Should students be graded on the basis of their handwriting?
Grading students on the basis of their handwriting is ableist and alienates students from demonstrating the real knowledge they are supposed to have gained.
Students who have cognitive disabilities or information processing disorders like dyslexia, or who suffer from tremors, peripheral nerve degeneration, or hypersensitivity in the hands may have trouble writing to a standard that meets most teacher's expectations. Even a physically and mentally typical child may simply have poor handwriting, and though this can improve with practice, punishing children for poor penmanship breeds poor self esteem and hostility in the school environment.
Unless enrolled in a course that specifically grades for penmanship--like calligraphy or design--a student's penmanship should not influence their grades. Teachers should be grading for whether or not material has been understood and synthesized rather than whether it is presented in a visually-appealing form.
If conflict arises over a student's handwriting, the option to type and print out assignments may be an appropriate alternative. In the case of a physical or mental impairment, a special plan may be developed between the student's family and the school to ensure that they are not unfairly penalized for their condition.