Indian economy · Complete guide
Banking and tax committees of India
Almost every reform since 1991 began as a committee report. The papers test them three ways: who chaired it, when, and the one thing it recommended. Here are all of them in order, with the two Narasimham committees and the two big tax committees taken apart properly.
Interactive
All the committees on one timeline
Banking and monetary committees run down the left, tax committees down the right, in the order they were set up. The must-knows show first; tick Show all for the minor ones papers occasionally slip into a match-the-list. Open any row for what it recommended.
- 1950s1956
- 1970s1971
- 1977
- 1980s1985
- 1990s1991Committee on the Financial SystemSet up 1991 by the Government; report November 1991
Examine the structure, organisation, functions and procedures of the financial system.
- Cut SLR from 38.5% to 25% over five years; cut CRR from 15% towards 3–5%.
- Phase out directed credit: priority sector redefined and cut to 10% of credit.
- Interest rates to be set by market forces; concessional rates phased out.
- Capital adequacy of 8% of risk-weighted assets, in stages; prudential norms for income recognition and asset classification.
- A four-tier banking structure; entry for new private and foreign banks; no more nationalisation.
- An Asset Reconstruction Fund for bad debts; end dual control by RBI and the Finance Ministry.
Exam hook Financial sector reform. SLR and CRR down, directed credit out.Full chapter ↓ - 1991
- 1997
- 1998
- 2000s2002
- 2004
- 2008
- 2010s2012
- 2014
Context
1991: why banking needed fixing
Bank nationalisation in July 1969 worked on the numbers it was meant to move. By 1991 rural deposits had risen from 3% to 15% of all deposits, priority sector credit from 14% to 41% of bank credit, and borrowal accounts from barely 4 lakh to over 3.5 crore. But productivity, asset quality and profits had collapsed. Narasimham I blamed two things above all: directed investment and directed credit.
Before reform
Pre-empted
₹53.5
Free to lend
₹46.5
Freed vs 1991
—
In 1991 CRR sat at its statutory maximum of 15% and SLR at 38.5%: more than half of every deposit went to the RBI or to government paper, mostly at below-market interest. Narasimham called high SLR a tax on the banking system.
1Directed investment
SLR and CRR locked up 53.5% of deposits, earning less than banks paid their depositors. The Committee called high SLR a tax on the banking system.
2Directed credit
Lending to priority sectors at concessional rates, often without proper appraisal. It found about 20% of agricultural and small-industry credit “contaminated”.
3Political interference
Loan melas and government-prepared borrower lists: “socially oriented credit… degenerated into irresponsible lending”.
4Rising costs
Branches opened without regard to viability, over-staffing, and pay unrelated to productivity.
Deep dive
Narasimham Committee I (1991)
Official name
Committee on the Financial System
Chair
M. Narasimham
former RBI Governor
Set up by
Government of India
1991
Report
November 1991
Its founding principle
A bank's resources come from the public and are held in trust; they must be deployed for the depositors' benefit. So even the Government has no business endangering a bank's solvency for planning or social goals.
ADirected investment
- SLR from 38.5% to 25% over five years; government borrowing at market-related rates.
- CRR from 15% to 3–5%; RBI to rely on open market operations; interest on impounded balances at the one-year deposit rate.
BDirected credit
- Phase out directed credit; it should be temporary, extraordinary support.
- Redefine priority sector to the weakest (marginal farmers, rural artisans, tiny sector) and fix it at 10% of aggregate credit, down from 40%.
CInterest rates
- Rates broadly set by market forces; remove controls on deposit and lending rates.
- Phase out concessional rates and IRDP subsidies; the Bank Rate as the anchor rate.
DStructure
- Fewer public sector banks through mergers, in four tiers (below).
- No more nationalisation; new private banks allowed; foreign banks may open branches or subsidiaries.
- Branch licensing ended: open branches on profitability.
EHealth and governance
- Capital adequacy of 8% of risk-weighted assets, reached in stages; prudential norms on income recognition and asset classification.
- An Asset Reconstruction Fund to take over bad debts at a discount.
- End dual control by RBI and the Finance Ministry; RBI the primary regulator; chief executives chosen by experts, not politics.
The four-tier banking structure it proposed
3–4Large banks with an international characterincluding SBI
8–10National banksnationwide branches, general or universal banking
ManyLocal banksconfined to a region
ManyRural banks, including RRBsagriculture and allied activities
What the Government did
Despite opposition from bank unions and parties, it accepted the major recommendations: SLR to 25% by October 1997, CRR to 5.5% by December 2001, interest rate slabs cut from 20 to 2 by 1994–95, and deposit rates decontrolled.
What it did not
The cut in priority sector lending from 40% to 10% was not accepted; the Narasimham II report itself records this. The Finance Ministry's Banking Division, which two members wanted closed, stayed.
Deep dive
Narasimham Committee II (1998)
Official name
Committee on Banking Sector Reforms
Chair
M. Narasimham
Set up by
Ministry of Finance
Report
April 1998
Asked to “review the progress of banking sector reforms to date and chart a programme on financial sector reforms necessary to strengthen India's financial system and make it internationally competitive.” The backdrop was capital account convertibility: large flows in and out would need a much stronger banking system.
1Strengthen the foundations
- Capital charges for market risk too; government securities marked to market within three years with a 5% market-risk weight.
- Income recognition at 90 days overdue instead of 180, phased in by 2002; a 1% general provision on standard assets.
- No further recapitalisation of banks from the budget; hard-core NPAs to an Asset Reconstruction Company against NPA swap bonds.
- For banks with an international presence: gross NPAs to 5% and 3%, net NPAs to 3% and 0%, by 2000 and 2002.
2Structure
- Merge strong banks for a “force multiplier effect”; do not merge strong with weak.
- Narrow banking to rehabilitate weak banks: place funds only in short-term, risk-free assets. If that fails, consider closure.
- Two or three banks with an international orientation, 8–10 national banks, and many small local banks.
- DFIs to convert into banks over time, or be treated as NBFCs.
3Ownership and regulation
- Government/RBI stake in nationalised banks and SBI down to 33%.
- Rename the Board for Financial Supervision the Board for Financial Regulation and Supervision, with statutory powers.
- RBI at arm's length from those it regulates; review the RBI Act, Banking Regulation Act, SBI Act and Nationalisation Acts.
4Directed credit, softened
- Accepted that the 40% priority sector target would stay, with 10% of net bank credit for weaker sections. Wanted interest subsidies ended and food processing, fisheries, poultry and dairying brought into the priority sector.
The verdict in Datt & Sundharam
Barring narrow banking and the rejection of strong-weak mergers, the book quotes one critic, the 1998 report was “like watching an action replay of the earlier report.”
Revision
Narasimham I vs II
| Narasimham I | Narasimham II | |
|---|---|---|
| Official name | Committee on the Financial System | Committee on Banking Sector Reforms |
| Report | November 1991 | April 1998 |
| Theme in exams | Financial sector reform | Banking sector reform |
| Capital adequacy | 8%, in stages | 9% by 2000, 10% by 2002 |
| Bad loans | Asset Reconstruction Fund | Asset Reconstruction Company; net NPAs to 3% by 2002 |
| Directed credit | Priority sector to 10% | Keep 40%; end interest subsidy |
| Structure | 3–4 international, 8–10 national, local, rural banks | Merge strong banks; narrow banking for weak ones |
| Ownership | Autonomy; no more nationalisation | Government stake down to 33% |
| Reserves | SLR 38.5% → 25%; CRR 15% → 3–5% | (builds on I) |
Remember the pair
I = 1991 = Financial system (SLR, CRR, directed credit, interest rates). II = 1998 = Banking sector (capital adequacy, NPAs, mergers, narrow banking). The same M. Narasimham also chaired the 1975 working group that led to Regional Rural Banks.
Tax
Tax committees, from Kaldor to the Direct Tax Code
Indian tax reform has swung in two big arcs. Up to the 1970s policy piled on taxes and near-confiscatory rates to fund the Plans, and the committees of that era either added taxes (Kaldor) or fought the evasion that high rates bred (Wanchoo). From 1991 they cut rates, widened the base and simplified. Read the ladder top to bottom: the questions usually ask for the order.
- 1953–54Taxation Enquiry Commission · John MatthaiFirst look at the whole system: central, state and local.
- 1956Kaldor · Nicholas KaldorExpenditure tax, wealth, gift and capital gains taxes for the Second Plan.
- 1970–71Wanchoo (Direct Taxes Enquiry) · K. N. WanchooBlack money: cut the confiscatory marginal rates that fed evasion.
- 1976–77L. K. Jha (Indirect Taxation Enquiry) · L. K. JhaTurn excise into a VAT; became MODVAT in 1986–87.
- 1991–93Tax Reforms Committee · Raja J. ChelliahThe post-1991 blueprint: lower rates, broader base, fewer rates.
- 1992–93Rekhi · K. L. RekhiSimplify customs and excise laws and procedures.
- 2002Kelkar Task Forces · Vijay KelkarExemption limit ₹1 lakh; abolish Section 88 rebate.
- 2004Kelkar Task Force on FRBM · Vijay KelkarRevenue-led consolidation and a dual GST.
- —Rastogi · T. R. RastogiService tax. Official key: after Kelkar 2002, before Shome.
- 2012–13Shome: GAAR, then TARC · Parthasarathi ShomeDefer GAAR by three years; reform tax administration.
- 2015Revenue Neutral Rate · Arvind SubramanianGST RNR of 15–15.5%.
- 2016New financial year · Shankar AcharyaExamined moving to January–December.
- 2017–19Direct Tax Code task force · Akhilesh RanjanDraft a new law to replace the Income-tax Act, 1961.
Deep dive
The Chelliah Committee (1991–93)
Official name
Tax Reforms Committee
Chair
Raja J. Chelliah
Reports
1991, 1992, 1993
interim Dec 1991; final in two parts
Covered
Direct and indirect
central taxes only
The interim report set out the principles and applied them to income and wealth taxes, tariffs and domestic consumption taxes. The final report dealt with administration and enforcement, and then with restructuring tariffs. The aim was to be revenue-neutral in the short run and raise revenue productivity in the long run: broaden the base, lower marginal rates, reduce rate differentiation, simplify.
Personal income tax
Many brackets
3 rates: 20, 30, 40%
Adopted from 1992–93; cut to 10, 20, 30% in 1997–98
Customs
100+ rates, up to 400%
5 to 50% by 1997–98
Rates to rise with the stage of processing
Company tax
Separate rates for closely and widely held
One rate
Unified at 40% in 1993–94
Excise
Cascading excise
A VAT
Extended to the wholesale stage, with states getting that revenue
The Finance Commission connection
Chelliah also argued that tax sharing forced the Centre to lean on non-shareable taxes, and suggested states get a fixed share of the Centre's aggregate revenue. The Finance Ministry asked the 10th Finance Commission to examine the idea, which led to the 80th Amendment. See the Finance Commissions guide.
Deep dive
The Kelkar task forces (2002, 2004)
2002
Task Forces on Direct and Indirect Taxes
Set up Sep 2002 · reports Dec 2002
- Income tax exemption limit up to ₹1 lakh.
- Abolish the Section 88 rebate and the standard deduction; strip exemptions to widen the base.
2004
Task Force on Implementing the FRBM Act
Asked for annual fiscal targets; proposed a new tax system
- Revenue-led consolidation: raising revenue is less contractionary than cutting spending.
- Income tax nil to ₹1 lakh, 20% to ₹4 lakh, 30% above; corporate tax 35.875% → 30%; depreciation 25% → 15%.
- Small businesses under ₹25 lakh turnover exempt from VAT.
The 2004 GST blueprint
Floor10%
Standard20%
Higher34%
CentreStates
Both Centre and states would get concurrent power to levy GST, which needed a constitutional amendment, and it would replace cascading taxes such as central sales tax, octroi and entry tax. Most goods would bear the standard 20%. The book's criticism: the income tax slabs gave little relief at the bottom and much more at the top, an “inverted equity principle”.
Exam traps
Exam traps
Watch out for
The mistakes examiners are fishing for
- Narasimham I vs II. I (1991) is the Committee on the Financial System; II (1998) is on Banking Sector Reforms. Match-the-list questions pair them exactly that way.
- Narasimham did not promote directed credit. It recommended phasing it out and cutting SLR and CRR.
- Two Rajan committees. The 2007–08 one on financial sector reforms (“A Hundred Small Steps”); the 2013 one built a state development index and is not a financial sector committee.
- Two Kelkar reports. 2002 task forces (Section 88, ₹1 lakh exemption) and the 2004 FRBM task force (GST blueprint, revenue-led consolidation).
- Chakravarty, not Urjit Patel, for monetary targeting. Chakravarty (1985) targeted money supply (M3); Urjit Patel (2014) targeted CPI inflation at 4% ± 2%.
- Kaldor = expenditure tax; Jha = MODVAT; Chelliah = three slabs.
Practice
Check yourself
A. Numbers
Problem 1
In 1991 a bank held ₹1,000 crore of deposits (net demand and time liabilities). With CRR at 15% and SLR at 38.5%, how much could it lend freely?
Problem 2
A bank has risk-weighted assets of ₹2,000 crore. What minimum capital did Narasimham II want it to hold by 2002, and how much more is that than under the old norm?
B. Facts and concepts
1The Committee on the Financial System (1991) was chaired by:
2Which of these did Narasimham Committee I NOT recommend?
3Narasimham Committee II wanted the minimum capital adequacy ratio raised to:
4'Narrow banking' as a way to rehabilitate weak banks was suggested by:
5Monetary targeting in India was recommended by the:
6Which committee recommended abolishing the Section 88 rebate?
7The Chelliah Tax Reforms Committee is linked to:
8Arrange by year: A. Chelliah B. Kaldor C. Kelkar (2002) D. Wanchoo
Sources
- Datt & Sundharam's Indian Economy (S. Chand, 2020): chapters on the commercial banking system, the RBI and monetary management, and Indian public finance
- Report of the Committee on Banking Sector Reforms (Narasimham II), 1998
- M. Govinda Rao and R. Kavita Rao, 'Trends and Issues in Tax Policy and Reform in India', India Policy Forum 2005–06
- RBI: Report of the Committee on Fuller Capital Account Convertibility (2006)
- RBI: Report of the Working Group on DFIs (S. H. Khan)
- PIB: Committee on the Revenue Neutral Rate for GST (Dec 2015)
- PIB: Shankar Acharya committee on a new financial year (Jul 2016)
- PIB: Task Force for drafting a new direct tax legislation
- The 1991 Project: committee reports (Kelkar 2002, Verma 1999, Rajan 2007, Urjit Patel 2014, Rekhi 1993, Wanchoo 1971)
Where a year could not be confirmed from a source, the page says so instead of guessing.
Try it on real questions
Sixteen past-paper questions on these committees
From UGC NET, IIT JAM, CUET-PG and the University of Hyderabad: Narasimham I and II, the chronology questions, Chelliah, Kelkar, Chakravarty and Urjit Patel.
These are questions from the TestStop bank. A free account answers 10 a day, each with its worked solution; All-Access opens every set with no daily limit.
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