Brexit: India need not be worried; expect only short-term impact

Today (23 June) is a defining day more for the concept of ‘economic integration’ as Britain will decide on whether or not it will remain with the EU. What is creditable here is that the decision is not taken by David Cameron’s government but by the people which makes it compelling. The PM is personally against an exit. But British democracy allows members of the party in power to vote whichever way they choose. [caption id=“attachment_2851678” align=“alignleft” width=“380”]  Reuters[/caption] What exactly are the issues here? Britain is a part of the 28 countries which got together to create a common market. This means that there is free movement of goods and services which includes labour too. The union as a group negotiates with other countries various deals and hence in a way there are common programmes for all. Intuitively it can be seen that this union becomes one of the largest markets with GDP being comparable to USA and China. It is different from the euro currency and euro zone which is a subset of the EU where there is also a common currency and agreed rules of the game such as fiscal deficit, debt, inflation. Britain is part of the EU and not euro and hence has its own monetary policy unlike the euro zone where the ECB sets the rules for all member countries. The irksome issues which have come to the fore pertain to the restrictive nature of the EU agreement where Britain feels constrained to go with the tide. This affects the sovereignty of the nation as the autonomy in policy formulation gets diluted to a large extent. Add to this the opposition to free migration from the EU nations and there is a scare of jobs being lost especially in these trying conditions. In the last few months refugees from Syria have been flooding the European nations which have become pain points. Further it has been argued by protagonists of Brexit that the annual fees paid to the EU are not worth the cost and hence a withdrawal will make little difference. A more flexible group within those who favour an exit has argued for preferential treatment as a way out of this imbroglio. This, ,however is not acceptable to the EU. There are two scenarios possible. The first is that there is an exit. Depending on how the market perceives the situation in terms of winners and losers, the sterling-euro relation would get distorted. Further based on the perception on the weight of this relation, it could be a permanent or temporary change. Second, the trade and investment terms between these two entities have to be renegotiated. The quantum of trade between the two is substantial and this makes the situation tricky. Interestingly, trade with the EU accounts for around 45% of the total for Britain. Several analysts feel that this may not change significantly as they need each other. Hence there could be marginal tinkering with rates just like it happens with countries not a part of this union. Norway and Switzerland are two such examples which though are not a part are still equal partners. Third, the immigration rules will kick in right away and the free flow of labour will be aborted. Four, the financial markets could get volatile as the flow of funds could get disrupted. This will affect the major players like banks. However, this may not be serious as there would anyway be a two-year window for this transition. Fifth, companies that do business outside Britain in the EU could face challenges as the rules of engagement which the EU has with other nations could be made applicable. The second outcome is that such an exit can create an incentive for others to also move out of the group or bargain for better terms. This will become a reality especially if it is observed in the next two years that there are no major repercussions on Britain with the gains outweighing the losses. This will put the idea of a common market into question. Therefore, the concept of economic integration between nations would come under a cloud. Where does India stand? We would be impacted only on the periphery as our relations with both Britain and EU are independent. To the extent that their common rules of engagement with the outside world applied for India, there could be some impact, though this will be only with UK and not EU. The rupee will get jittery through the euro sterling relationship, but given that the link is more with the dollar, this should be temporary. The same will hold for the stock markets which have been generally unaffected so far by the sentiment. Migration rules could become more favorable for India though this will require some time to work out. But at the micro level Indian companies with significant operations in Britain would get impacted depending on what proportion of the output gets sold in Europe. Britain has become a launching pad for several companies which are able to do business in Europe from here. Hence, a Brexit, which probably may not happen as the odds are more in favour of the retention of the status quo, will certainly have short term repercussions through volatile markets. The transition time will however provide the buffer to even out the edges. India need not be worried at the broader level, though the companies operating here will have to reconsider their options. This, in short, is an illustrative series of possible outcomes of a rather path-breaking event which will serve as templates for other such alliances and agreements. The author is chief economist, CARE Ratings. Views are personal