In the long term longer-term, Britain’s exit from the EU will have far-reaching consequences for both the UK and the countries engaged with it economically and financially, but it won’t impact much on Indians, says Arvind Sukumar, in an opinion piece for India’s leading finance portal Money Control.
Every newspaper, news station, current-affairs website, and what-have-you is inundated with pundits – political, economic, financial, and social — sprouting warnings and encouragements in accordance with their personal philosophy.
All of this has culminated on one big event: the British have spoken. Most of them have decided they want to walk away from the European Union, so that’s almost certainly going to happen now. The reaction to the vote has also been largely along predicted lines. Global financial markets are in free fall – be it stocks, currencies or commodities – except the bullion markets, where Gold’s standing as a safe haven investment will trump everything except maybe the discovery of gold deposits on Mars or Jupiter.
But what does it all mean? Not for the global economy, not for the Indian economy, and not for the myriad larger-than-life intangibles out there. What does it mean for you and me: the person walking along a water-logged road with a newspaper held overhead and a curse-word for every motorist splashing rainwater-mixed-with-sewage on to our trousers? Will this really change our lives? Realistically, just a little.
Sure, just like some pundits said, the British’s decision to leave the EU is creating some negative feedback from the global investor community, especially in the stock markets. Central bankers and governments have rushed to soothe fears of a sudden exodus of liquidity, saying they have made provisions for just such a situation.
Some have even put these promises into action. The stock markets’ reaction is excusable, especially in Emerging Markets: short term, forex inflows will dry up, or at the very least, get delayed. Ditto for Foreign Domestic Investments flowing in from the UK, and maybe even from the EU. The financial wizards are also right when they say that longer-term, Britain’s exit will have far-reaching consequences for both the UK and the countries engaged with it economically and financially.
Let’s take the UK. The OECD has forecast that GDP would shrink three per cent by 2020, and five per cent by 2030. On top of that, there are numerous changes to taxation and regulatory frameworks that will have to be accounted for by companies operating within those borders.
Some of those adjustments could hurt the UK further, as FDI inflows into the UK drop, and organisations grapple with lower labour productivity, slower technical progress, and a smaller pool of skills.
Sitting in India, however, these ramifications are not immediately life changing, or lifestyle-threatening. Speaking for myself, if I were invested in stocks, I’d probably have read the writing on the wall (it might not have been clear which way the vote would go, but that uncertainty would have been warning enough), withdrawn a good portion of my investment, and waited to see how things stand once the dust settles.
That way, I lose a little if things go to hell, and I make some money if they don’t. Plus, if scenario one played out, I’d have had the option of buying in at cheaper valuations. Longer term, the Indian government has been reiterating for a while now that it has things covered. So one can expect a cushion there.
Sure, some investors are feeling the pain, but that pain itself is more of a kneejerk reaction. Evidence: The Sensex, which pretty much jumped off a cliff soon after trading began for the day, managed to grab on to a handhold 1,000 points down, and even clawed itself half-way back to where it was yesterday.
However, it’s pertinent to note that the retail investor population in India is nigh negligible. A 2011 study from the Indian School of Business estimated that there were around 2.02 million retail investors in India, which is roughly 0.2 percent of the Indian population. In addition, most retail-level stock-related investments in India are carried out through Mutual Funds; and the professionals managing those investment are bound to have taken steps to hedge against a worst-case scenario.
There’s another reason the Brexit will not turn your world topsy-turvy in a matter of minutes. As Alex Malley the chief executive of CPA Australia, one of the world’s largest accounting bodies so succinctly put it: “It’s not as if the UK is being erased from the world map.” As procedure goes, the UK government must now decide whether it will honour the people’s vote, or toss it into the dustbin. The former is the most likely to play out, because any government that chooses to ignore the people’s mandate on such a sensitive subject is courting political suicide. Then, the British government has 2 years to negotiate terms with the EU, and wheedle it into an agreement that lets the UK walk away.
This does not mean there will be no real negative implications from a Brexit. Near term, there have been some predictions that leaving the EU will mean a weaker Pound, and a weaker Rupee – and that’s definitely playing out. This is bound to throw exporters and importers in both countries for a loop. Currency and Bond traders can also brace for trying times.
Financial guru George Soros hit the nail on the head when, in his piece for The Guardian titled “The Brexit crash will make all of you poorer – bewarned”, he wrote: “I would expect this devaluation [of the Pound Sterling] to be bigger and more disruptive than the 15 percent devaluation that occurred in September 1992, when I was fortunate enough to make a substantial profit for my hedge fund investors, at the expense of the Bank of England and the British government… If sterling fell to this level, then ironically one pound would be worth about one euro – a method of “joining the euro” that nobody in Britain would want.”
From an econo-diplomatic perspective, a Brexit will mean an advantage for India in the larger context. We, as a country, have been trying for years (since June 2007, to be exact) to sign the EU-India Broad-based Trade and Investment Agreement (BTIA), and both sides have consistently failed to find the common ground that will take negotiations forward. Now, given that the UK itself is a large business partner for India, UK’s economic and financial independence opens a door that’s remained shut thus far — an independent Free Trade Agreement (FTA) with the UK. An added edge here is that the compulsions to see eye-to-eye with a 28-nation bloc with vast internal issues have withered away. This could potentially boost Indo-UK trade, and not just monetarily.
Such an FTA would mean that India’s exports to the UK could increase beyond garments and textiles, machinery and instruments, petroleum products, footwear and leather, manufactures of metals, gems and jewelry, engineering goods, transport equipment and parts, spices, drugs and pharmaceuticals and marine products. In return, the list of India’s imports from the UK would be longer than just machinery and equipment, ores and metal scraps, precious and semi-precious stones, silver, aircraft and parts, beverages and spirits, engineering goods, and other professional instruments other than electronics, non-ferrous metals, and chemicals.
For businesses which use the UK as a staging area to enter the EuroZone, a Brexit will mean some major adjustments. For one, these Indian businesses may have to spend quite a bit of money to open branches in Continental Europe to cater to that market specifically, and jump through the EU’s intricate regulatory and legal hoops.
The bigger opportunity for India’s diplomatic corps, as UK proceeds to cut ties with its continental brethren, is that having been a part of the European Economic Community (which preceded the European Union) for 40 years, the UK will have been driven to the back foot when it comes to brokering new deals. As Sydney University’s Mark Melatos pointed out to international wire agency Bloomberg, “The UK will be in a very weak bargaining position because everyone will know it is desperate to negotiate new agreements… All potential trading partners will take advantage of that weakness.” So why not India?
Now this negotiation, if done well, could prove lucrative for the common Indian once the trickle-down effect makes its presence felt. So there could be good news on the horizon for folks like the fisherman, the tanner, the weaver and the goldsmith, to name a few. Of course, such trade alliances and agreements take time – we’re talking years, not months – so there’s no need to fuss about it right away.
Indian IT industry body Nasscom has said a Brexit will have a negative impact on the USD 108 billion Indian IT sector in the short term. However, it has also said that the exact nature and extent of this impact will only emerge over a longer period of two years or more.
But seriously, that should be enough time for companies with an exposure to the UK and the EU to take measures to protect themselves from any negative fallout. Operationally, that may mean changes to employee deployment by these companies, so an IT employee’s immediate plans to relocate to an off-shore project site in either of these regions may be in for a bit of a rejig. However, if you’re not an employee of such a concern, and don’t have family who are, it does not matter. Further, unless you own stocks in any of these IT companies (or run them), your wallet and your nerves are pretty safe.
When it comes to travelling to the UK from India, whether as an emigrant or as a student, or to further your professional interests, UK’s staying with, or leaving the EU makes no difference.
As Sarosh Zaiwalla, a Senior Partner at the international law firm Zaiwalla & Co based in London told the International Business Times, “Britain has always had an open immigration system. The technical requirement for employment is that a person should speak English and have the essential skills that are not readily available in the local market. The employment visa will be given to people who fulfill these credentials.” The same goes for any of the other visas one might covet.