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Brexit and its impacts on India

2020 FEB 11

Mains   > International relations   >   India and Global Regions   >   India & EU

WHY IN NEWS?

On January 31st at 11 PM GMT, Britain has formally left the European Union through what is termed as Brexit.

WHAT IS BREXIT:

  • Brexit caught on as an abbreviation for “British exit”, the proposal that Britain split from the European Union (EU) and change its relationship to the bloc on trade, security and migration.
  • Britain has had a troubled relationship with the EU since the beginning and has made various attempts in the past to break away from it. A referendum was held in June, 2016 to decide whether Britain should exit or remain in the European Union, in which 52% of voters agreed to leaving.
  • There will then be a transition period until 31 December 2020, where the future trade relationship will be negotiated.

EUROPEAN UNION:

  • After World War II, European leaders realized that drastic changes needed to be made to ensure that the armed conflicts that had plagued the continent for more than half a century would become a thing of the past. Thus, the European Union formerly known as the European Community (EC) was formed in the 1950s.
  • The EU and European citizenship were established when the Maastricht Treaty came into force in 1993. Later in 2009, several organizational changes were brought forth through the Treaty of Lisbon.
  • Today, the EU is a political and economic union of 28 member states.  Some of the group’s major successes are:
    • Developed an internal single market
    • A monetary union composed of 19 EU member states which use the euro currency
    • No passport control for travel within the Schengen Area
    • Creation of General Data Protection Regulation (GDPR) to protect the data privacy of individuals and address export of data outside EU
  • Member states must agree unanimously for the EU to adopt policies concerning defense and foreign policy. Subsidiarity is a founding principle of the EU
  • The headquarters is located in Brussels, Belgium.
  • The main institutions that administer the EU are the European Parliament, the European Council, the Council, the European Commission, the Court of Justice of the European Union the European Central Bank and the Court of Auditors.

MEMBERS:

  • Prior to Brexit, the European Union (EU) consisted of 28 member states (EU-28)
  • Unlike members of most international organizations, the member states of the EU are subjected to binding laws.
  • membership of the European Union is open to any European country that is a stable, free-market liberal democracy that respects the rule of law and human rights

REASONS FOR BREXIT:

  • Threat to sovereignty: A series of EU treaties have shifted a growing amount of power from individual member states to the central EU bureaucracy in Brussels.
  • Immigration laws: EU law guarantees that citizens of one EU country have the right to travel, live, and take jobs in other EU countries. However, post 2008 crisis, this has led to large scale immigration from countries such as Ireland, Italy, and Lithuania into Britain. This has led to great public disgruntlement.
  • Fiscal burden: The UK’s contribution to EU is worth about £13 billion ($19 billion) per year, which is about $300 per person in the UK.

POSITIVE IMPACTS ON INDIA:

  • Potential Free Trade Agreement:
    • After losing access to the EU single market, the UK would want to develop strong trade relations with emerging markets around the world. India, with strong economic fundamentals and a large domestic market, is in a better position.
    • From India’s perspective, a trade deal with the UK could be an opportunity to increase pressure on other Asian countries, especially China, to liberalise their trade.
  • Easy market access into UK:
    • India is a significant Foreign Direct Investment (FDI) source for the UK because many Indian firms have used it as a gateway to the EU single market. Initially, after divorcing from the EU, the UK wouldn’t like to miss Indian investment. It will attract Indian firms by offering more incentives such as tax break, relaxed regulations and opening up markets.
  • Improves India’s attractiveness:
    • As investors look around the world for safe havens in these turbulent times, India stands out both in terms of stability and of growth.
    • For UK, the young talented and English-speaking labour force in India is vital for to sustain its diminishing labour force
  • Benefits from falling exchange rates:
    • Experts expect the British currency (The Pound) to weaken after the Brexit is complete. For India, being more of an importing country than an exporting nation, this overall effect may turn out positive.
    • It can also make UK an affordable destination for Indian students and tourists.
  • Reduce blockage in finalizing a Broad-based Trade and Investment Agreement (BTIA):
    • The discriminatory visa rules of UK against Indian technological professionals have been a major contentious issue in the BTIA talks. With Britain now out of the EU, India can move away from this issue and seek for faster finalization of the deal.

Broad-based Trade and Investment Agreement (BTIA):

            Bilateral Trade and Investment Agreement is a Free Trade Agreement between India and EU, which was initiated in 2007. Despite a decade in talks, the agreement has been in deadlock.

The contentious issues for India are:

  • India has not been granted “data secure” status by EU
  • U.K. visa rules discriminate against Indian technical professionals
  • EU imposed a ban on sale of several pharmaceutical products
  • India cancelled most bilateral investment agreements with EU
  • Presence of stringent non-tariff barriers

The contentious issues for EU are:

  • High taxes on liquor and automobiles
  • Demand for further liberalization, with less duty interference.
  • Changes in India’s Investor-State Dispute Settlement (ISDS) mechanism

NEGATIVE IMPACTS ON INDIA:

  • Restricts access to other EU countries:
    • The UK has always been a gateway for Indian firms to enter the EU single market. After Brexit, this may cause short term distress on Indian firms.
  • Affects business and investment ecosystem:
    • Brexit will hamper India’s businesses based in the UK as till now they had border-free access to the rest of Europe. This was the main reason why Indian companies go to the UK.
    •  UK accounts for 17 percent of India’s Information Technology (IT) exports, which could be negatively affected by the new taxation regime.
    • Brexit will adversely affect the movement of investors into the UK and will directly impact the investment. UK is the third-largest Foreign Direct Investment (FDI) investor in India. There are more than 800 Indian companies in Britain.
  • Currency volatility:
    • Rupee will experience currency volatility as there would be devolution of Pound and Euro due to Brexit. It can also affect the stock markets of both countries.
    • With BREXIT, foreign portfolio investments will outflow and will lead to the weakening of the rupee. The Indian companies with sizable presence will have to bear the brunt.
  • Impact of Forex security:
    • Both UK and EU account for 23.7% of Rupee’s effective exchange rate. Changes in the value of Euro and Pound could diminish the foreign exchange reserves of India.
  • Impact on service Industry:
    • Brexit can affect Indian flagship IT market sector, given that EU accounts for 17 % of the global market and UK accounts for solely 3% out of that 17%. Brexit will increase overhead cost and setting up of new headquarters perhaps, in both EU and UK separately.

WAY FORWARD:

  • Although Brexit has some negative effects on the Indian economy, it brings with it the myriad opportunities of growth for Indian industries. India just needs to be watchful and capitalize on whatever opportunities comes her way.
  • To reduce the impact on currency and market volatility, the RBI must try to recalibrate the monetary policy.
  • As far as trade with India is concerned, the first order of business might be to work toward finalizing the free trade agreement. While trade relations between India and the EU/U.K. have been strong historically, Brexit could be the catalyst that makes them stronger. As the EU and the U.K. both look for new trade opportunities elsewhere, India could emerge as a beneficiary of this new arrangement.
  • If the U.K. can no longer serve as a gateway to Europe, Indian companies should consider diversifying their current investments in London. An attractive destination could be Ireland, because of its close proximity to the U.K. and membership to the EU.
  • With UK gone, the EU will be looking for strong and reliable trading partners. India should use this opportunity to strengthen its ties with the EU and promote its export economy.

Practice Question

Q. Critically examine the impact of ‘Brexit’ on India's relation with U.K and European Union? How will it benefit India and Indian Diaspora?

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