The quota system should be removed alltogether. I don't think we can build a casteless society if we start providing privileges to some sections of society on the basis of class/caste.
The "one year preparatory course" scheme at iits is good as from my personal experience i have found the people that come through that scheme to be good enough to survive in the IIT environment. Similar schemes should be in place at all institutions rather than providing illogical quotas, if the government still wants to stick to its caste-based gradation of society.