Understanding Brexit and Its impact on India

Q.1 What does Brexit mean?

Ans: It is a shorthand way of saying the UK leaving the EU – merging the words Britain and Exit to get Brexit.

Q.2 What is the European Union?

Ans:

♣ The European Union (EU) – is an economic and political partnership involving 28 European countries. It began after World War Two to foster economic co-operation, with the idea that countries which trade together were more likely to avoid going to war with each other.

♣ It has since grown to become a “single market” allowing goods and people to move around, basically as if the member states were one country. It has its own currency, the euro, which is used by 19 of the member countries, its own parliament and it now sets rules in a wide range of areas – including on the environment, transport, consumer rights and even things such as mobile phone charges.

Q.3 Why is Britain leaving the European Union?

Ans:

• A referendum – a vote in which nearly every one of voting age can take part – was held on 23 June 2016, to decide whether the UK should leave or remain in the EU. Leave won by 51.9% to 48.1%. The referendum turnout was 71.8%, with more than 30 million people voting.
• The poll produced data nearly half (49%) of leave voters said the biggest single reason for wanting to leave the EU was “the principle that decisions about the UK should be taken in the UK.
• Poll 33% of leave voters said the main reason was that leaving EU “offered the best chance for the UK to regain control over immigration and its own borders. This despite the fact that most migration to Britain was from outside the EU, and entirely under the remit and control of UK authorities.

Q.4 What happens next?

Ans: 

• Britain has managed to avoid crashing out of the EU without a deal by extending the negotiating period twice. This did mean it was forced to participate in the EU Parliament elections held on May 23. Britain can leave the EU before October 31 if it chooses to, either with a deal or without.
• Johnson, a hardline Brexit supporter, is prepared to leave the EU without a deal. If Britain leaves the EU without the ratification of a deal in what is known as ‘Hard Brexit’, there will be no two-year transition period. The U.K and the EU are meant to negotiate a new, long-term trade agreement during the transition period. In the absence of a deal, WTO rules will come into effect.
• Johnson may choose to hold talks with the opposition party to reach a compromise and win approval for May’s deal, but his campaign rhetoric indicates that he won’t take that path. He could also propose another round of votes on Brexit alternatives. MPs have voted twice on several options, but none were able to receive majority support.

Q.5 What Brexit means for India?

Ans: 

• UK’s decision to leave the European Union presents a potential upside for India in numerous ways. First, the massive selloff of the British pound that followed Brexit resulted in a roughly 8% decline of the currency relative to the Indian rupee. Financial experts predict the plunge to continue before the pound stabilizes, making it considerably less expensive for Indians to travel and study in the UK. The falling currency also presents cheaper real estate options for Indian citizens and companies seeking property in the UK’s notoriously expensive property market.

• Second, Brexit will likely compel London to seek a more robust trade relationship with New Delhi. Britain and India have been so far unable to reach a free trade agreement, with negotiations having become mired in the convoluted financial politics of the 28-nation EU bloc. Now unencumbered by the rest of the EU, the UK will aim to boost trade ties with India and other similarly situated countries. With India’s economy outperforming all of its counterparts, the erstwhile crown jewel of the British Empire appears to be shimmering brightly once again from London’s view.

• Third, and closely related, the financial and political uncertainty enveloping the EU makes the Indian stock market a more attractive destination for foreign investment. While Indian markets experienced a dip in the immediate aftermath of the referendum, they have generally recovered, particularly relatively to other global exchanges.

• Fourth, some analysts predict Brexit could lead to changes in UK immigration policies that would favor high-skilled workers from India. Divorced from the rest of Europe, the UK could potentially face a dearth of high-skilled EU workers if the movement of professionals from the continent is curbed. India could benefit from the possible shortfall. This would be ironic given the xenophobia, nativism and isolationist sentiment that presaged and perhaps even motivated the exit.

• Fifth, the U.S. Federal Reserve, along with the central banks of other major countries, will likely wait to raise interest rates to avoid affecting economic growth and exacerbating already precarious global markets. The delay should help maintain or even strengthen the influx of foreign investment to India as a result of relatively higher interest rates.

Although Brexit’s impact on India appears muted, serious risks remain, particularly for those sectors with significant exposure to the UK. Some of India’s most prominent companies, which employ over 100,000 workers in the UK and include the Tata Group and several high profiles IT firms, could be hardest hit. Now confronting the prospect of higher tariffs for their exports, the promulgation of new regulatory and immigration policies and a plummeting exchange rate, these companies have all indicated the need to review their massive operations in the UK given these new governing realities. Ultimately, prolonged uncertainty stemming from the EU referendum could undermine the resiliency India has demonstrated in response to Brexit thus far.