Overview of Rajan Committee

Raghuram Rajan, a University of Chicago professor who formerly served as the head economist of something like the International Monetary Fund, chaired the panel. The group suggested broad-based financial sector changes in its report A 100 Tiny Initiatives, suggesting that rather than focusing “upon a few huge, and generally politically problematic steps,” India should “take a 100 small steps in the same direction.”

Montek Singh Ahluwalia, therefore the Deputy Chairman of something like the Planning Commission, commissioned Rajan to prepare a paper suggesting the next phase of banking sector reforms in India in 2007. The task was to take a broad picture of the industry in order to provide suggestions, showing connections between essential improvements while maintaining a consistent fundamental approach.

Raghuram Rajan Committee

Raghuram Govindarajan (born 3 February 1963) is an economist of Indian origin who taught finance at the University of Chicago Booth School of Business as the Katherine Dusak Miller Distinguished Service Chair of Finance. He became Chief Economist & Director of Research there at the International Monetary Fund from 2003 to 2006. He was also 23rs Governor of the Reserve Bank from September 2013 to September 2016, and he was also the Vice-Chairman of Bank of International Settlements in 2015.   

Following the Asian financial crisis of 1997, the Imf was chastised for imposing fiscal austerity and harsher monetary policies on emerging countries. The IMF’s policies, according to critics such as Laureate and former World Bank head economist Joseph Stiglitz, have caused economic instability and destabilisation.  While a distinguished macroeconomist had traditionally held the position of chief economist, the IMF wished to expand its finance competence. The IMF’s first deputy managing partner, American economist Anne Krueger, had recently read Rajan’s book Defending Capitalism from Capitalists and reached out to him to see if he was interested.

Narasimham Committee

From the 1991 Indian financial downturn to its current position as the third biggest economy in 2011, India’s GDP and the banking industry have both risen tremendously. Recognizing the industry’s changing demands, the Finance Ministry of something like the Indian government established numerous committees tasked with assessing India’s banking industry and adopting laws and policies to make it effective, competitive, and efficient during this time.

Under the presidency of Maidavolu Narasimham, two similar expert committees were formed. In the 1990s, they published two studies, the Narasimham Committee-I (1991) report as well as the Narasimham Committee-II (1998) report, in which they made their suggestions.

These ideas not only aided in unlocking India’s banking potential but they were also credited with reducing the impact of the global financial crisis that began in 2007.

India is therefore no longer isolated from the world economy, as it was during the dirigiste period up to the mid-1980s. India’s banks fared well throughout the 2008 financial crisis.

Financial Sector Reforms

Interest rate liberalization, quantitative limitations liberalization, including credit & exchange controls, and steps to improve the efficiency gains and integrity of the finance industry, particularly the banking system, are all common features of financial sector reforms. The cost of capital, the amount of savings funds, and the allocation of money and project selection are all routes through which the financial sector has an impact on the real economy.

Part of the impact of banking sector reform will be seen in the proxies’ movements. Financial sector reform, on either hand, is a long-term process including institutional and structural changes that are likely to affect the propagation of financial sector factors to the real economy. As a result, the sample was divided into three periods: pro-reform, reform, and post-reform, with the reform period encompassing the five years due to the implementation of specific discrete financial changes, such as the repeal of the rate of interest or quantitative restrictions. This method allows us to investigate the impact of the many channels via which the finance system influences the real sector throughout financial repression, as well as during the reformation and post-reform eras.

Conclusion

As a result of financial sector reform, the actual real interest rate on subsidized projects would rise, while the rate on other projects would fall. This may need some capital stock reorganization, including the retirement of capital from formerly supported enterprises which are no longer feasible. The changes, on the other hand, would almost certainly provide prospects for focus on new activities.

Greater equilibrium interest rates should, in principle, be linked to more efficient investment growth rates of rate of return, as well as more savings and growth. Unusually relatively high interest rates, on the other hand, may be linked to adverse choice and the reinvestment of money in higher-risk enterprises.