Indian stock-market performance remained barely positive in contrast with other Asian markets that were in the red through November, ahead of state elections this month and Prime Minister Narendra Modi’s formal re-election campaign over the coming months, as good tech-company earnings and strong 7.5% economic growth offset dramatic non-bank frailties adding to financial-system jeopardy.

Defaults by 30-year-old Infrastructure Leasing and Financial Services, with US$13 billion in debt outstanding, revealed the breakneck 20% annual increase of such “shadow bank” lending mainly for construction and property projects in recent years, and threatened a broader liquidity and possible solvency seizure with close mainstream bank and mutual-fund ties.

Institutions like ILFS together equaled one-quarter of the total credit contribution of private banks. Dominant state ones still account for half the amount even as their equity valuations are discounted for poor management, inefficiency and regular scandals like February’s $2 billion Punjab National Bank fraud.

The government’s immediate crisis policy reaction further stoked financial and real-estate sector jitters when it tried to press the nominally independent central bank to release a reported half of its $100 billion in reserves in emergency lines. The move not only underscored the size of the potential balance-sheet hole officials have consistently denied through incremental recapitalization and liberalization steps, but represented unprecedented overt intrusion in the monetary realm.

Former Reserve Bank of India governor Raghuram Rajan was alleged to have fallen out with the Modi team after facing behind-the-scenes pressure to slow the cleanup of bad bank assets, and the current governor, Urjit Patel, through his deputy signaled that reserve turnover would have “potentially catastrophic” effects on the central bank’s perceived autonomy and technocratic reputation.

His backbone was a surprise after acquiescing to the sweeping ill-fated demonetization strategy immediately upon appointment, and in a compromise talks were agreed between the Finance Ministry and the monetary authority. The talks may still lead to an outcome with a sizable holdings chunk transferred, and  the episode magnified doubts about fiscal consolidation and banking overhaul prospects in a Modi second term.

The latest quarter’s expected 7.5% growth in gross domestic product, down from the previous period’s 8%, is in line with international forecasts like those of the Organization for Economic Cooperation and Development (OECD) as changes to statistical output measurement continue to invite criticism.

Figures were again adjusted to cut the previous government’s average GDP growth pace to 6.5% and widen the gap since Prime Minister Modi took office, and former finance minister P Chidambaram blasted them as a politically motivated “bad joke.”

Despite the headline number and partial rupee recovery toward 70 per US dollar with imported oil-price relief, analysts highlight soft spots as the ruling Bharatiya Janata Party’s re-election drive kicks off.

Unemployment was 7% in October, and despite a good manufacturing Purchasing Managers’ Index (PMI) reading of 53, business sentiment is weak, and slower auto sales also point to consumer pessimism.

With retail inflation within the 4% medium-term target, benchmark interest rates should be on hold into next year, but lower food prices will hurt agriculture.

This fiscal year’s 3.3%-of-GDP budget-deficit goal will likely be missed, according to India Ratings, and although exports were up 18% in October, they continue to slide in value terms, with the current-account gap stuck at 2.5% of GDP.

Progress on Indian structural reform was hailed in a 25-place jump in the latest World Bank “Doing Business” rankings, with a top credit-access score now facing reversal with the shadow-bank-induced liquidity crunch. Morgan Stanley predicts single-digit loan expansion through the March 2019 fiscal year, even though state banks will provide guarantees to over-leveraged non-banks, which loaded up on short-term corporate debt to support long-term housing and infrastructure portfolios in a classic maturity mismatch.

ILFS had a top “AAA” credit rating to ease wholesale borrowing, and its default sparked panic among fixed-income mutual funds and on the Bombay Stock Exchange. Funds sold off debt at heavy discounts to meet redemptions, and big players like Dewan Housing Finance experienced double-digit equity-price declines.

State banks, after taking large government-bond losses in recent months, will be reluctant to offer non-bank credit enhancements despite RBI authorization, as big foreign portfolio investors shun the sector entirely in the wake of muddles over institutional arrangements and rescue policies. They dumped $2 billion in financial shares in November according to stock-exchange data, and outflows will continue until crisis cooperation and rehabilitation flow more smoothly.