Farm loan waivers can inhibit investment: Rajan

Amid reports that Prime Minister Narendra Modi-led government is likely to announce Rs 4 lakh crore of farm loan waiver ahead of general elections, former RBI Governor Raghuram Rajan on Friday warned the move can create “enormous problems” for government finances and chock investment.

Besides, he said not all farmers benefit from the loan waivers and it goes mainly to the most connected ones rather than poor farmers.

“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.

“Second, it obviously creates enormous problems for the fiscal of the state. And I think, unfortunately, it inhibits investment down the line,” Rajan said here releasing the report, 'An Economic Strategy for India'.

He also attacked the government-determined credit targets for banks, saying it should be avoided all costs.

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Rajan's comments came in the midst of a crucial meeting of the RBI Board where the government representatives are likely to push for an ease in lending norms for banks by the central bank of India.

“Among the more dangerous mandates are lending targets and compulsory loan waivers. Government-imposed credit targets are often achieved by abandoning appropriate due diligence, creating the environment for future NPAs,” he said.

Loan waivers, as 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. Agriculture needs serious attention, but not through loan waivers. An all-party agreement to this effect would be in the nation’s interest, according to Rajan.