Demonitisation has come to haunt Modi in elections

Ruling party has blundered on the economic front and it’s payback time for the voters

It’s not going well for Prime Minister Narendra Modi. Reserve Bank of India (RBI) Governor Urijit Patel finally said “enough” and quit, though his term was till September 2019. His resignation letter did not mention Modi. Upendra Kushwaha, a central minister from Bihar, finally resigned and told the world what was an open secret – Modi and Bharatiya Janata Party (BJP) chief Amit Shah had turned the council of ministers into a rubber stamp. And drowned out by other news was the resignation of Surjit Bhalla from the PM’s economic advisory council; Bhalla has staunchly defended Modi’s record on job creation, which has been insufficient.

The worse news was the election results of five state assemblies. The three Hindi belt states – Rajasthan, Madhya Pradesh and Chhattisgarh – had BJP governments, which were all set to lose power; even in MP, which throughout Tuesday had been a neck-and-neck contest. The Congress party made a comeback after being down and out after its decimation in the 2014 parliamentary election.

While most analysts had predicted a Congress victory in Rajasthan, the Chhattisgarh result was the big surprise. Much of the debate during the campaign had been over whether a splinter party led by former Congress chief minister Ajit Jogi or the dalit-centric Bahujan Samaj Party (BSP) would dent the Congress vote and keep it from defeating the incumbent BJP government. Chhattisgarh is afflicted with left-wing extremism, and workers of the Congress party were targeted by the Maoists. In the end, nonetheless, the Congress scored a two-thirds majority that no one foresaw.

For the BJP, it was 0-5 wipeout. Telangana was retained by the TRS, which scored a sweeping win over the Congress and Telugu Desam Party (TDP) combine, despite the Congress party’s complaint of 2.2 million missing names from voters list (out of a 28 million-strong electorate). The tiny northeastern state Mizoram finally booted out a Congress government in favour of the Mizo National Front (MNF).

The reasons for the BJP’s losses are clear. Anti-incumbency was a factor – though in MP the BJP came close to overcoming anti-incumbency due to Shivraj Singh Chouhan’s popularity as an administrator in the mould of exPM Atal Behari Vajpayee – but what has come to haunt Modi is the biggest blunder of his tenure: demonetisation. The whimsical withdrawal of highdenomination currency in November 2016 led to agricultural distress and hurt the small-scale enterprise sector; the non-availability of cash, and the non-readiness of the authorities in the replacement exercise, cut off supply chains in the vast countryside. Some of the voters finally had their revenge.

Urijit Patel was three months into his job when Modi presented him with the fait accompli of demonetisation. He was appointed as RBI Governor because his predecessor, Raghuram Rajan, was against demonetisation. Patel’s tenure will be remembered for this surreal and absurd exercise of replacing 86 per cent of the country’s currency. Though he said on Monday that he quit for personal reasons, a showdown between the RBI and the government had been brewing ever since deputy Governor Viral Acharya’s speech in Octoberend where he warned against encroaching on the RBI’s autonomy.

The government wants the RBI to release some of its reserves to help the very small-scale sector that the government had blindsided with its demonetisation surprise. The RBI, by nature a cautious institution, did not want to release the reserves because it was a government-created mess that it was being asked to clean up with reserves meant for emergency monetary or foreign exchange situations. Second, the government wanted the RBI to relax norms instituted against banks which were crushed under bad loans, and also to loosen some of the stipulations of the bankruptcy code – as demanded by major holders of non-performing assets in the power sector, notably the Gujarati industrialist Gautam Adani, widely known to be close to Modi.

Patel’s departure, “with immediate effect”, comes on the heels of the former chief economic advisor Arvind Subramanian publicly stating that demonetisation was a major shock to the monetary system, One wonder why Subramanian, who left government in July, did not speak his mind two years ago. He also pooh-poohed the Niti Aayog’s rejigging of GDP growth figures, made to show the growth during Dr Manmohan Singh’s years as less than Modi’s. Incidentally, Bhalla left because of the controversy over the GDP rejigging.

Modi will select a new RBI Governor who can help him in view of the coming parliamentary election in April-May. Modi wants to release two to three trillion rupees into the economy to help growth and create jobs before the polls. It will likely create inflation and send the rupee to 80 per dollar. And it may do nothing to help the PM, electorally.

These elections have one silver lining for Modi: it gives Congress president Rahul Gandhi an enhanced stature. The Opposition strategy is to fight the BJP with local alliances without providing the PM with a national adversary; these wins help Rahul emerge as first among equals. Modi wants nothing more than presidential-type contest in which he feels he holds the advantage.

These elections have one silver lining for modi: it gives congress president rahul Gandhi an enhanced stature