Brexit: Every cloud has a silver lining
The world is reeling from the effects of Britain’s vote to leave the EU, but India may be able to take advantage of the situation
Dhruba Basu Delhi
The historic Brexit referendum was not only a crack in what Ian Bremmer referred to as ‘the historic concord…[that] made the West safe and rich’, but also a thunderclap for global finance. The pound plummetted by an unprecedented 10% against the dollar the day after the referendum and more than $3 trillion of stocks were wiped off worldwide in a rabid sellout that has been described as an exaggerated and unnecessary response. The Dow Jones Industrial Average fell by over 600 points in the U.S. Japan even brought trading to a halt for 10 minutes after the Nikkei index fell by 8%.
It is expected that volatility will be the name of the game until the dust settles on negotiations about the future of Britain’s relationship with the EU and consequently the rest of the world, negotiations that may take up to two years, beginning after Article 50 of the Maastricht Treaty is triggered to officially notify the European Council of the UK’s intention to leave the EU. This has of course not happened yet and will in all probability not happen before the end of the year. British Prime Minister David Cameron’s announcement of his intention to step down from his post leaves the handling of the real Brexit, which will reshape Britain’s relationship with much of the rest of Europe and overhaul its trade, tariff and migration policies, to his successor. In the same announcement, Cameron made it clear that the succession on which everything hinges will take at the very least until October, when the Conservative Party will hold its annual conference in Birmingham.
Since the initial spiral, however, sanity has returned. The indices in London (FTSE 100), Frankfurt (DAX), Paris (CAC), New York (DoW, S&P 500) and Tokyo (Nikkei 225) all showed sustained gains after June 28, with investors hoping for generous stimulus packages to offset the repercussions of the cataclysmic vote. The economies of east Asia led the way on this front. South Korea announced a budgetary supplement of 10 trillion won ($8.44 billion) and Japan has stressed the importance of providing assistance to its small businesses. China, showing signs of recovery from its market crash last year, has come out of the storm relatively unscathed. Some analysts have recommended that it save any stimulus it may be contemplating for an even rainier day.
Indian businesses have a strong presence in the UK, with companies like Tata, Tech Mahindra and nearly 800 others generating upwards of $25 billion a year from operations there. The bad news is, with the uniform laws and regulations of the EU gone, companies will not be able to maintain a single headquarters for all of Europe. More offices will have to be set up in other European countries
Amidst all the upheavals, there are several reasons for India, which has been described as among the more stable economies of the world, to feel relatively secure as well. According to international ratings company CRISIL, no great dent is forthcoming in the country’s exports, with only a few sectors (automobile components, textile, metal, IT) in the line of fire. It is true that exports have declined for the 16th consecutive month and are down 16% from last year, but this is only in line with global trends. The impact report also projects greater foreign interest in Indian bonds in the short term due to yields remaining stable, as compared to seismic fluctuations and record lows in major economies.
Indian businesses have a strong presence in the UK, with companies like Tata, Tech Mahindra and nearly 800 others generating upwards of $25 billion a year from operations there. The bad news is, with the uniform laws and regulations of the EU gone, companies will not be able to maintain a single headquarters for all of Europe. More offices will have to be set up in other European countries. The good news is, the importance of London has not greatly diminished. It is still the de facto financial capital of Europe and English is still the most widely spoken language in the world. Being headquartered there is not likely to turn into an inconvenience anytime soon.
What will prove inconvenient is the need for the UK to now initiate Free Trade Agreement (FTA) negotiations with each of the 27 countries still in the EU. To add to this, the US, Britain’s biggest market after the EU, long ago announced its lack of interest in bilateral FTAs. Since Britain accounts for about 16% of the EU market, its exit leaves the Transatlantic Trade & Investment Pact (TTIP) between the US and the EU scuppered. One possible result of this disarray could be a dramatic revival of trade relations between the island nation and its former colonies, a situation that India, among the three largest investors in the UK in recent times, is well-placed to take advantage of. The volume of trade between the two stood at $14 billion in 2015-16.
The trade tensions between India and the EU could also ease up, paving the way for a free trade agreement to finally materialise between the two. This hinges on the expectation of greater flexibility on the latter’s part, especially in view of the Indian government’s recent decision to throw open food retail, airlines and private security to higher FDI, up to 100% in many sectors. Things have changed considerably since 2013, when the talks were stalled due to an inability to reach a compromise to address the demands of both parties. India has unilaterally undertaken several reforms to increase and simplify overseas investments. It was announced by the CII earlier this year that Indian industry is open to the idea of greater market access to European Union firms in areas such as automobiles, wines and spirits. Perhaps the coming months will see these developments and declarations being capitalised on.
Another angle that cannot be ignored is that of Russia, the only major power to have welcomed the referendum result. At a time when Anglo-Russian bilateral relations are virtually non-existent over Russia’s actions and policies vis-a-vis Ukraine, Crimea and Syria, an EU minus the UK might take some of the pressure off Moscow for reasons of economic pragmatism. A more relaxed Russia is always better for India because co-operation between the two countries in areas like defence, nuclear energy and space is in less danger of being compromised. Overtures for an arms deal or more investment in Russian energy would go a long way in solidifying our relationship with our traditional ally.
At the same time, it must be kept in mind that NATO’s response to the political and economic crisis that the EU finds itself in could well be to come together in a more pronounced manner, which would not bode well for Russia, which has found itself more and more isolated as a result of NATO expansion in eastern Europe. What the US and its European allies choose to do will be revealed at the NATO summit in Warsaw, due to begin on July 8.
It goes without saying that China will reap rich dividends from the opportunities created by Brexit, with British Chancellor of the Exchequer George Osborne already having announced intentions of cosying up to the cash-rich Asian economy, whose interests Britain has by and large protected in Europe. Should India ‘do the needful’ at this juncture too, the prospect of an Asian footprint on the 21st century does not seem quite so farfetched even in these turbulent times.