Editorial 1 : At the heart of Iran-Israel
Introduction: In the last few weeks, Israel and Iran have crossed all the red lines in their decades-long shadow war. In tit-for-tat retaliation, both countries directly attacked each other's assets.
Consequences of the Iran-Israel conflict
Speeding up Iran’s nuclear weapons programme
- Iran’s arial barrage was successfully stopped by combined efforts of US, UK, France, Jordan and Israel.
- The Israeli establishment is vowing to retaliate in equal measures.
- A possible Israeli attack on Iran will prompt Iran to develop a deterrence mechanism.
- Unfortunately, this most recent attack will only speed up Iran’s nuclear weapons programme, which is close to breakout time.
- The immediate question now is whether Iran will retaliate again or take a longer time to do so.
- The messages about this from Tehran have been mixed, with some claiming the most recent Israeli attack to be insignificant, and thus not worth responding to, while other officials have stated that there will be a massive response.
Khomeini’s ideology, and insecurity about America
- The government of the Islamic Republic of Iran is convinced that the United States, and its regional incarnation Israel, are determined to topple its regime.
- Iran’s leaders are scarred by the eight-year war with Iraq (1980-88) in which Iraq was backed by the Western powers and hundreds of thousands of Iranians were killed and maimed.
- One of Iran’s tools for projecting influence, and thus self-defence, is its revolutionary ideology, namely, the radical Islamist thought of Ayatollah Khomeini – the revolution’s leader — with its mixture of anti-imperialism, Islamic supremacism, and social justice.
- The regime has sought to defend itself by promoting Khomeini’s ideology throughout the Middle East, with the creation of loyal militias that would exert pressure through the threat of violence against both the US and Israel.
- Hezbollah in Lebanon is the prime example of this effort and forms the principal line of deterrence for protecting the Islamic state in Iran.
- With its 1,50,000 missiles aimed at Israel and its well-trained militia, Hezbollah constitutes a formidable threat to Israel.
- This model has been replicated by Iran with comparable militia forces in Syria, Iraq, Hamas in Palestine and the Houthis in Yemen.
- For example, the Houthis have shown the ability to block maritime shipping through the Red Sea, effectively blocking two choke points, the Bab al-Mandab and the Suez Canal, at Iran’s behest.
- With these militias, an arrogance about power has developed in Tehran, which today is on full display with its claims to want to destroy Israel and to expel the US from West Asia, thereby establishing its own hegemony over the region.
- In other words, Iran is a revisionist state that seeks to protect itself by dominating West Asia – disruption and instability of the existing order are its top priority because these serve its interests.
Palestine is the elephant in the room
- Like Iran, Israel’s present government is radical and revisionist.
- It seeks to eliminate the possibility of a future Palestinian state, thereby denying the people its right to self-determination.
- It wishes to create a greater Israel in the West Bank and engages in acts of repression of Palestinians and expropriation of their land.
- In so doing, Israel is allowing the Palestinian cause to fester, which generates radical and violent action, as we saw in the despicable acts on October, 7, 2023, but also in many earlier attacks on Israelis.
- Iran benefits from and encourages such deeds because it focuses attention on the injustice of Israel (and the West) towards the Palestinians, and this resonates deeply throughout the Arab and Islamic worlds and beyond.
- In Saudi Arabia, for example, a country that is ostensibly about to normalise relations with Israel, the war in Gaza has generated nearly two million individual donations for a total of $190 million – this effectively means that half the Saudi population has contributed to alleviate Palestinian suffering.
- For Israelis, however, all this support for the Palestinians amounts to a desire to see Israel destroyed, and this plays on their existential fears.
- The war in Gaza has made clear that the denial of Palestinian rights – and unless their right to a state is granted — there will be instability and violence in West Asia.
- Spoilers against peace and stability, like Iran and the right-wing government in Israel, will take advantage of this chaos to achieve their maximal goals.
- Desiring a different outcome, the US, Jordan, Egypt and the Arab Gulf states such as Saudi Arabia have been pleading with Israel to give binding commitments for the creation of a Palestinian state.
- Their proposal is to return to the two-state solution as envisaged by the 2002 Arab Peace Initiative.
- Yet, Israel’s existential trauma after October 7, the ideology of its right-wing government and the arrogance produced by its military superiority have so far led it to refuse any acknowledgment of a Palestinian state.
Conclusion: Open conflict between Iran and Israel makes it clear that without a resolution to Palestine's statehood, there will be no peace in West Asia.
Editorial 2 : Reviving the cycle
Introduction: An issue that has been nagging policymakers is the revival of the investment cycle. While the central government has been meeting its target on capex in the last few years, the trajectory in the case of the private sector and state governments is less certain.
The state of gross fixed capital formation
- At the aggregate level, the gross fixed capital formation provides some clues to what is happening.
- The good news is that the investment rate has improved from 30.8 per cent in 2022-23 to 31.3 per cent in 2023-24.
- This is encouraging given that this ratio had gone down to 27.2 per cent in 2020-21.
- In 2022-23, 59 per cent of this was in construction of “dwellings”.
- The boost to housing provided by the government has resulted in this increase in capital formation which is good for the economy.
- But, considering that the share of plant and machinery had come down from 36 per cent in 2017-18 to 30.7 per cent in 2022-23, at the aggregate level, there is still some distance to traverse.
The trends in private-sector investment
- On the trends in private sector investment, one source of data is the CMIE’s data on new investment announcements.
- In 2023-24, it had touched Rs 27.1 lakh crore, which, though is lower than the Rs 39 lakh crore worth of announcements in 2022-23, was the second highest in the last decade.
- This, of course, refers only to intentions which may not necessarily materialise.
- But, clearly, there is some promise insofar as companies are looking towards investing more.
- Of the total intentions, 85 per cent came from the private sector, of which 11 per cent is from foreign companies.
- There are also other indications of activity.
- Debt issuances were at a high of Rs 11.1 lakh crore in 2023-24, as against Rs 9.64 lakh crore in 2022-23.
- However, 71 per cent of this amount was raised by the financial services sector.
The share of investments in different sectors
1. Power sector
- The CMIE data throws some light here.
- Of the Rs 27.1 lakh crore of investment announcements, the highest share was accounted for by the power sector.
- One possibility here is the thrust being given to renewables is leading to a sizable expansion in capacity.
- The Production Linked Investment (PLI) scheme of the government which covers solar panels, etc., could have been a trigger for greater investments.
2. Transport Sector
- The second, most important sector was transport services.
- Here, airlines have contributed to the increase in investment intentions — the two large airlines companies have made announcements which point towards a dramatic expansion in their fleet over the coming years.
- But as these will be met through imports, the effects of backward linkages to domestic industry will be missing, even as they improve airline traffic and generate value addition for the forward-linkage segments such as airports and related services.
3. Miscellaneous sectors
- The other industries which have made significant announcements are chemicals, machinery, metals and auto.
Overall investment trends among above mentioned sectors
- Together, these six industries account for 90-92 per cent of all announcements.
- The significant aspect of this list is that there are no consumer-oriented industries, even those in the electronics space where the PLI scheme has been a game changer.
- Based on these trends, one could argue that even as the private investment cycle has picked up, it is not yet broad based.
- It is restricted more to industries which have government capex as front-loading investments.
- Hence, metals and machinery are doing well due to government spends on roads and railways.
Why are not companies in the consumer goods segment investing?
- The answer lies in the fact that there is still excess capacity in these industries.
- Typically, companies invest more in capital as demand rises and capacity utilisation rates come closer to the 80 per cent mark.
- But, demand has been affected over the last few years for a variety of reasons.
- First, more productive jobs, which substantially increase purchasing power, have not been created. While employment has increased in construction and logistics, the wages in these sectors are not that high. A number of large companies are going slow on hiring.
- Second, rural demand has not quite picked up due as farm production is not steady.
- Third, high inflation, which now adds up to 24 per cent in the last four years, has eroded the consumption power of households. High food inflation reduces room for discretionary spending. The pent-up demand had ebbed.
States are lagging in capex investments
- State governments have tended to slow down on their capex in order to meet their fiscal targets.
- In 2022-23, states spent Rs 6.08 lakh crore as against a revised estimate of Rs 7.32 lakh crore.
- Considering that put together capex by states accounts for a sizable share of overall investments in the economy, how states spend will also have a bearing on the investment cycle in the country.
Conclusion: Centre has been meeting its capex targets, but the trajectory of private sector and state governments is less certain.