Tuesday, April 16, 2024

West Asia Crisis Ratcheting Up Could Spin Out of Control | Arun Kumar

https://theleaflet.in/west-asian-moves-and-countermoves-challenges-of-them-spinning-out-of-control/

West Asian moves and countermoves: Challenges of them spinning out of control

Arun Kumar·April 16, 2024

What will the complex calculus of the new Middle East crisis resolve into, and what will be the impact on India?

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ISRAEL has succeeded in diverting world attention from Gaza and Hamas to Iran. This is similar to how Hamas, in October 2023, successfully short-circuited US efforts at normalising relations between the Arab states and Israel under the Abrahams Accord.

These moves and countermoves are ratcheting up the intensity of conflict in West Asia with serious global implications, including for India. The Indian approach seems to be similar to that in the case of the conflict in Ukraine— to play both sides.

Countermoves

Iran’s attack on Israeli soil is unprecedented. It is a response to the Israeli attack on its consulate in Syria on April 1, killing some of its top army commanders. It had warned of a retaliation and that gave Israel and its partners, the US, the UK, etc., time to prepare.

The US had already moved its forces and prepared its allies in the region to shoot down the projectiles from Iran. Even Jordan apparently participated in this. Israel could take care of the projectiles that managed to reach its territory. So, 99 percent of the projectiles were shot down in the air and there was little damage in Israel.

The Indian approach seems to be similar to that in the case of the conflict in Ukraine— to play both sides.

It provided a sense of victory to Israel, the US and their allies. This was US President Joe Biden’s message to Israeli Prime Minister Benjamin Netanyahu and to forestall any immediate Israeli retaliation.

Also read: What Palestine teaches teachers of politics and law

Did Iran need 15 days to prepare to attack Israel? Could it not have used many more than 300 projectiles to attack to overwhelm Israeli defences? Could the Iranian allies like the Hezbollah in Lebanon and the Houthis in Yemen not have fired a much larger number of projectiles?

Clearly, Iran was making a show of avenging an attack on them but did not want to hit Israel. It did not want to provoke an attack on its territory from the much superior US and Israeli forces.

The Iranian foreign minister stated in a press conference after the attack that the US, Turkey and some Arab neighbours were given advance information about the limited attack. The US has denied that it had advance information.

Not only were 15 days given to Israel to prepare its defence, the timing of the attack was also conveyed in advance. The drones, which would take six–seven hours to reach Israel, and cruise missiles, which would take two–three hours, were bound to be neutralised given the advance preparations.

Only ballistic missiles, which take only a few minutes to traverse the distance that exists between Israel and Iran, were a serious challenge, but due to the advanced notice and preparation, even they got neutralised.

The Iranian army briefing after the attack also mentioned that the attack was a limited one and had achieved its objective and no more attacks would occur unless Israel attacked its territory. Thus, the Iranian attack was for show and not effect.

The US and the G7 that met in the aftermath of the Iranian attack while condemning the Iranian attack suggested that Israel had won and that it should not retaliate against Iran.

Some even argue that this presents an opportunity to take out Iran’s nuclear establishments and cripple its nuclear bomb capability.

Indeed, Israel’s attack on the embassy in Syria was meant to draw the US and other allies into unequivocally supporting Israel. That support had been dwindling due to the ongoing genocide in Gaza which was inflaming world opinion. Israel has succeeded in this aim. Today, the attention has shifted from genocide in Gaza to the global implications of a wider war in West Asia.

Pressures escalating

The US, while saying it does not want an escalation and that it would not support an Israeli strike, has also said its support to Israel is “ironclad”. Just as Israel has defied US advice to avoid civilian casualties in Gaza and allow more humanitarian aid to enter, it can defy the current US advice to not escalate the conflict.

Also read: The only language Israel understands

Israel could attack, secure in the fact that the US and the allies would defend it if Iran retaliates substantially in response to the Israeli retaliation.

Will Israel oblige by not attacking Iran? The ultra-right in Israel is pressurising the government to retaliate. They have been a part of the growing problem created by the displacement of Palestinians from the West Bank, coming up of new settlements and aggressive assertions in Jerusalem. All this has led to rising Palestinian resentment.

Many Israelis and conservative Republicans in the US are arguing for Israeli retaliation. The Israeli war cabinet said the conflict is “not over yet” and we will “extract a price”.

Even the moderate leader Benny Gantz wants retaliation, though at a time of Israel’s choosing. The ultras argue that Iran has crossed a red line by attacking Israeli soil and it must pay for that.

Some even argue that this presents an opportunity to take out Iran’s nuclear establishments and cripple its nuclear bomb capability.

Hamas’s action was a result of perceived subjugation and atrocities by Israel over a long period, which could not have been anticipated by Israel and the US.

But, there are limits to such actions since there are other players who may be forced to intervene. Also, it could lead to a wider conflict in West Asia. The Sunni nations, though not allies of Iran, may also be forced to act. Already, some of these US allies have prohibited the use of their air space by the US.

Limits of shadow fights

Israel has a huge network of intelligence in not only Gaza but all over West Asia. It has been able to kill its opponents’ leaders in Gaza, Lebanon, Iran, Iraq and Syria. Recently, it could kill the sons and grandsons of Hamas leader.

But, the October 7 attack by Hamas in Israel and Hamas still being able to fight in Gaza six months later lays bare the limits of their intelligence. The extensive network of tunnels in Gaza, the troop strength of Hamas and Israel’s inability to get hostages released for six months also point to the same limitation.

Also read: The brutality in Gaza rekindles the horrible memories of women in war

All this points to the limits of shadow fighting in international relations. Hamas’s attack on October 7 destroyed an equilibrium because it was willing to accept the massive death and destruction in Gaza.

Israel’s attack on the embassy in Syria knowing that Iranians would retaliate has further shifted the out-of-equilibrium position. These instabilities are feeding into each other since one cannot anticipate what nations may do under uncertainty no matter how well a powerful nation may plan.

Hamas’s action was a result of perceived subjugation and atrocities by Israel over a long period, which could not have been anticipated by Israel and the US.

The attack on the embassy in Syria was also unanticipated and a result of Israel’s perception that Iran is behind the Hamas, Hezbollah and Houthis. Iran’s attack on Israel is also a result of its perception of having been attacked on its soil which required an attack on Israeli soil.

Conclusion: Rising global challenges

Now that the world is divided into two blocs, the situation has become more worrisome. Iran is a part of the bloc consisting of Russia and China. It has been supplying drones to Russia for its war in Ukraine. Even though this bloc may not want a second front, it cannot but stand with Iran in case of a Western bloc attack on Iran.

Its stand on the issue will be a crucial determinant of what happens next. The stance of G7 and NATO will be vital since they have been unsuccessfully trying to restrain Israel. Military mobilisation will rise in key nations. The beneficiary will be the military-industrial complex.

Also read: Interview with Adila Hassim, counsel for South Africa versus Israel before the ICJ

War in West Asia will impact the petroleum products market. If Iran is attacked and it blocks the Hormuz Strait or attacks oil tankers, petro-goods prices will rise. Shipping through the Suez has already been impacted and may face further disruption.

India imports 85 percent of its petroleum requirements so the outgo of foreign exchange may increase leading to a deterioration in the balance of payments (BOP), weakening of the Indian rupee and higher inflation.

Thus, the post-pandemic easing of supply bottlenecks may reappear and create inflation globally, disrupting many economies.

India imports 85 percent of its petroleum requirements so the outgo of foreign exchange may increase leading to a deterioration in the balance of payments (BOP), weakening of the Indian rupee and higher inflation.

Foreign investments may slow down. A substantial number of Indians working in West Asia may be forced to return and that will reduce repatriation by non-resident Indians.

Thus, capital flows may be impacted and further aggravate the BOP. India would need to prepare for these challenges in the midst of the fraught election season where the leadership’s attention is not where it should be.

Author of `Indian Economy’s Greatest Crisis: Impact of the Coronavirus and the Road Ahead’. 2020.

Arun Kumar

Arun Kumar is a Retired Professor of Economics at the Jawaharlal Nehru University. He is the author of `Demonetization and Black Economy’ (2018, Penguin Random House) and 'Indian Economy’s Greatest Crisis: Impact of Coronavirus and the Road Ahead' (2020). He blogs at http://arunkumarjnu.blogspot.com/.

Friday, April 12, 2024

Video: Electoral Bonds enquiry needed urgently from independent agency

How come loss-making companies gave crores to the BJP? | Satya Hindi

Money trail in Electoral Bonds scam, investigation can be launched by official agancies but will they? | Arun Kumar (The Wire)

As Media Continues to Expose Electoral Bond Issues, What’s Next?

https://m.thewire.in/article/government/as-media-continues-to-expose-electoral-bond-issues-whats-next

Video: The Electoral Bond Effect ! | Arun Kumar

Sunday, March 31, 2024

Electoral Bonds a dicussion on legal political and economic aspects --with Madan Lokur, Sitaram Yechury, Arun Kumar at Dil Se hosted by Kapil Sibal

In this episode of @dilsewithkapilsibal, host Kapil Sibal discusses various facets and implications of the “crooked intent” of the BJP bringing in Electoral bonds. The data revelations are only the beginning. Investigations must follow, to rescue Indian democracy and restore probity in public life, which is at an all-time low. Where is this money coming from? Justice (retd) Madan Lokur, former judge of the Supreme Court, Sitaram Yechury, CPI(M) General Secretary, petitioner in the matter in court and economist Prof Arun Kumar discuss.

https://youtu.be/ipEK3jA6ohE?si=WEid9NK9Rj4CH5xY

Wednesday, March 13, 2024

India: GDP data for Q3 2023–24 , the real story | Arun Kumar

(Published in The Leaflet)

GDP data for Q3 2023–24: The mystery of a robust growth

Arun Kumar·March 5, 2024

Recently released GDP figures have sprung a surprise, baffled experts and overturned the government’s own data and projections. What could be the reason?

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GROSS Domestic Product (GDP) figures have sprung a surprise— showing a growth of 8.4 percent in Quarter 3 of 2023–24, on top of the previous two quarter’s growth of 8.2 percent and 8.1 percent.

The annual growth for 2023–24 is projected at 7.6 percent. But given the growth rates in the first three quarters, it is likely to be above 8 percent, unless the economy decelerates sharply in Q4, of which there is little sign.

The surprise

Experts are embarrassed that how could they be so far off. In December 2023, the Reserve Bank of India (RBI) had upped its projected growth rate from 6.5 percent to 7 percent.

Various foreign credit rating agencies had revised the expected growth rate to only around 6.5 percent. The International Monetary Fund (IMF) expected a 6.3 percent rate of growth.

In December 2023, the Reserve Bank of India (RBI) had upped its projected growth rate from 6.5 percent to 7 percent.

The Union finance ministry of India said that the rate of growth would be comfortably above 6.5 percent, but did not say it would be over 8 percent. The largest Indian bank, which usually gives a glowing picture of the economy, which then gets amplified in the media, just a day earlier had predicted a rate of growth of between 6.7 percent and 6.9 percent. It argued that there was a moderation in economic activity in Q3.

Media reports had been mentioning that the festive demand in October and November had been moderate— not the expected big boost to economic activity.

Reports were that the rural market was subdued. El Nino was being mentioned as a reason for problems in agriculture. High cereal prices, in spite of a ban on exports of rice and wheat, were being cited as a reason to doubt the official production figures of agriculture.

Also read: The K is Indian GDP’s reality: Why deny?

A moderation of profits in the corporate sector due to a slowdown in demand was being cited as another signal of slow growth. The war in Gaza was creating problems in shipping and leading to an increase in the prices of imports.

A slowdown in China, Europe, Britain and Japan was the reason for the slowdown in exports. All these were the reasons why the Q3 numbers were expected to herald a slowdown.

Despite these factors, growth has accelerated. This mystery needs to be resolved.

Data points to growing disparities

Sectoral performance compared to Q3 of 2022–23 shows higher growth in manufacturing, mining, electricity, gas, public administration and so on.

There has been a sharp increase in mining, from 1.4 percent to 7.5 percent, and in manufacturing from -4.8 percent to 11.6 percent.

Another boost is from net taxes, which have increased from -2.6 percent to 32 percent. In the case of construction, growth remains unchanged at 9.5 percent.

In the case of group trade, hotels, etc., growth declined from 9.2 percent to 6.7 percent, for the group of financial, real estate, etc., the drop is from 7.7 percent to 7 percent. The biggest drop is in the group agriculture, livestock, etc., from 5.2 percent to -0.8 percent.

Another boost is from net taxes, which have increased from -2.6 percent to 32 percent.

Analysis of the expenditure components of GDP shows a decline in the share of private final consumption, from 61.3 percent to 58.6 percent and government final consumption from 8.7 percent to 7.8 percent. The external sector, represented by exports minus imports, shows a decline from -0.7 percent to -1.8 percent.

These three engines of growth are pulling growth down.

So the growth acceleration is coming from an increase in Gross Fixed Capital Formation, from 31.8 percent to 32.4 percent, in valuables, from 1.1 percent to 1.7 percent and in discrepancies, from -3.3 percent to 0.2 percent.

Also read: GDP growth: The gap between reality and rhetoric

This pattern of increases and decreases in different components of GDP can help resolve the mystery.

First, the sharp increase in net taxes suggests that the incomes of tax-paying citizens have risen sharply. They belong mostly to the organised sector of the economy.

The unorganised sector hardly contributes to the taxes since most of the incomes of this sector are below the taxable limit and they are exempt from the Goods and Services Tax (GST).

So, the sharply higher net tax collection indicates that incomes of the well-off sections belonging to the organised sector have sharply increased.

Second, the decline in the share of consumption in GDP also points in the same direction. The well-off citizens consume a smaller percent of their income while the poor consume most of their income. Thus, a shift of incomes in favour of the well-off will lead to a decline in the share of consumption in GDP.

Third, the decline in the share of agriculture in GDP also suggests the same. It is the largest component (in employment terms) of the unorganised sector. About 85 percent of the farmers are small and marginal cultivators operating less than 5 acres of land and have low incomes from farming. As their income declines, the share of consumption in GDP would drop.

Fourth, the government has shifted its expenditure towards capital accounts so the share of its consumption has declined.

Further, the government’s capital expenditure is shifting towards capital-intensive sectors and away from labour-intensive ones. This boosts the organised sector at the expense of the unorganised sector.

Also, the government’s stated aim is to formalise the economy through digitisation which is damaging the unorganised sector and benefitting the organised sector.

Also read: A taxing tale: Assessing the impact of six years of GST

Finally, the sharp increase in the ‘discrepancies’ points to the errors in the data. Both the production side and the expenditure side of GDP have large errors. To unravel the mystery, there is a need to understand these errors.

Contradictions in GDP data

For the quarterly GDP estimation, the unorganised sector (except, for agriculture) data is not available. That is also the case for most of the organised sector. So GDP estimation is based on various assumptions and approximations. How valid are these?

According to the press note, GDP estimates are based on ‘indicators’, ‘using the benchmark-indicator method’.

The government has shifted its expenditure towards capital accounts so the share of its consumption has declined.

Further, previous year estimates are ‘extrapolated’ using relevant performance indicators. Indicators used are the Index of Industrial Production, the financial performance of listed companies in the private corporate sector, air and rail traffic, etc. These are largely from the organised sector.

In brief, the quarterly estimates are largely based on limited organised sector data (but for agriculture). The limited organised sector data is used to proxy the unorganised sector. This washes out the decline in the unorganised sector and the economy appears to be doing well.

This is not the only lacuna. Projections from the previous year’s data are used. If the previous year’s estimates were in error, that would impact the current year’s estimates.

If the economy suffers a shock, a projection from the previous (normal) year would overstate growth. The methodology would require a change. That would be true for the pandemic and the accomopanying lockdown, and demonetisation. The impact of the shock would continue to affect the estimates, based on projections from the previous year, for several years.

Also read: Is the decline in multidimensional poverty in India real?

Consumption data from the recently released household consumer survey shows per capita rural and urban consumption as ₹3,773 and ₹6,459 per month. But GDP data gives a figure of ₹9,896. This is a result of over-estimating the production of the unorganised sector which produces a large part of the consumption goods.

Thus, even when the economy is not performing well, the method of estimation of GDP will show good growth, as has happened with Q3 of the financial year 2023–24.

Conclusion

The above points to why even if parts of the economy are languishing, GDP data shows the opposite. This is not just to do with the large gap between GDP and Gross Value Added.

Even when the economy is not performing well, the method of estimation of GDP will show good growth, as has happened with Q3 of the financial year 2023–24.

There is evidence of growing disparity in the economy since the unorganised sector is declining while the organised sector is growing— the K-shaped pattern of growth. The recently released Consumption Survey data also points to this.

Clearly, the method of estimating the quarterly GDP based largely on organised sector data overestimates growth, especially when there is a shock to the economy.

At best, the recently released GDP data represents agriculture and the organised sector but not the entire economy.