In a whirlwind 24-hour span, Indian Prime Minister Narendra Modi has seen his main opponents seize back momentum ahead of the 2019 national election.
First came the abrupt resignation on Monday night of Reserve Bank of India Governor Urjit Patel, which sent stock, bond and currency markets tumbling when they reopened on Tuesday. Then Modi’s Bharatiya Janata Party faced defeat in three key states that he carried in his 2014 national victory, in what amounts to his biggest political setback since taking office.
“The results reveal the declining political stock of Narendra Modi going into the national elections,” said Katharine Adeney, director of University of Nottingham’s Asia Research Institute. “The opposition will be heralding this as a significant victory, but these results are as much a negative vote against the BJP’s failure to deliver on their economic promises and alleviate rural poverty.”
The results in Rajasthan, Madhya Pradesh and Chhattisgarh make Modi look more vulnerable ahead of the federal poll next year, while the central bank governor’s exit gives ammunition to opponents who accuse him of weakening institutions that check the government. The results will provide momentum for the main opposition Congress party, which is seeking to link up with regional parties to topple Modi in the national election.
"We accept the people’s mandate with humility," Modi tweeted on Tuesday evening. "I thank the people of Chhattisgarh, Madhya Pradesh and Rajasthan for giving us the opportunity to serve these states."
The rupee traded 0.7 percent lower on Tuesday. The S&P BSE Sensex gauge of stocks gained 0.5 percent, reversing an intraday drop of 1.5 percent.
Patel’s resignation and the negative election results could continue to pressure the currency and make markets "increasingly jittery" as India heads toward its general election next year, according to Rajiv Biswas, the Asia Pacific chief economist for IHS Markit.
“The resignation of RBI Governor Patel has intensified financial markets concerns about the future independence of the Indian central bank,” he said. “The close election results in a number of Indian state elections today also point to a tough national election contest for Modi and the BJP.”
Patel’s exit also came on the same day Modi’s government won a key victory in the battle to bring back Vijay Mallya, a beer baron who defaulted on more than $1 billion in debt before leaving India. A British court dealt the absconding tycoon a blow in his battle to avoid extradition.
If Mallya returns to India and is put in jail, it would burnish Modi’s government’s anti-corruption credentials and potentially limit the damage caused by Patel’s resigation.
While Mallya’s potential extradition “will resonate with the masses,” Patel’s exit is only bad for elites and investors, said Nilanjan Mukhopadhyay, a political analyst who has authored a Modi biography.
For the Congress Party, Tuesday’s victories represent a rare moment of triumph after four-and-a-half years in the political wilderness. Now the challenge will be to find enough allies for the national campaign to unseat Modi, whose party is still favored to win.
“Undoubtedly, the Congress will evolve as the nucleus of opposition unity,” said Sandeep Shastri, a political analyst and Pro Vice-Chancellor of Bangalore’s Jain University. “You’re seeing rising disquiet about the central government.”