Expert Speak Raisina Debates
Published on Jul 06, 2018
Beyond Brexit: Between UK and EU

Since establishing relations with the European Union, India’s European policy has resembled a midlife crisis. Torn between old ties to an Eurosceptic UK, and an ambitious EU which seemed to mirror India’s ambition for pluralism, New Delhi’s indecision long frustrated scholars and policymakers alike, till UK’s own accession to the EU’s softened the chasm. The peace is now proving shaky once again, as Brexit looms.

Building their discourse around Brussels as a stifling actor whose seemingly onerous regulations were locking the UK into an EU-dependence, Leavers such as Foreign Secretary Boris Johnson argued that countries would ‘queue up’ to trade with a ‘free’ UK, allowing it to overcome the economic shock of losing the EU. In this spirit, London later named India among their major bilateral priorities.

The lure of New Delhi for the Leave faction was understandable. Bilateral trade was worth US$21.6 billion in 2015, according to the Confederation of British Industries. Considering that the EU-India figure (US$89.6 billion in 2016) included the UK, the role of Britain in trade between India and Europe was significant. The Reserve Bank of India states that the UK still remains India’s largest source of Foreign Direct Investment from Europe, despite the fast-rising contributions of both France and Germany. While France’s recent promise to invest US$10 billion in India over the next five years may worry London, the size of the Indian diaspora in the UK gives Britain a significant advantage. The diaspora contributes 6% of the UK’s Gross Domestic Product, allowing it significant influence on India’s UK policy, as evidenced by Prime Minister Narendra Modi’s recent visit to London.

With Indian businesses in the UK employing over 110,000 people, the diaspora’s growing presence was testament to significant untapped potential in UK-India relations, which the Leavers sought to tap.

Indian expectations were further shaped by Prime Minister Theresa May’s visit to New Delhi in November 2016. As May’s first state visit outside the EU, it had powerful symbolic value, and seemed to confirm India’s status as London’s key priority. To a Britain in need of partners post-Brexit, a bilateral deal with India was crucial. Despite a rising share of students in mainland Europe, India also provides the second-largest non-EU bloc of students in UK universities, an increasingly important demographic with half of India’s population being below 25 years of age. Aware of its strong negotiating position, India expected the UK to pursue the deal with a sense of urgency, allowing both parties to secure mutual benefits, with India focusing strongly on infrastructure and providing opportunities.

Nineteen months on, the proposed bilateral deal is nowhere close to conclusion. Rather, Britain recently tightened student visa norms for Indians, compromising both a key Indian priority and a valuable source of foreign exchange. In this light, and the progress of the UK-EU exit talks, India may need to adjust its expectations.

Policy paralysis 

The paradoxical conduct of the UK in expecting close cooperation, while limiting one of India’s key priorities, is a consequence of the deep policy paralysis pervading London.

Consider the final nature of Brexit to be pursued. A ‘hard’ Brexit would see UK-EU trade revert to WTO norms, albeit allowing Britain stronger control over migration. A ‘soft’ Brexit would see the UK retain access to the Common Market, subject to some conditions including lower control over migration than the ‘hard’ alternative. In the aftermath of the referendum, partners such as India were fuelled with optimism because the government plumped for a hard Brexit, which made a bilateral deal both necessary and promising. However, domestic considerations have since changed matters considerably.

Due to the further dilution of power from last year’s snap election, the British government finds itself under intense scrutiny from interest groups of various stripes.

Additionally, the interplay of Brussels’ tough negotiation and gloomy economic forecasts make a ‘hard’ Brexit increasingly costly to pursue in policy terms. As a result, Britain is slowly resigning itself to a ‘softer’ Brexit, a decision also marked by odd voices for a second referendum in parts of Parliament.

The Conservatives, realising that this would alienate Leave’s core constituency, would probably try to placate it while making sense of the chaos around Brexit. The desire to make Brexit appear as hard as possible, while appeasing an anti-immigrant core in anticipation of a softer exit best explains Britain’s dilemma.

A softer Brexit also explains why the bilateral trade deal with India or other partners was not pursued with the urgency expected circa 2016.

Considering the constraints faced by the May government, two key takeaways arise for India’s European policy. Firstly, the bilateral trade deal may not be as beneficial as initially expected, given that a softer Brexit will decrease the extent to which the UK needs access to the Indian economy. Secondly, Britain may not be India’s most reliable ally in Europe over the short and medium-term. Indian businesses in the UK often saw London as a gateway to Europe, taking advantage of colonial and cultural ties. The chasm once papered over by the UK joining the EU has reopened, and with India’s UK-based businesses increasingly eyeing relocation to Germany or other countries to stay in the Common Market, decisive policy is critical.

The way forward

Though a hard Brexit could still occur, it would not be wise for India to bet on it. Economists have consistently predicted a medium-term contraction of the British economy in that case, which would make it less willing to import from or invest in India. The British pound has also largely recovered its post-referendum fall against the rupee, making India a less than ideal destination for British exports. Exports would be an immediate concern for London, since the Parliament reports that 44% of British exports go to the EU.

In such an unpredictable situation, it would be wise for India to cover its bases. Cooperation with Britain is certainly encouraged, given historical and cultural advantages to India. However, the Modi government could increase cooperation with continental Europe, aiming to leave India better off irrespective of the final result of the Brexit negotiations.

An obvious route would be pursuing relations with Brussels more firmly. EU-India cooperation has improved in recent years, with the EU contributing 13.2% of India’s trade.

The appetite for cooperation has also risen in Brussels since the Brexit referendum, evidenced in joint declarations on clean energy and sustainable urbanisation, drawn up in October 2017.

The Indian experience at enabling diverse communities to coexist could prove instructive to an EU facing challenges to its internal cohesion, providing possibilities for political cooperation. The EU’s growing skepticism of China, caused by the 16+1 grouping, provides another policy alignment between India and the EU. In case of future cooperation between the EU and the Shanghai Cooperation Organisation, EU-India could form a valuable counterweight to the Sino-Russian axis in the SCO, ensuring that their concerns and values are adequately reflected in the Asia of the future.

However, India may initially balk at dealing with an increasingly bureaucratic EU. In that case, it could use its strong relations with EU member states to provide a conduit to Brussels. France provides a case in point. The productive visit of President Macron already adds to growing Indo-French defense, economic and cultural partnerships, while Germany is already India’s sixth largest trading partner. Such bilateral relationships could be useful to resolve possible misunderstandings between New Delhi and Brussels in future deliberations.

Recognising the possibilities afforded by the continent, while giving due regard to old ties with Britain would suitably energise Indo-European relations, while putting India in a prime position to profit from increasing European cooperation.

Avtansh Behal is a Research Intern with Observer Research Foundation, Delhi

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