BREXIT & It’s Impact on India

“We are in the midst of an age of competitive devaluation and beggar-thy-neighbor policy. When elephants fight, the grass suffers.”-Mr. Raghuram Rajan For a very long period now there has been a fear of BREXIT. BREXIT in simple terms refers to Britain holding a referendum to decide whether it wants to continue membership under EU or not. The referendum was held on 23rd June 2016 and 52% voted for BREXIT whereas 48% voted for remaining within the EU. Although the referendum is not binding on the Britain’s parliament, the PM has announced that he has to respect the will of the people. Background

  • Post the Second World War, two countries Germany and France came together and decided that they wanted to establish trade relations as it would prevent their countries waging war against each other in the future.
  • The result was the 6 members (France, Germany, Italy, Belgium, Luxemburg and Netherlands) signed a deal covering resources like coal and steel.
  • In 1957 a treaty was signed in Rome (Europe)-European Economic Community (EEC) or Common Market
  • This has expanded and now has 28 member states.
  • There are four key institutions in the EU
    • European Commission- based at Brussels (Belgium), it consists of 28 commissioners (1 each from the member states, it administers the money spent and also formulates new laws
    • European Parliament- based at Brussels (Belgium), there are 751 members in the parliament, their function is to discuss and vote all the laws that have been proposed by EC
    • Council of European Union- based at Brussels (Belgium), It is where the government of each member country will have their say and hold discussions as to in what political direction should the EU be moving. Usually the deals are signed at the end of the discussions
    • European Court of Justice- based at Luxembourg. The function is to make sure that all the member states abide by the rules and regulations; will also come into picture if there are any frictions between the above three institutions.

  The Great Britain

  • It became a member country in 1973 and held the first referendum in regards to EU in 1975 (when they voted to stay in EU)

 

A referendum is basically a vote in which everyone of voting age takes part specifying –yes or no- answer to a question. Whichever side gets the majority of votes (of the total votes cast) is considered to be a winner.

 

  • Today the arguments in favor of BREXIT have increased because the representatives of BRITAIN are of the opinion that the EU over the decades has undergone a lot of transformation and has taken away the powers of Britain to decide on various matters
  • Some of the reasons for Britain to seek BREXIT are
    • Sovereignty- Although the British Government has an influence in some form in selecting the members to the European Commission, the members are neither under the influence nor accountable to the British Parliament and some of the policy decisions such as competition policy, agriculture, copyright and patent law go against the interests of Britain (these laws override the domestic laws)
    • Regulations are becoming burden- some of the regulations such as –limits on the power of vacuum cleaners, non-recycling of tea bags etc have often been seen as a burden on some of the conservatives in Britain. As per Michel Gove these regulations have cost Britain to the tune of £3 billion per year.
    • Euro the disaster- although Euro is the common currency for EU, Britain still uses pound as its currency. Now if the euro had to be successful then it would have required greater fiscal and monetary integration and this cannot be achieved unless all the member states have the same currency. The problem with euro as a common currency has also been exposed wherein on one side countries such as Greece and Spain are suffering from high debt, high unemployment, whereas other countries such as Germany are enjoying higher growth. Now in this situation the ECB (European Central Bank) is in dilemma whether to go for fiscal stimulus or prudence.
    • Immigration- Britain is not a signatory of Schengen Border free zone (allows easy travel across Europe), over the last ten years there has been a quite an opposition towards migration into the country from within the EU and its effects on wages and public services especially post 2008 recession wherein the workers from Lithuania, Poland, Italy, Romania etc have moved to Britain

  The “leave” proponents show the example of Canada and Australia which follow a point based immigration system and say Britain could adopt such measure rather than being forced to follow the laws laid down by EU  

Point based immigration system-under this the potential migrants are awarded points based on factors such as language, job skills, education and age. In simple words those who can contribute to the economy once they allowed to immigrate will be rated higher

 

  • Finance- although EU doesn’t have the powers to collect the taxes from the people directly, it mandates member countries to make payments. In case of Britain it comes around $19 bn per year or $300/person. Although the funds are again used on Britain, the BREXIT supporters say, the money could be used more efficiently, if Britain is out of EU
  • EU pro or anti corporate?- there has been a mixed response to this question. The far left in Britain argues that EU is too pro-corporate and the far right argues the vice versa

  Any measures taken to prevent call for BREXIT- In the beginning of 2016, David Cameroon (Britain’s PM) sought an agreement to change the terms of Britain’s membership, the deal was conditioned on BREXIT outcome to remain within EU.   Some of the points under the agreement are

a) Migrant workers will still be able to send child benefit payments back to their home country ( Mr. Cameron had wanted this abolished), but the payments will be set at a level reflecting the cost of living in their home country rather than the full UK rate

b) New migrant arrivals will not be able to claim tax credits and other welfare payments straight away – but will gradually will gain the right to more benefits. (he had promised a blanket ban)

c) Britain will retain pound also an assurance from EU that it will not be discriminated as it has a different currency and any money of Britain used to bail out the nations in crisis (in Euro Zone) will be reimbursed.

d) Britain’s large financial service industry will be protected from imposition of euro zone regulations

e) It will be incorporated in an EU treaty change that Britain will not be a part of “ever closer union” (one of the core principles of EU).

f) Red card system- If 55% of national EU parliaments object to a piece of legislation then the legislation has to be rethought (the critics say it is not clear if this would ever be used in practice).

  The critics pointed out that what was proposed under the agreements made no change and fell short of what he had promised when he had announced his plan for referendum   Why Scotland voted in favor of staying- as per the numbers it was found that 62% of the voters in Scotland chose to remain within EU. The reasons for their decision are

a) EU is a common market which not only allows the movement of four freedoms (finance, goods, services and labour) but also provides a huge market for Scotland to export

b) With Scotland being a part of EU, the trade barriers will be eliminated to a great extent (both for exports from and imports into Scotland)

c) Scotland has been able in attracting foreign investments as a result of which there has been employment creation, contribution to growth etc (in 2013, 40% of the companies in Scotland were foreign owned which employed more than 3 lakh workers)

d) When the EU negotiates a deal with other countries (has trade deals with more than 50 countries), it is automatically applicable to Scotland but with BREXIT, Scotland may be forced to sign all the deals again with the trade partners (the advantages may be lost)

e) As a member of EU, it will get access to various development funds (Regional Social Funding, Rural Development Programme etc)

f) With BREXIT, the citizens of Scotland may lose the freedom of movement i.e. to move freely in Europe

g) In a nutshell Scotland is much safer than remaining within rather than moving out of EU. (on moving out it will face security/terrorist threats, climate change, trade barriers etc all alone)

Global impact of BREXIT

a) The globalization has increased correlation between the countries. If there is a disturbance in one country then there will be impact on other countries

b) The BREXIT would affect the global growth

c) It is a big blow when more countries are moving towards multilateral trade arrangements

d) It will further alienate the investors and the capital will move from risky markets to more safer havens

e) The major exporting countries such as China and India would get affected as EU is one of the major export market

f) As per one of the estimates BREXIT would lead to 25% reduction in imports by Britain

g) BREXIT was a referendum which rode on many components-anti immigration, increasing protectionism etc. with this these sentiments are going to increase in other parts as well

h) Britain was one of the major financial and military contributors to the EU but with BREXIT, the financial of EU will suffer.

i) With BREXIT there are calls for NEXIT(Netherlands exit), Italeave (Italy leaving) and FREXIT (France Exit) etc

j) With BREXIT there have been demands for Scotland exiting from UK

Impact of BREXIT on India

a) India is the third largest source of FDI for UK. There are more than 800 Indian companies in Britain. With BREXIT, the business of these companies will be affected. With the fluctuation in exchange rates, the bottom line of these companies will suffer.

b) Although the pro exit supporters have claimed that the Britain can sign bilateral agreements free of restrictions any restrictions imposed by EU now, but the experience has shown that it takes a long period to negotiate and sign a new atrade agreement (eg- India and Japan took around 5 years to discuss and conclude CEPA)

c) India considers Britain as a gateway to EU, now with Britain opting out, India loses the advantage. Hence there is a need to get border free access

d) The FTA that India was negotiating with EU will not have the same impact (negotiations are going on since 2007). Now since Britain is out, India needs to work on an agreement separately with Britain

e) UK accounts for 17% of India’s IT exports. With BREXIT the overhead costs are going to increase. Nasscom in a report has said that the Indian IT industry is going to experience a negative influence in the short term. The depreciation of pound also will have an effect on the returns of these companies.

f) One argument is that BREXIT could lead to movement of skilled labour from India to Britain but this might be a misplaced argument as immigration into Britain from other EU countries was one of the reasons for BREXIT.

g) UK and EU both account for 23.7% of rupee’s effective exchange rate. BREXIT would lead to outflow of foreign portfolio investments and this may further weaken rupee. (on the positive side the central bank will try to maintain the liquidity in the market so the fear of fed hike of interest rate could be brought down)

h) Brexit is a blow to the commodity prices. As such because of lower global demand, slowdown in china and many European countries had led to drop in the prices of commodities and this will be further accentuated because of BREXIT.

i) The sectors that would get affected are-auto and auto components; IT sector, metals, oil, aviation, pharmaceuticals etc

j) The central bank has to recaliberate the monetary policy so as to reduce the market volatility

  List of some of the companies that export to Europe and the drop in the share prices  

Company Share of revenues from EU Note
Tata motors 31% Almost half of these revenue come from UK
TCS 11% Almost 15% revenue from UK
Tata steel 52% Share prices dropped by  6.37% (on 24th June 2016)
Infosys 23% Share prices dropped by  1.41% (on 24th June 2016)
TechM 28.5% Share prices dropped by  4.7% (on 24th June 2016)

  What could be done in India

a) The central bank has to recalibarate its monetary policy so as to account for the volatility that will be craeted in the market

b) SEBI and the stock markets will have to be very watchful in not allowing any manipulators from taking undue advantage. Brokers, portfolio managers and other market intermediaries have to be prevented from any attempts to lure small retail investors into promises of hefty gains from the futures and options trading, especially in banking stocks and indices, the official added.

c) Since Brexit makes the revival of global growth more difficult, there is a need for Indian to focus more on the domestic demand so that the impact is minimized

d) The strong forex reserves position has to be maintained so that any fluctuations in the exchange rate of rupee can be limited

e) The companies that have business in Europe (especially in UK and it pertains more to the IT industry) have to rework their strategy.

What most of the experts agree upon is the effect of BREXIT on the global economy coupled with weakening/depreciating currencies of various countries will make it more harder for recovery and in case of India, thanks to the stability in the fundamentals of domestic economy and huge forex reserves position, the effect of BREXIT can be minimized, but nevertheless the effect is going to be felt in short term. Approach to UPSC GS 3- International economics, trade relations Questions

  1. The BREXIT makes the global economic recovery more difficult-discuss
  2. In the light of recent BREXIT what will be the impact on the Indian economy
  3. When elephants fight, grass suffers-discuss the statement in the light of BREXIT

To get a quick glimpse on BREXIT in the news for UPSC Current Affairs Click Here.