Brexit - The Context and Future of India

The entire world for past couple of weeks is going haywire with respect to Queen’s Landing’s (Britain) exit from the European Union. Initially, I had no idea of what is this issue all about. What could possibly be the reason for Britain to exit from EU especially when the British Politicians, almost explicitly were absolutely against of such decision? How it could impact Britain in the short and as well as long-term and in the midst of such chaos, how this entire phenomenon will impact Indian Businesses?

So as usual, I started my journey for the quest of Understanding Brexit and its implication on both Britain, EU and India.

 Let’s understand the context of Brexit first.

On 23rd of June 2016, the British voters voted for Britain’s exit from the European Union which in turn meant the biggest loss for EU as it lost one of its largest members. On 1st August 1961 Britain first, applied to join EU, formerly known as European Economic Community or EEC but despite the huge opposition of former French President Charles De Gaulle Britain got its membership from 1st January 1973. Due to this long relationship with the European community Britain’s economy and legal system is deeply integrated with the rest of the continent. Disrupting that relationship will obviously result in grave economic and social disordering.

Here we need to understand that the British exit from EU will cost Britain more than the entire EU. 2008 Financial Crisis and more recently the Syrian Refuge Crisis has put EU’s already dilapidated political system in tension. One major risk that may haunt EU in general in the future is the fact that this exit of Britain may trigger similar thoughts among other big players in the continent.

Now let’s see why Britain would want to exit EU after such hard-won entrance and long relationship.

A fraction of Brits has always been a bit wary of a deeper economic relationship with the rest of the continent and the 2008 Financial Crisis gave them a fair chance to spread their apprehensions on others. Despite joining EU in 1973, Britain never gave full control of its institutions to the EU, unlike other members which can be exemplified by the fact that Britain never accepted common Currency Euro. Britain’s Euroskepticism got mileage after the poor performance of European Economies after 2008 Crisis.

Arguments in Britain in support of the exit are many but the two most common arguments are

1. Liberal Rules in EU for Migration
2. EU Economic Regulations

According to some opinions, EU is undemocratic and unaccountable to the public but despite everything the issue of migration make Brits the touchiest. As part of EU, they have to allow migrants from less affluent economies like Poland or Portugal and there’s absolutely nothing that the Brits can do to control it.

But people like David Cameron, who supported the stay of Britain in EU, the argument was fairly economical. The long-term leverage that UK experiences by staying in EU by providing World’s largest Free-Trade zone will be replaced by short-term pains. One also can’t really deny that EU Membership amplifies UK’s world influence.

Though, like Norway, a non-member state, Brits can also strike a deal with the EU which can allow Brit Businesses to have the same kind of privileges that they enjoyed before the exit but here the issue will be of ego rather than rational senses, under the influence of which, EU might not be so forgiving to the Brits. Another factor would be that Norway, despite being a non-member state, abides by most of the EU rules which Brits will not agree to follow.

The vote for the decision of exit from the EU was rather close than someone would have anticipated. It had a margin of 52% to 48%. British pound took a huge hit worldwide due to the sudden panic in the market. It is nearly a 10% drop against the dollar, probably the biggest in decades. David Cameron also stated that he would leave the office by October this year which made the political situation of Britain more chaotic as no replacement for him has been announced yet.

On the other hand, one might not get an idea that after Thursday last week, Britain is suddenly not a part of EU anymore. It is. Britain is still a member of EU as of now. For it to exit from EU, it needs to invoke Article 50 of EU Constitution which gives both parties 2-year window to settle the exit terms, and if within that window both parties cannot find a common term then the membership automatically expires. That means a chaos altogether. A business which works both in Britain and EU, have to declare that they comply individually to both EU and British rules, residents of EU member states, residing in the UK, and British people residing in various EU states, has to update their immigration statuses etc.

To give you an example of the gravity of the situation, let’s take an example of AUDI. AUDI has now same safety and environmental standards throughout Europe and Britain but after the formal exit, AUDI will have to comply with different sets of standards for UK and Europe individually. This will be repeated in each and every industry.

Critics also say that by 2030, UK’s economy will shrink anywhere between 4 to 8 percent compared to what it is today.

Brexit poses another challenge for Britain as well. Britain comprises of countries, England, Wales, Scotland and Northern Ireland. If they vote against EU today, who knows tomorrow they will vote against “United” Kingdom itself.

Though Brexit is more directly affects Britain and EU but as a significant ally, US can’t be kept untouched too. Stability in EU is in the good interest of US and obviously such tension in the region will be a cause of worry for the US, as far as geopolitics is concerned.

Now coming to India, the effect can cause compound worries after Rajan announced not to run for the second term in the office. Both Manufacturing and IT industry could take a hit in FY’17. If Bank of America Merrill Lynch is to believe then Brexit may trigger a recession risk which will hugely affect Indian IT industry which may be hurt by 10-15% revenue growth for the British businesses of Indian IT giants. % large Indian IT companies including TCS, Infosys, HCL has 8-15% revenue exposure to the Pound which will be a major cause of worry for them. The worst is that Britain’s exit from EU may have a cascading effect.

Currency impact cannot be totally ignored also despite the anchor for INR is US Dollar, which will be amplified by the Global Market Volatility.

Britain is India’s 3rd largest Investor with FDI of $22.7 Billion from 2000 which accounts to total 8% of the total FDI inflows. On the other hand, India is the third largest investor in the UK in terms of projects. Indian companies are growing at the rate of nearly 10% in a year in the UK.

From an organizational perspective, companies which are solely focussing on UK’s domestic market will be relieved compare to those which are using the UK as a base for accessing other European markets. Those companies need to rethink their plans.