Raising its concern on state governments waiving off farm loans, the Reserve Bank of India (RBI) on Wednesday said that such actions increase the risk of slippages and contribute to inflation sooner or later.
"The Monetary Policy Committee (MPC) resolution says that risk of fiscal slippages has risen with the announcement of large farm loan waivers," RBI Governor Urjit Patel told media persons in a briefing after the repo rate was kept unchanged.
Unless there is existing fiscal space in the state budgets, the states should avoid going down the "slippery path" of farm loan waivers, he said, adding that it can erode the fiscal gains made over the previous two to three years.
He also added that the fiscal slippages sooner or later does lead to increase in inflation.
"Past episodes have shown when there are significant fiscal slippages they do permeate through inflation sooner or later.
"So it's a path we need to tread very carefully before it gets out of hand," Patel noted.
After Uttar Pradesh, Maharashtra Chief Minister Devendra Fadnavis has promised to implement what he termed as the "biggest" farm loan waiver in the state's history by October 31.