Oh man do I get excited when writers talk about the impact of psychology on a situation. In this instance Kakar is wondering whether psychology or politics is the true factor in determining identity. In the past, identity has been explained in terms of "competition between elites for political power and economic resources." (149) This competition results in a winner and a loser. Both parties know their place and can carry on their life with an identity of a winner or of a loser. But cultural identity is not a fixed status as the battle for power and resources, land and community continues to shape the identities of many individuals who are caught in the balance. But that is not the entire story. "Cultural identity... is an unconscious human acquirement which becomes consciously salient only when there is a perceived threat to its integrity." (150) In other words, it is a human need to have a defined identity and that identity, while unconscious before, come to the surface when someone questions whether that identity is who you truly are. That is the psychology aspect. Are you defined by whether you are a "winner" or a "loser," or are you defined by how you stand up to perceived threats against your claimed identity?
Sorry to say that this question does not have a kind answer. Both psychology and politics play a role in determining identity and only using one to describe identity leaves much unexplained. The only way to understand identity is to combine the two. "Thus, without the psychological perspective to complement the political-economic one, we will have only a partial and thus dangerously inadequate understanding of the reason for the success of political formations based on religious mobilization." (152)
I think this type of understanding should be accepted more often. In many cases, its not either/or but rather, it might be both/and. Sometimes you need both.
Chocolate and Peanut Butter are great separate in satisfying basic needs of hunger but in combination, they provide nourishment and life fulfillment.