Great Britain will have a referendum on Thursday on whether to remain part of the European Union or leave it. Britain has had a troubled relationship with the EU since the beginning and has made various attempts to break away from it.
Britain's latest campaign to leave the EU is the biggest yet and it has garnered enough momentum to have a referendum. The Leave Campaign argues that Britain is losing out a big deal by staying in the EU: it has to pay millions of pounds each week as a contribution to the European budget; the extremely bureaucratic nature of the European parliament is hurting British exporters; and finally, that unmitigated migration from the European Union into Britain is creating an imbalance in the welfare schemes of the UK government.
However, as numerous experts have pointed out, none of this truly holds water. Britain gains much more from the EU than it pays as contributions; despite the bureaucratic hurdles, British companies have unfettered access to the entire European Union; and finally, Britain would not be able to shut its doors to immigrants even if it exits the EU because to trade with the bloc, it would need to accept some share of outsiders within its borders.
Despite being a ludicrous proposition, countries across the world must address the contingency of a Brexit. If it does happen, it will have wide-ranging repercussions on every country that is remotely connected with the global financial market. Here are five ways in which India will be affected:
1. The uncertainty following Brexit: The biggest drawback of the Leave Campaign is that they have not mapped out the future course of action if Brexit indeed happens. There is no sound plan regarding Britain's future relationship with the EU or any other specific country within the EU. Will they continue to have access to the European markets? Will trade barriers increase if they leave? Are there any agreements with the Union regarding the movement of goods, capital and labour? These are the important questions that are left unanswered by those advocating for Britain to leave the EU. And it is precisely the uncertainty over these questions that are spooking financial markets across the world.
If Brexit does happen, global financial market volatility can be readily expected. Markets across the world will tank. The pound will depreciate against most major economies. India cannot remain immune to this. Sensex and Nifty will tumble in the short-run.
2. Investment: India is presently the second biggest source of FDI (Foreign Direct Investment) for Great Britain. One of the main reasons for this is the historic and cultural ties with the UK that India shares along with the fact that the UK proved to be a gateway into the rest of Europe. Indian companies that would set up their factories in the UK could sell their products to the rest of Europe under the European free market system. However, if Britain exits the EU, it will not be as attractive a destination for Indian FDI as before. Having said that, Britain would not want to lose out on capital coming in from India. Thus, one can expect Britain to try extra hard to woo Indian companies to invest there by providing much bigger incentives in terms of tax breaks, lesser regulation and other financial incentives. Further, if Britain is leaving the EU due to the latter's complex bureaucratic regulatory structure, Indian companies can expect a deregulated and freer market in Britain.
3. Another EU partner: As aforementioned, if Britain exits the EU, India will lose its gateway to Europe. This might force India to forge ties with another country within the EU, which would be a good result in the long run. India is already trying to build trade negotiations with Netherlands, France, Germany, and others, albeit in a small way. Netherlands is India's top FDI destination as of now. A Brexit could force India to build trading partnership with other EU nations in order to access the large EU market.
4. The Commonwealth: With Britain cutting off ties with the EU, it will be desperate to find new trading partners and a source of capital and labour. There have already been many proponents of the Leave Campaign that suggest that the UK should look towards the Commonwealth to forge new alliances. Britain will still need a steady inflow of talented labour, and India fits the bill perfectly due to its English-speaking population. With migration from mainland Europe drying up, Britain would be able to accommodate migration from other countries, which will suit India's interests.
Further, Britain is one of the most important destinations for Indians who want to study abroad. Presently, British universities are forced to offer subsidized rates for citizens of the UK and EU. With Brexit, however, the universities will no longer be obliged to provide scholarships to EU citizens, which will free up funds for students from other countries. Many more Indian students may be able to get scholarships for studying in the UK.
5. Ties with European Union: With or without a Brexit, it would be in Europe's interest to develop India as a strong trade and strategic partner. Brexit would surely accelerate this process. Europe needs to counterbalance United States and China geopolitically and would also need to hedge against a slowing China for its economic interests. For this, Europe would be looking at the fastest-growing major economy in the world and would need to quickly resolve the pending trade issues with India in order to develop a lasting relationship.
Thus, even though Britain stands to suffer from leaving the European Union in terms of reduced trade and a sustained drop in its GDP, the net effect can turn out to be positive for India.
(Anupam Manur is a Policy Analyst at the Takshashila Institution, an independent and non-partisan think tank and a school of public policy.)
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