DNA Money Edit: Ex-RBI governors oppose loan waivers

Recent announcements by state governments of Uttar Pradesh, Punjab, Karnataka, Telangana and Maharashtra to provide farm loan waivers have drawn much criticism from economists across the political spectrum. After promising the waiver, some fund-starved state governments are struggling to make it a reality. Such waivers have mounted pressure on several other states.

Two former Reserve Bank of India (RBI) governors have raised a red flag over such loan waivers. Y V Reddy, ex-governor, believes such decisions would hinder the economic growth while C Rangarajan, another ex-governor, adds that it was better to give farmers more time to repay instead of waiving off the entire loan.

There is consensus on the argument that loan waiver is not good for credit culture. Every political party in India has given farm loan waivers in some state or the other or at all-India level. It is a political decision but cannot be justified in the longer run.

Is there an alternative when farmers face distress? State governments could waive off interest payments during the year of distress, and then, they could reschedule the loan so that farmers get a longer timeframe for repayment. A loan waiver should be an option only if all these options fail.