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A week of economic uncertainty

Cliches sometimes sum up situations better than profound comments. It never rains but it pours is the hackneyed phrase that suits the current situation as far as news on the economy is concerned. While political pundits were debating the five Assembly election results in television studios today, economic analysts were simultaneously trying to cope with the flood of newsbreaks since yesterday''s sudden resignation of the central bank governor, Urjit Patel.

A week of economic uncertainty

Sudden: Urijit Patel’s resignation.



Sushma Ramachandran
Senior Financial journalist

Cliches sometimes sum up situations better than profound comments. It never rains but it pours is the hackneyed phrase that suits the current situation as far as news on the economy is concerned. While political pundits were debating the five Assembly election results in television studios today, economic analysts were simultaneously trying to cope with the flood of newsbreaks since yesterday's sudden resignation of the central bank governor, Urjit Patel.

Patel quits as RBI Guv

The news was not all bad, but it was surely cataclysmic. To take first things first, the resignation of Patel was completely unexpected after he had completed only two years of his three-year tenure. It came soon after a meeting of the Reserve Bank board which, according to public statements by several members, proceeded smoothly, with both government nominees and RBI officials taking decisions in a harmonious manner. After such bonhomie, articles were written about the end of hostilities between the government and the RBI, with the caveat that it was the former that had won the day. 

Even so, the resignation seemed to come out of the clear blue sky and stunned the government, the markets and the investor community. Though frictions between finance ministers and RBI governors are almost passé now, these have always been smoothed over at the last minute by compromise solutions. Comparisons could only be drawn to the long-ago resignation of the Nehru-era governor, Benegal Rama Rau, who stormed out of the post in a huff due to interference by the then Finance Minister, TT Krishnamachari. Most other resignations of central bank governors came after their tenures had ended, as in the case of the last incumbent, Raghuram Rajan.

Extraditing rogue tycoon

This information was barely absorbed before reports flowed from London about a Westminster court's decision to extradite rogue industrialist Vijay Mallya. After the dismal news about the central bank governor's exit, this came as a balm to the country's spirits. It was indeed an achievement as the Modi government has been accused of allowing scamsters to flee the country. In this case, media reports say even the much-maligned CBI conducted itself with aplomb by providing sufficient credible evidence for the prosecutors to argue their case in court. Though Mallya is bound to appeal the verdict, it is clear the wheels of justice will now grind slowly but surely to bring him back to this country. This, in turn, raises hopes that another pair of fugitive businessmen — Nirav Modi and Mehul Choksi — may be the next in line to be extradited back here to pay for their crimes. The noose is tightening for many of those who felt the long hands of law could not reach beyond this country's shores.

What is of interest, however, are the cutting comments made by the British judge about the cavalier manner in which Indian banks gave loans to the flamboyant billionaire. She clearly hinted at malfeasance in this process. But she has left that for the Indian authorities to deal with as her role was limited to deciding on the extradition issue.

Impact on stocks, rupee

The news was not good enough, however, to prevent stock markets from crashing yesterday and the rupee from going into a free fall, while yields of government bonds which move in the reverse direction, rose marginally. The scenario was even worse in the morning, owing to the election results which showed the ruling party on a losing streak. Markets tend to support the status quo and the NDA government is seen as stable and pro-reforms, hence changes made investors nervous. Fortunately, the stock markets seem to have revived somewhat during the course of the day as experts felt the election results had been factored in over the past week as a result of opinion polls which had predicted this outcome. The markets had fallen by about 1,700 points last week on the back of exit polls. The rupee also revived slightly, raising hopes that the volatility in both the currency and stock markets may be a temporary affair.

Economic adviser quits

To add to the tumult came news, even before the election results came in, that a member of the Prime Minister's Economic Advisory Council, Surjit Bhalla, has resigned. This was again surprising as he has espoused and supported the NDA government's economic policies till now. The reason for his departure is not clear, but in a recent article, he did criticise the role of the Niti Aayog in releasing the back series GDP data that sparked much controversy. The withdrawal of an economist who has been a staunch supporter of the NDA's policies, including the criticised demonetisation, must come as a blow to the administration, especially the Finance Ministry.

The array of startling news within a span of 24 hours is bound to have proved unsettling for economic policymakers who would be gearing up to formulate the interim budget for the next financial year as only a few months remain till the General Elections. Even so, the Finance Ministry now has to contend with a new central bank governor, an altered economic advisory council for the PM and volatility in stock markets and currency. 

This is coupled with political uncertainty following the NDA's poor poll results, which intensifies the pressures to finalise more, rather than less, populist policies. Though any government will opt for populism in an election year, the developments point towards a soft budget. One can only hope that the expected sops go along with a sustainable growth path for the long run.

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