Two events - the exit of Urjit Patel, former RBI governor, and below expectation-election results in the five states - may force PM Narendra Modi's regime to undergo course correction, especially as BJP was thought to have a stronghold in Rajasthan, Chhattisgarh and Madhya Pradesh.
These states will send nearly 60 MPs to the lower house of the Parliament. In 2014, BJP had swept almost all of these seats. The government is besieged on other fronts too.
Finance Minister Arun Jaitley's hands are tied as revenues from GST collections are not increasing. There are only about 60 days left to when the election commission may announce dates for the General Elections.
However, there are certain external positives that are in favour of the government. This includes the softer crude oil prices and the US Federal Reserve's reluctance to increase rates. Both these factors have stabilised the rupee's depreciation.
Finance Minister Jaitley is expected to present an interim budget on February 1. But before that, the PM has convened a meeting of country's top economists at NITI Aayog on December 13.
Most economists expect corrections in the implementation of farmer oriented schemes; this includes working out farm debt waivers and improvement in procurement methods. In the past 10 years, Madhya Pradesh has remained at the forefront with double-digit growth rate in agriculture, but due to poor procurement methods, BJP witnessed a slide in popularity in the state. Similarly, though farm debts in Madhya Pradesh and Rajasthan were waived, it was only a temporary solution.
In Madhya Pradesh, despite schemes such as Bhavantar Bhugtan Yojana and bonus on wheat with direct procurement, corruption at local level and poor implementation marred the sentiment. In Rajasthan, too, farmers complained about faulty procurement of wheat. Another question that BJP needs to focus on whether the Hindutva card works for it or not. BJP is under immense pressure from its ideological parent RSS to commit itself to the construction of Ram Mandir at Ayodhya.
The RSS is pushing BJP to bring in an ordinance to change the stated law and start the construction of the temple. The matter is pending in the Supreme Court. This issue has a strong resonance in the Hindi belt of the country. In fact, BJP used Uttar Pradesh Chief Minister Yogi Adityanath as a star campaigner in the recent elections.
Those linked to RSS say that BJP will have to commit to the task and a half-hearted approach might backfire, but there is also a strong lobby inside BJP which wants to sell the development model. In addition to this, BJP also believes that MSMEs and smaller traders are yet to come out of the GST hit and they are getting dissuaded.
A correction in the PM Mudra Scheme is expected, which may allow NBFCs to extend loans. With the exit of Urjit Patel from RBI, a liquidity window for NBFCs may open. These changes may include dilution of the Prompt Corrective Action (PCA) norms, under which 11 public sector banks at present are unable to extend debt, even for low-risk projects.
Moreover, the PCA exit routes for banks that show improvement can be worked out. It may take time to improve liquidity, but the sentiment can seep in. This move can be in addition to easing the GST filing rules for small and micro businesses. The MSME sector was the worst hit by demonetisation and GST implementation.
The government tried to heal some of the wounds with a series of reforms and doles announced in the first week of November. Patel's exit from RBI might also allow the government to seek an early resolution for 56 road projects' financial closures and salvage 34 stressed power projects. But all this will require some time. The to-do list is long and time is short; PM Modi will have to run faster if he wants his party to perform better in General Elections 2019.