S. Chakravarty Committee

The S. Chakravarty Committee was a high-level expert committee constituted to examine the functioning of the monetary system and to recommend reforms aimed at strengthening monetary management and financial stability in India. In the context of banking, finance, and the Indian economy, the committee’s work is regarded as a landmark in shaping modern Indian monetary policy, particularly in relation to money supply management, credit control, and the role of the central bank.
Named after its chairman, the eminent economist Sukhamoy Chakravarty, the committee provided a comprehensive analytical framework that influenced subsequent monetary and financial sector reforms in India.

Background and Context of the Committee

The S. Chakravarty Committee was set up in the mid-1980s at a time when the Indian economy was characterised by administered interest rates, extensive credit controls, and a high degree of government intervention in the financial system. Monetary policy largely relied on quantitative instruments such as credit ceilings and statutory pre-emptions, while fiscal dominance constrained the effectiveness of central banking operations.
Inflationary pressures, growing monetisation of fiscal deficits, and inefficiencies in credit allocation highlighted the need for a systematic review of the monetary system. Against this backdrop, the committee was tasked with examining the relationship between money supply, credit, inflation, and economic growth, and suggesting reforms to improve policy effectiveness.

Composition and Mandate

The committee was chaired by Sukhamoy Chakravarty, a distinguished economist and public intellectual, and comprised experts from economics, banking, and public policy. Its mandate was to assess the existing monetary framework and recommend measures to ensure price stability while supporting economic growth.
Key areas of focus included the definition and measurement of money supply, the transmission mechanism of monetary policy, coordination between monetary and fiscal policy, and the operational autonomy of the central bank.

Conceptual Framework and Approach

One of the defining features of the S. Chakravarty Committee was its emphasis on a rule-based and medium-term approach to monetary policy. The committee argued that inflation control should be the primary objective of monetary policy, as sustained price stability was essential for long-term economic growth.
It adopted a monetarist perspective, emphasising the relationship between money supply growth and inflation. The committee recommended that monetary expansion should be aligned with the growth of real output, taking into account the economy’s capacity to absorb liquidity without generating inflationary pressures.

Recommendations on Money Supply and Inflation

A central recommendation of the committee was the adoption of monetary targeting as the core framework for monetary policy. It proposed targeting a broad monetary aggregate and regulating its growth within a pre-announced range consistent with projected real GDP growth and acceptable inflation levels.
The committee highlighted the importance of controlling excessive money creation arising from the monetisation of fiscal deficits. It stressed that unchecked expansion of reserve money could undermine price stability and erode confidence in the currency.
By linking money supply growth to macroeconomic fundamentals, the committee sought to introduce greater transparency and predictability in monetary policy.

Role of the Central Bank

The S. Chakravarty Committee strongly emphasised the need to strengthen the role and autonomy of the central bank, particularly the Reserve Bank of India. It argued that effective monetary control required a clear separation between fiscal policy imperatives and monetary policy objectives.
The committee recommended limiting automatic monetisation of government deficits and enhancing the central bank’s capacity to use indirect instruments of monetary control. This approach was intended to improve policy credibility and reduce inflationary bias in the system.

Credit Policy and Financial Discipline

In addition to money supply management, the committee examined the structure of credit allocation in the economy. It recognised the importance of directed credit for developmental objectives but cautioned against excessive reliance on administrative controls.
The committee recommended a gradual shift towards market-oriented instruments, improved interest rate flexibility, and better assessment of credit demand. It stressed the need for financial discipline among borrowers, banks, and the government to ensure efficient use of financial resources.
These recommendations laid the groundwork for later financial sector liberalisation.

Implications for Banking Sector Reforms

The committee’s analysis had important implications for the banking system. By advocating reduced pre-emptions and improved monetary control, it indirectly supported the strengthening of banks’ balance sheets and lending efficiency.
Its emphasis on price stability and disciplined credit growth highlighted the need for sound banking practices and prudent risk management. Although major banking reforms were implemented later, the intellectual foundations provided by the committee influenced subsequent policy thinking.

Significance for the Indian Economy

The S. Chakravarty Committee occupies a significant place in India’s economic policy history. Its recommendations contributed to a clearer articulation of monetary policy objectives and strengthened the analytical basis of macroeconomic management.
By prioritising inflation control and advocating a medium-term monetary framework, the committee helped shift policy discourse towards stability-oriented growth. This was particularly important in an economy undergoing gradual transition from a controlled to a more market-oriented system.
The committee’s work also underscored the importance of coordination between monetary and fiscal policy in maintaining macroeconomic stability.