Raghuram Rajan: Don't make farm loan waivers part of poll promises

Raghuram Rajan

Eschew loan waivers that divert resources from much-needed investment in India, says a report prepared by 13 noted economists, including former RBI Governor Raghuram Rajan, which was released here on Friday.

Releasing the report titled "An Economic Strategy for India", Rajan said that farm loan waivers should not form part of election promises and that he has written to the Election Commission to put a bar on such a practice, which inhibits investment in the farm sector, as well as putting pressure on the finances of the concerned states.

"I have said forever, even written a letter to the Election Commissioner saying they should be taken off the table. I mean, certainly, there is a reason to think about farm distress. But, the question of whether the flows to farmers is best affected by waiving loans, after all, there is only a subset of farmers who get those loans," he said.

"It's no surprise to you that there is fair amount of agricultural distress which we have seen being highlighted by farmers, and also political parties are responding with variety of measures such as loan waivers.

"So, it often goes to the best connected rather than those most poorly off. Second, it obviously creates enormous problems for the fiscal of the state once those waivers are done. And I think, unfortunately, it inhibits investment down the line," he said.

"We need to create the environment in which they (farmers) can be a vibrant force and I would say more resources are definitely needed. Whether loan waivers are the best? I think it's highly questionable," he added.

Rajan, who is currently teaching in the US, also said an all-party agreement to eschew farm loan waivers would be in the interest of the nation.

The report, which outlines the challenges facing the economy, says that the country's economic history is full of instances which demonstrate that protecting macroeconomic stability is essential for strong and sustainable 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 says.

Rajan said although India has had 7 per cent growth, the economy is not clearly creating enough jobs, citing the example of how 25 million people had applied for 90,000 railway jobs.

"So many applicants... 250 per job and these are not priced jobs. These are actually low level jobs. So, it does suggest enormous demand for jobs," he said.

He pointed out that growth is not benefiting all sectors and all people, while inequality is increasing.

"We should ask the question that is this growth path viable and clearly more needs to be done on macro stability, on fiscal deficit, there are proposals in the paper that how we can do that," the former central bank Governor said.

He said there had been no improvement in the fiscal deficit of the Centre and the states in the last five years.

"In terms of public sectors borrowing, it is still as big as it was and that is a source of concern especially as states budgets are going out of balance. We see trade deficit is large even after taking out the effect of borrowing," he said.

"We absolutely need to enhance growth beyond 7 per cent... with a lot of back and forth on what the true growth numbers are, whatever they are, they are not enough," he said, making a reference to the recent controversy regarding the back series GDP data released by the government.

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