The Reserve Bank on Wednesday warned of fiscal situation getting out of hand if states unabatedly continue to waive farm loans saying it also risk spurring inflation.
RBI Governor Urjit Patel said unless that state governments' budgets allow that fiscal space to go in for a loan waiver, it would be risky to tread on that path.
"The risk of fiscal slippages, which by and large can entail inflationary spillovers, has risen with the announcements of large farm loan waivers, the RBI said in its second bi-monthly monetary policy review for 2017-18.
Patel said that the risk of going down the "slippery path" of waiver could dissipate the important gains that the states made in fiscal rectitude over the last 2/3 years.
"Past episodes in our country had shown that when there are significant fiscal slippages they do permeate to inflation sooner or later. So, it is a path that we need to tread very carefully and before it gets out of hand," he said.
Yesterday, Maharashtra Chief Minister Devendra Fadnavis had said the government will announce a loan waiver before October 31 and about 1.07 crore farmers with less than five acres of land would be eligible for it.
Earlier, in April, the Uttar Pradesh government had waived farm loan worth Rs 36,000 crore and if Maharashtra implements the waiver scheme, it would cost the state exchequer an estimated Rs 30,000 crore.
Farmers in Madhya Pradesh too have been agitating since June 1 seeking loan waivers, higher minimum support prices and other benefits.