It is no wonder that with his poll pre-occupations in Bihar currently, and more states to follow within months, Mr Modi chose discretion better part of valour. But as the leader of the Lok Sabha enjoying supremacy, Mr Modi failed to use his skills to build a more co-operative government-opposition culture in Parliament.

If he had, Mr Modi would have not only helped to restore the image of parliamentary democracy, however shaken by aberrations and disruptions in more recent years, for which both opposition Congress now and the ruling BJP earlier had been responsible, but also smoothened the way for some of his reforms, especially GST, to be put through.

To add to the Modi Government problems, there is a rise in agitations across the country, particularly from the Patidar community in Gujarat led by young Mr Hardik Patel, somewhat of a shock for PM himself, besides the long drawn-out veterans' protests for OROP. Government's attempts to carry out labour market reform are stranded by the determined opposition of almost all trade unions with a call for countrywide strike on September 2.

The economy, with a slow recovery, is facing more challenges than perceived at the beginning of the year, and these have been highlighted in last week's Annual Report of the Reserve Bank of India. The monsoon will again be below normal, it is now official, and large parts of Northern India including Bihar would miss the timely rainfall, which influences agricultural fortunes.

Rural distress from last year's poor monsoon would get accentuated. The BJP-led Government would now be forced to get cracking with anti-drought relief measures on a larger scale, focussing more on agricultural revival than its much-touted reform agenda. Finance Minister Arun Jaitley with daily utterances keeps the flag for 8 per cent growth flying but ignores some intractable domestic structural constraints.

To this is now added a re-emergence of a global crisis emanating from China's devaluation and its unpredictable set of policies in the weeks to come. (China is trying to ride two horses at the same time – get SDR status for its devalued yuan and keep easing monetary and fiscal policies as necessary to save growth at not less than 7 per cent in 2015 while stabilising the volatile Shanghai market.)

While China may get away saying the new crisis is not from its devaluation but due to global factors, the fall-out from China's unpredictable moves becomes worldwide. Being the second largest economy and principal growth engine hitherto, there are fears of a hard landing in China. China's sharp slowdown has triggered tremors in all world markets and had also led to further falls in prices of key commodities it depended on for its rapid growth.

The concerns relate to both its banking system and the huge pile of debt it has accumulated after the massive stimulus of the past. India prides itself as being the only country better placed to meet any spillovers, let alone the negative consequences it has to bear in terms of rupee exchange rate and further loss of export momentum.

And with 8 to 9 per cent growth, Mr Jaitley says, India can replace China as the driver of world economy. India's growth constraints are mainly domestic, as detailed in the RBI annual report. Externally, India has cushion to overcome any spillovers, with reserves of the order of 355 billion dollars, largely capital inflows including NRI deposits.

External debt has risen over the last two years to 475 billion dollars by March 2015. Going forward, RBI sees current account deficits being held at sustainable levels with an estimated 1.5 per cent of GDP in 2015/16.

Government is on course to limit fiscal deficit and in fact Mr Jaitley says it can spend more for social programmes with buoyant indirect tax revenues. The RBI assessment says with fiscal consolidation firmly underway and, given business optimism, the stage is now set for 'unshackling stalled investments and for boosting new capital spending in order to accelerate the pace of growth'.

Finance Ministry officials, taking cue from Mr Jaitley, have been egging on the Governor of RBI Dr Raghuram Rajan for a rate cut to revive economic growth prospects. The Governor says RBI continues with its monetary accommodation policy but would await data on inflation to make certain that disinflation continues along with higher growth. He has not ruled out cuts which would be data-dependent, he told his interviewers.

Importantly, RBI said in the report, resolute actions are needed to ease stress in financial assets, mitigate/resolve debt burdens so that stranded assets are put back to work quickly wherever feasible and capital buffers are built to enable financial intermediaries to provide adequate flow of credit to productive sectors.

As the initiatives announced in the Union Budget to boost investment in infrastructure roll out, they should crowd in private investment and revive consumer sentiment, especially as inflation ebbs, the report noted. It urged early actions on disinvestment budgeted for and on strengthening the banking system to rid it of its current weaknesses.

To ease constraints in doing business cited by investors, RBI said significant changes are required in the legal and regulatory environment, labour market reforms, tax regime and administrative procedures. Yet, emerging markets do not expect capital flows of the levels of recent years, as the developed countries gradually move away from monetary accommodation.

The outlook for capital flows is highly uncertain, with the widely anticipated normalisation of US monetary policy shortly. The US Federal Reserve meets on September 17-18 to determine the timing of the first rate increase in the Federal Funds rate held at near zero since 2008.

Any decision on rise in US interest rates could generate capital outflows from emerging markets and also harden financing conditions as bond yields rise, according to analysts. (IPA Service)