BREXIT – IMPACTS

The people of Britain voted for a British exit, or Brexit, from the EU in a historic​ ​referendum. The vote to
leave the EU will trigger a two-year ‘withdrawal process’ which will determine the future of U.K.’s
relationship with the European Union. Under Article 50 of the Lisbon Treaty, the formal negotiation
process for withdrawal shall take place within a two-year period.

Impact on India
While capital markets across the globe were quick to react and bounce back, long-term ramifications of
this verdict on geopolitics and geoeconomics will unfold in the months to come. The decision certainly
does not bode well for the world economy that is still grappling in the clutches of recession and
austerity. However, this verdict may have positive implications for India, especially in economic and
trade ties, according to experts.

-​Imports and Exports

The immediate, short-term effect must be negative, with its severity depending on the extent to which
the major economies in Europe are affected. If Brexit results in a sharp contraction in these economies,
then their demand for Indian exports will shrink. These effects will smoothen out over time once the
European economies recover. This process will be faster for those Indian companies which compete
with British manufacturers in European markets since the British companies can no longer treat
continental Europe as a “home market” in so far as import taxes are concerned.

Moreover, the devaluation of the pound implies that imports will be costlier in Britain and this will be
another source of decrease in imports over and above that caused by a shrinking economy. Since Britain
is an important destination for Indian exporters, this will also have a non-negligible impact on Indian
exports. Indian firms which use Britain as a base for their European operations will now experience an
increase in trading costs since they will face increased tariff barriers once Britain formally leaves the EU.

-​Indian Businesses

While the UK accounted for 15% of India’s total merchandise trade last year, its share has been
declining. Trade in services has also eased, with UK service imports from India slowing and making up
only about 2% of the total, much lower than with the US and Asia. In this context, a Brexit could
potentially open up new trading opportunities with Britain.

India invests more in the UK than in the rest of Europe combined, emerging as the UK's 3​rd​ largest FDI
investor. Access to European markets is therefore a key driver for Indian companies coming to the UK.
Anything that lessens this attractiveness may have a bearing on future investment decisions. It is, thus,
important also to ensure continued border-free access to the rest of Europe for the many hundreds of
existing Indian firms that have base in the UK.

Indian businesses in the UK that tap into the European free market, especially many Indian
pharmaceutical companies, may face challenges in the medium term. Exports to the UK are expected to
face challenges in the short term owing to confusions in procedures, now that EU processes may not
apply to UK any longer.

Depending on the trade negotiations the UK has with the EU, the Indian firms will have to rethink their
strategy. A third of the​ ​Indian investment in the UK​ ​is in the IT and telecom sector. With Britain's exit, a
requirement for separate headquarters for Europe and Britain might crop up. Hence, if these have to
navigate with the other firms to the continent, the Indian investment would be diverted to the EU.
However, with Britain freed of strict EU regulations, one can only hope that it will be easier for India to
engage in business with the fifth-largest economy in the world.

-Indian Economy

On the positive side the verdict provides India an opportunity to establish new trade ties with UK,
unhinged by the challenges posed in the India-EU BTIA.

Moreover, now is the time for India to enter into an FTA with the UK. A depreciating pound also means
cheaper British imports into India, especially in the field of food, technology, fine liquor and capital
machinery.

Also,​ ​in the longer run, Brexit could help strengthen India-UK economic relationship as the UK seeks to
compensate for loss of preferential access to EU markets.

Situation of the Indian economy is also such that it is calibrating and making assessment of the situation.
India is resilient to any financial shocks that may arise due to a credit crunch in the global market. ​With
comfortable foreign exchange reserves, inflation coming down and structural reforms on path, India will
be able to deal with all eventualities, as it did after stocks markets and rupee dropped on results from
UK referendum on EU membership showed the “leave” camp doing better.

-Immigration and Foreign Education

Brexit may have the potential to affect immigration negatively, ​through "work and study routes" from
non-EU nations, as the nation has done in a move expected to make it difficult for British firms to hire
professionals from countries like India.​

The most worrying issue is that this exit might prompt other nations to go ahead with shifting the power
back to national governments in areas like immigration, while maintaining the trading union.
On the contrary, the impact of Brexit on higher education opportunities for Indian students appears
beneficial. A cheaper pound will benefit Indian students seeking education in the UK. While on the other
hand, there is also an off chance that it could become more expensive if they are charged international
student rates instead of that, or if they are not eligible for EU funding and loans.

-What India must do?

Views of ​C. Raja Mohan:

● New Delhi must immediately signal strong solidarity with Britain and Europe, both of whom are
likely to be weakened in the near term. Finding ways to rejuvenate the economic and political
ties to both should now be at the top of India’s diplomatic agenda.

● If the fracturing of Europe makes India’s security environment a lot more uncertain than it was
before the Brexit vote, strengthening strategic partnerships with Britain and Europe must be
central to any new Indian effort to shape the Eurasian balance of power.

● New Delhi, which has much goodwill among the Brexiteers, must make its move sooner than
later. On the economic front, India must signal readiness to negotiate a quick free trade
agreement with Britain.

● India must match economic reassurance with a political exploration of the possibilities for
strengthening the Commonwealth as a political institution.

● As Germany and France struggle to deal with the political shock waves from the British vote and
fend off potential copycats elsewhere in Europe, New Delhi must reach out to Berlin and Paris,
who have been staunch supporters of India’s political aspirations in recent years. An early
conclusion of a free trade agreement with Europe would be a strong vote of confidence from
India.