Unless you really know what you are doing, you should say Y here.
The reason is that some programs need kernel networking support even
when running on a stand-alone machine that isn't connected to any
other computer.

If you are upgrading from an older kernel, you
should consider updating your networking tools too because changes
in the kernel and the tools often go hand in hand. The tools are
contained in the package net-tools, the location and version number
of which are given in <file:Documentation/Changes>.

For a general introduction to Linux networking, it is highly
recommended to read the NET-HOWTO, available from
<http://www.tldp.org/docs.html#howto>.

source code:

drivers/net/loopback.c