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Shun loan waivers, Rajan tells States

It often goes to the best connected rather than to the poorest, says the former RBI Governor

State governments should resist giving farm loan waivers since they will create fiscal stress and not reach the farmers that need them, former RBI Governor Raghuram Rajan said on Friday.

“Certainly, there is a reason to think about farmers’ distress, but the question that flows is whether loan waivers are the only solution,” Mr. Rajan said, speaking at a panel discussion about a report on ‘An economic strategy for India.’

“Does it reach the farmers who actually need it?” the former RBI Governor and Chief Economic Adviser asked. “It often goes to the best connected rather than to the poorest. It also creates enormous problems for the fiscal of the State once the waivers are done.” Mr. Rajan’s comments assume significance at a time when speculation is increasing about a possible farm loan waiver from the Centre similar to those given by some State governments. “Government-imposed credit targets are often achieved by abandoning appropriate due diligence, creating the environment for future NPAs,” he said. “Loan waivers, as the RBI has repeatedly argued, vitiate the credit culture and stress the budgets of the waiving State or Central government. They are poorly targeted, and eventually reduce the flow of credit.”

Focus on agriculture

That said, Mr Rajan did stress that the agriculture sector needed serious attention, and that an all-party agreement on this would be in the nation’s interest.

Mr Rajan, along with economists Abhijit Banerjee, Gita Gopinath, Neelkanth Mishra, Karthik Muralidharan, Eswar Prasad and Sajjid Chinoy, released the report which is a five-year economic agenda for India covering a number of issues, including the macro economy, health, education, banking reforms and infrastructure.

Mr. Rajan’s note pertained to banking reforms in which he argued that public sector bank boards are still not adequately professionalised and that the government’s role in deciding board appointments leads to “inevitable politicisation.”

“The government could follow the P.J. Naik Committee report more carefully,” he wrote. “Eventually, strong boards should be entrusted with all bank-related decisions, including CEO appointment, but held responsible for performance. Strategic investors could help improve governance.”

Mr. Rajan further said that the out-of-court restructuring process and the bankruptcy process both need to be strengthened and made speedier.

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