. While this part of the amendment is partially voided by the basic structure doctrine from Kesavananda, the amendment remains on the books till date, and Directive Principles trump Fundamental Rights that are not part of the basic structure. What becomes clear through the Indira Gandhi era is that even though property rights and eminent domain shaped Indian jurisprudence and Indian constitution in long-lasting ways, the Parliament and courts’ jurisprudence did not create a just eminent domain policy. With the Twenty-Fifth Amendment, the right to property entered a permanent vegetative state. The formality of pulling the plug was complete with the Forty-Fourth Amendment, which will be discussed in my next essay.

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Read the next essay here and the previous essay here

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About the author

Shruti Rajagopalan

Shruti Rajagopalan is an Assistant Professor in Economics at Purchase College, State University of New York, and Fellow at the Classical Liberal Institute, New York University Law School.