The ‘leave verdict’ in the UK’s Brexit referendum has shocked geopolitical observers across the world. 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.
“The forces of globalisation have certainly improved the standard of living and accelerated economic growth and development. Nevertheless they’ve also left deep scars, especially among the lower section of the socio-economic strata. Jobless growth has given rise to highly skewed income distribution creating faults in the economy. The exit verdict is a message from the bottom of the pyramid asserting their democratic right. What forces will this exit unleash and what subtleties may these forces hold for the future of democracy is yet to be understood,” said Mr. R Raghuttama Rao, MD ICRA Management Consulting, in his opening remarks at a seminar organised by ORF Chennai Chapter in association with the Madras Management Association (MMA) and Flo, the local branch of the FICCI women’s wing, on July 8, 2016. The theme was, Brexit, India, Europe and the World.
Speaking on the circumstances leading to the referendum, Mr. M. Ganapathi, former Secretary (West), Ministry of External Affairs (MEA), Government of India, pointed out that British Prime Minister David Cameron had promised an ‘in-or-out’ referendum during the run-up to the nation’s 2015 general election, if only to pacify the Euro-sceptic back-benchers in his Conservative Party. The referendum, conceptualised as a low-risk ploy to disprove his anti-EU colleagues, was expected to return a “remain” verdict, which made economic sense to many in the political spectrum.
Ever since the country’s inclusion in the European Economic Community in 1973, the UK has had an estranged relationship with the EU. The UK has negotiated its terms of membership several times in the past decades, the latest being the discussions in February 2016. While being a member of the political union, UK had decided to stay away from the Schengen area and the common currency. Immigration and the consequent rising cost of health and social security was one of the key issues linked with this referendum. Concern over legislative sovereignty, reflected by the marginalising trade competitiveness (due to EU laws), non-beneficial agricultural policies (of the EU), especially in the area of farming and fishery and border control were the other major issues that Britons voted on, noted Mr. Ganapathi.
Reflecting on the rather unforeseen turn of events, Mr. M. R. Sivaraman, former Revenue Secretary, Government of India, said that the verdict reflected the discontent of the masses, who have failed to benefit from globalisation. He further stated that the lower middle class and the proletariat have been left out in the race for globalisation. EU’s economic policies have had little to no effect on the lower section of the population, the vote is a stand against elitism, remarked Mr. Sivaraman.
A complete free market and the grant of all four freedoms (labour, capital, goods and services) has not helped the EU countries grow any faster than the other nations in the world. On the contrary, countries such as Spain, Greece, Portugal have all seen high levels of unemployment, mounting sovereign debt (with increasing credit spreads) and reduced a growth rate in the recent years, observed Mr. Sivaraman.
While the “remain” campaign projected a doomsday picture highlighting what UK stands to lose if it chooses to leave the EU, it failed to clearly articulate the benefits of being a part of the union. The “leave” camp that mounted a popular campaign, failed to do the homework and create a succession plan, in the event of a “leave” verdict, he said.
In the aftermath of the “leave” verdict, the UK faces an uphill task. Economic uncertainties have been compounded by a spate of political resignations creating a leadership vacuum at this critical juncture. While global markets have recovered from the unexpected verdict, the pound has suffered its worst fall, lowest in the past 31 years. Investment in shares and property values have fallen, and uncertainty prevails over businesses in the UK, especially the ones that rely on the European free market, Mr. Sivaraman observed.
The verdict also has political implications for the UK and the EU region in general. In the UK, Scotland may seek for a second in-or-out referendum to be with the UK, provided it is unable to negotiate a membership deal with the European Union. Scotland, Northern Ireland and London all voted to stay in the EU. The verdict also comes as a shot in the arm for the extreme right across Europe, this will embolden right winged parties to raise the rhetoric of anti-immigration and may even garner popular support.
Speaking on the global impact of Brexit, Mr. Sivaraman said that the exit may not have any effect on western economies, given that most of these countries are growing at the rate of 1 to 1.5 percent in the last 10 years. And this verdict is not expected to cause any major turnaround, he added. However, the exit may give rise to fissures in the EU, and could even become contagious among countries such as Greece and Portugal that are reeling under severe austerity measures.
Commenting on the implications of the verdict for India, Mr. Sivaraman said that India 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. On the positive side the verdict provides us an opportunity to establish new trade ties with UK, unhinged by the challenges posed in the India-EU BTIA.
Mr. Somi Hazari, Convener of International Trade Cell, FICCI Tamil Nadu Council, said that Brexit is good for India. He concurred with Mr. Ganapathi’s view on creating new trade ties with the UK, and said 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, a cheaper pound will benefit Indian students seeking education 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, noted Mr Sivaraman.
This report is prepared by Deepak Vijayaraghavan, Associate, ORF Chennai.
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