Stating that farm loan waivers inhibit investment down the line, former Reserve Bank of India (RBI) Governor Raghuram Rajan on Friday said he has written to the Election Commission against the farm loan waivers as poll promises. Rajan also said that uncompensated government mandates have been imposed on public sector banks (PSBs) for a long time, but said privatisation of public sector banks may not be a panacea.
“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 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 and 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,” Rajan said at an event organised by University of Chicago.
A group of thirteen economists released a report named ‘An Economic Strategy for India’ outlining the economic agenda for the country over the next five years. Besides Rajan, the other economists who contributed to the report included Abhijit Banerjee, Pranjul Bhandari, Gita Gopinath, Amartya Lahiri, Prachi Mishra, Karthik Muralidharan, Rohini Pande, and E Somanathan.
Rajan called for an all-party agreement for addressing the agricultural distress instead of farm loan waivers. “Agriculture needs serious attention, but not through loan waivers. An all-party agreement to this effect would be in the nation’s interest,” he said.
He also highlighted the issue of inadequate job creation even though the Indian economy has had 7 per cent growth. Citing example of job shortage, he said 25 million people applied for 90,000 railway jobs. “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, adding that growth is not benefiting all sectors and all people and inequality to some extent is increasing. He also expressed concern over subdued growth rate of exports despite the fact that India has enormous quantities of cheap labour.
For the banking sector, the former RBI Governor also said that there is need to reduce uncompensated government mandates imposed on PSBs. “This is lazy government — if an action is worth doing, it should be paid out of budgetary resources. It also is against the interests of minority shareholders in PSBs,” he said. Rajan also commented on the politicisation of appointments in public sector banks. “Public sector bank boards are still not adequately professionalised, and the government rather than a more independent body still decides board appointments, with the inevitable politicisation,” he said.
On the resolution of stressed banking assets, Rajan said India needs a functional out-of-court restructuring process such that most of the cases are resolved out of bankruptcy code. The National Company Law Tribunal can act as a court of last resort if no agreement is possible, he said. “The NCLT will help restructure debt for the largest firms and projects under the bankruptcy code,” Rajan said. “The tribunal will be overwhelmed if every stressed firm or project is filed before it,” he added.
When asked about the ongoing debate over independence of institutions, Rajan said, “That goes without saying that as we grow, as we become a more developed economy, we have to think about these institutions which can help guide our growth and that certainly emphasises the strength of the institution and the operational independence of these institutions under an overall guiding framework.”