Two setbacks & a troubled outlook

Subir Roy
Senior Economic Analyst

THERE is an element of unreality about the current Indian scene. First, the ruling BJP met with severe electoral setbacks in the Assembly polls in three north Indian states hitherto considered its bastions. Then, the economy turned in excellent numbers on inflation and industrial output. If the BJP is minding the economy so well, why have voters turned it down so decisively?

The explanation lies in the statistics itself. The inflation rate has touched a new low mainly because food prices have turned negative, actually gone down! This points to the distress sweeping rural India — farmers are not getting a minimum sustainable price for their produce and hence staring at farm loan default and in a few cases committing suicide.

The further irony is that inadequate farm incomes resulting in a prolonged agitation by farmers came not from drought and crop failure but because of the farmers’ ability to be more efficient and produce more, which has created a supply glut. In the case of MP, the losing Chief Minister, Shivraj Singh Chouhan, is credited with having brought about a farm revolution akin to what Pratap Singh Kairon did in Punjab.

This points to a critical dilemma for the BJP whose Central government can do little to lessen farm distress in the five months to the coming parliamentary elections. It can lead the states in comprehensive loan waivers across the country, which has been promised by the Congress in its winning campaign. But a lot of loans, taken particularly by marginal farmers, are from local moneylenders who are a source of every kind of credit in different emergencies in rural societies.

While institutional loans can be waived quickly, the problem of assuring proper prices for farmers is more intractable. The Indian system does this by fixing an MSP topped by ‘bonuses’ from individual states. This works through state procurement which can be neither comprehensive nor effective. A long-term solution lies in freeing up agricultural markets which will allow modern private trade channels and cold chains to come up. Again this is time consuming.

If farmers’ distress is what swung the tide against the BJP, it logically follows that the distress overcame the impact of the periodic Hindutva agitation to build a Ram temple at the site of the Babri Masjid which peaked around the anniversary of the demolition in December. In fact, contrary to the campaign in 2014 being structured around the twin themes of vikas and jobs, this time it was the majoritarian theme that held sway. Yogi Adityanath, the UP Chief Minister and strident standard bearer of Hindutva, held more rallies in the three states than Modi and Amit Shah.

So we have a situation where there is a question mark hanging over whether the default campaign theme of the Sangh Parivar, the majoritarian agenda, will work in the coming general election when farmers and people at lower income levels will continue to feel economically distraught. The latter were traumatised by the travails that small businesses which mainly deal in cash went through in the aftermath of demonetisation and introduction of GST.

The recovery in growth figures indicates that the economic impact of the two, particularly the former, is behind us (GST processes still need a lot of debugging) but there is certainly an absence of any feel good factor that would have been created by more jobs becoming available. 

If you are in the habit of looking for omens, a bad one preceded the adverse election results for the ruling dispensation — the day before, RBI Governor Urjit Patel abruptly resigned. The ramifications of this can be as long lasting as the ills that bedevil India’s farm economy.

The big question that has been raised is the future autonomy and independence of the central bank. Ever since the early nineties when India slowly joined the global system of free financial flows by removing its own capital account barriers gradually, the regulatory importance of the bank has grown. The system has mandated it the task of maintaining financial stability, both domestic and external.

What finally broke the camel’s back is not known but the issues that the impending RBI board meeting is set to discuss certainly offer a pointer. The government’s agenda is to turn the RBI, which has till now been run by the Governor and his team, with the board playing effectively an advisory role, into a board managed institution. And since the government appoints the board, the clear and present danger ahead is of the bank losing its autonomy and on a day-to-day basis being run by the mandarins of the Finance Ministry.

In the long run, this cannot power investor confidence, both domestic and global. In the immediate aftermath of the resignation the markets have sharply recovered but this is attributed to the expectation that the discipline that the regulator was seeking to impose on troubled banks will be eased and everybody will be invited to join in the credit party in the runup to the parliamentary elections. A return to the forbearance towards troubled bank assets that the RBI displayed in the latter part of UPA rule can hardly generate confidence in the long-term health of the banking sector and the economy.

Political circles have argued that the anti-incumbency factor that led to the defeat of ruling parties in the Assembly elections will not affect the general election and Modi’s personal popularity remains undiminished. That may well be so but it will in no way diminish the setback that the BJP has suffered in the last few days.