Chakravarty Committee

The Chakravarty Committee was a landmark expert committee constituted to examine and recommend reforms in India’s monetary system with a focus on controlling inflation and improving the effectiveness of monetary policy. Its recommendations laid the foundation for a rule-based and disciplined monetary framework in India and continue to influence the conduct of monetary policy and banking regulation in the Indian economy.

Background and Constitution of the Chakravarty Committee

The Chakravarty Committee was formally known as the Committee to Review the Working of the Monetary System. It was set up in 1982 by the Reserve Bank of India under the chairmanship of Professor Sukhamoy Chakravarty, a distinguished economist and former member of the Planning Commission.
The committee was constituted at a time when the Indian economy was facing persistent inflationary pressures, growing fiscal deficits, and excessive dependence on deficit financing. Monetary policy lacked clear operational targets, and credit expansion often exceeded the requirements of productive sectors. The need for a comprehensive review of the monetary framework led to the establishment of the Chakravarty Committee.

Objectives of the Chakravarty Committee

The primary objective of the Chakravarty Committee was to evaluate the existing monetary system and suggest measures to improve monetary control and price stability. The committee aimed to align monetary expansion with the real needs of the economy while ensuring balanced economic growth.
Its major objectives included controlling inflation, reducing excessive money supply growth, strengthening the role of the central bank, and improving coordination between fiscal and monetary policies. The committee also sought to establish a clear monetary policy framework with measurable targets.

Major Recommendations of the Chakravarty Committee

The Chakravarty Committee made several far-reaching recommendations that significantly influenced India’s monetary and banking policies.
One of its most important recommendations was the adoption of monetary targeting. The committee suggested that the growth of money supply should be used as the principal intermediate target of monetary policy. It proposed that the expansion of money supply should be consistent with the growth rate of national income and acceptable levels of inflation.
The committee strongly criticised excessive deficit financing by the government. It recommended strict limits on the monetisation of fiscal deficits, arguing that uncontrolled borrowing from the central bank was a major cause of inflation in India.
Another key recommendation was strengthening the autonomy of the Reserve Bank of India. The committee emphasised that the central bank should have greater independence in formulating and implementing monetary policy without undue fiscal pressures.
The Chakravarty Committee also suggested rationalisation of interest rates and improved credit planning to ensure that bank credit flowed to priority and productive sectors of the economy.

Monetary Targeting and Inflation Control

A central contribution of the Chakravarty Committee was its emphasis on monetary targeting as a tool for inflation control. The committee argued that inflation in India was primarily a monetary phenomenon and that controlling money supply growth was essential for price stability.
It recommended setting explicit targets for broad money growth and using instruments such as bank rate policy, open market operations, and reserve requirements to achieve these targets. This approach marked a shift from discretionary and ad hoc monetary policy towards a more rule-based framework.
The recommendations led to the adoption of monetary targeting in India during the mid-1980s, which remained the guiding principle of monetary policy for several decades.

Impact on Banking and Financial System

The Chakravarty Committee had a profound impact on the Indian banking and financial system. By emphasising credit discipline and monetary control, it encouraged banks to align their lending practices with macroeconomic objectives.
The committee’s recommendations improved coordination between the Reserve Bank of India and the government, particularly in managing public debt and controlling inflationary financing. It also highlighted the need for better data, forecasting, and analytical capacity within the central bank to conduct effective monetary policy.
These reforms contributed to greater stability in the banking system and enhanced the credibility of monetary policy in India.

Significance in the Indian Economy

The Chakravarty Committee holds a place of major significance in the history of Indian economic reforms. It was among the earliest efforts to introduce a systematic and analytical approach to monetary management in a developing economy context.
By advocating monetary discipline, reduced deficit financing, and central bank autonomy, the committee addressed the structural causes of inflation and macroeconomic instability. Its recommendations helped create an environment conducive to sustainable economic growth and financial stability.
The emphasis on monetary targeting also paved the way for later reforms, including the transition towards multiple indicator approaches and eventually inflation targeting in India.

Criticism and Limitations

Despite its contributions, the Chakravarty Committee faced certain criticisms. Some economists argued that exclusive reliance on monetary targeting was less effective in an economy with underdeveloped financial markets and supply-side constraints.
Others pointed out that fiscal dominance limited the practical implementation of its recommendations, particularly regarding deficit financing. Additionally, changes in financial innovation and capital flows later reduced the effectiveness of strict monetary targeting.