Thumbs down: Former RBI governor Raghuram Rajan denounces farm loan waivers

By: |
New Delhi | Updated: December 15, 2018 8:42:51 AM

rbi, raghuram rajanHe stated that PSBs should also strengthen their risk-management and regulatory compliance functions.

With the general election just four-five months away, former Reserve Bank of India governor Raghuram Rajan on Friday called for the need to abandon the practice of farm loan waivers, as they add to the burden of state finances.

“The question is whether the flows to farmers are best affected by waiving loans. After all, there is only a subset of farmers who get those loans. And so it often goes to the best connected rather than those who are most poorly off,” Rajan said at an event to release the report titled ‘An Economic Strategy for India’. Also, it (waiver) obviously creates enormous problems for state finances. “And I think, unfortunately, it inhibits investment down the line.”

Six states implemented farm loan waivers totalling of Rs 1.26 lakh crore in FY18-FY19 while new governments in Madhya Pradesh and Rajasthan could also follow suit soon by taking forward their electoral promises in this regard.

To reduce farmers’ distress, the government should move to a fixed cash subsidy per acre cultivated based on digitizing and identifying plots as demonstrated successfully by the Rythu Bandhu Scheme of the Telangana government, noted the report authored by a group of economists, including Rajan.

On governance at public sector banks (PSBs), Rajan said the government still decides appointments to the boards, leading to the inevitable risks of politicisation. He said strong boards should be entrusted with all bank-related decisions, including appointment of chief executive officers. However, these must then be held responsible for performance, he said.

He stated that PSBs should also strengthen their risk-management and regulatory compliance functions. As for capital infusion into state-run banks, Rajan said capitalising them through budgetary resources is against the interest of minority shareholders.

Rajan pitched for a functional out-of-court restructuring process for stressed assets and added that if no agreement (between creditors and debtors) is possible, the National Company Law Tribunal (NCLT) can act as a court of last resort.

“The NCLT will help restructure debt for the largest firms and projects under the bankruptcy code. The tribunal will be overwhelmed if every stressed firm or project is filed before it.” The Insolvency and Bankruptcy Code also requires ‘steady modifications to make it effective, transparent, and not gamed by unscrupulous promoters’, he added.

On the economy, the report observed that preserving and protecting macroeconomic stability is an essential prerequisite to strong and sustained growth.

“Every time macro stability has been traded off to boost growth, the economy has been pushed towards a crisis, the consequences of which have undermined the very growth that was the initial policy focus,” it said.

Also read: RBI board steers clear of taking decision on diluting governor’s power, for now

To ensure macroeconomic stability, it is important to maintain low and stable inflation, ensure the consolidated fiscal deficit leaves enough space for private investment, and see that the current account deficit is sustainable and can be financed largely through stable capital inflows, to help insulate the economy from sudden swings in global sentiment.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.