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Brexit and it’s possible impact on India

BREXIT is an abbreviation of “British exit”, which refers to the June 23, 2016 referendum by British voters to exit the European Union.

brexit-1

Origin of the European Union

After World War II, an important development in European integration was the creation of the European Coal and Steel Community, ECSC, formally established by the Treaty of Paris in 1951. The treaty was signed by Belgium, France, Western Germany, Italy, The Netherlands, and Luxembourg, who are also the founding states of what now is the European Union (EU). The idea behind the creation of the coal and steel community was to integrate the coal and steel industries of the participating states, and notably of two former core enemies, Germany and France.
So the core idea was to move forward after World War II, and to start creating the foundations for what today is the European Union.

Reasons to quit

The EU threatens British sovereignty:

Over the past few decades, a series of EU treaties have shifted a growing amount of power from individual member states to the central EU bureaucracy in Brussels. On subjects where the EU has been granted authority — like competition policy, agriculture, and copyright and patent law — EU rules override national laws.

The EU is imposing burdensome regulations:

Sometimes these EU rules sound simply nonsense, like the rule that you can’t recycle a teabag, or that children under eight cannot blow up balloons, or the limits on the power of vacuum cleaners.

The EU was a good idea, but the euro is a disaster:

The global recession that began in 2008 was bad around the world, but it was much worse in countries that had adopted the euro. The unemployment rate shot up above 20 percent in countries like Greece and Spain, triggering a massive debt crisis. UK chose not to join the common currency, so there’s little danger of the euro directly influencing the British economy. But the euro’s performance served extra reason to Brexit supporters.

The EU allows too many immigrants:

EU law guarantees that citizens of one EU country have the right to travel, live, and take jobs in other EU countries.
The eurozone has struggled economically, and workers from eurozone countries such as Ireland, Italy, Lithuania and any other have flocked to the UK in search of work. In recent years, many Eastern Europeans have come to Britain for jobs, this resulted in less opportunites to the native working population.

The UK could keep the money it currently sends to the EU:

The EU does not directly collect taxes, but member states make an annual contribution to the central EU budget. Currently, the UK’s contribution is worth about £13 billion ($19 billion) per year.

While much of this money is spent on services in the UK, Brexit supporters still argue that it would be better for the UK to simply keep the money and have Parliament decide how to spend it.

Impact on India

Overall impact on India would be low as the flows of trade and investment between these nations will continue as it was. However following impacts in different aspects can be assumed.

Presently, the impact on migration will be a case of assumptions, it is believed that India may benefit from it, as labour does come at a lower cost unlike that from the EU. But, one cannot be too certain.

Trade is expected to go down after Brexit, as European Union is among the largest trade partner of India, embracing 13% of its trade. Even if trade with Britain increases, there is no certainty that a UK outside of Europe would drive bilateral trade.

The chances of investors departing would be more from emerging market currencies and euro/pound investments, which in turn will lead investors to store their funds in safe haven of dollar and US treasury, strengthening dollar against other currencies.

As EU is among the largest trading partner to India, probable depreciation in Rupee/Dollar could be expected. However, as dollar is the India’s local currency’s primary anchor, there will be some element of volatility in these markets.

References: 

www.investopedia.com
www.telegraph.co.uk
www.dnaindia.com

June 30, 2016

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