Brexit: How does it affect India and the World?-UPSC Mains 2016

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Brexit: How does it affect India and the World?-UPSC Mains 2016

By | 2017-12-25T10:41:15+00:00 July 2nd, 2016|Categories: Education, International Relations|0 Comments

Brexit: How does it affect India and the World?-UPSC Mains 2016

Brexit: How does it affect India and the World?-UPSC Mains 2016

Hello friends Welcome to . In this Article We are providing you An analysis of BREXIT . This is very Important Issue for India and India Foreign relation With Uk . We will try to Explain ‘What is Brexit?’, ‘What is the European Union?’, Why the ‘Leave EU’ campaign?’, ‘Brexit referendum and the result’, ‘positive and negative impact of Brexit referendum to India and the world’ etc.

What is Brexit?

  • It is the abbreviation of “British Exit” from the European Union (EU).
  • Brexit mirrors the term Grexit — a term which was coined and used by two Citigroup’s economists in February 2012 to refer to the possible exit of Greece from the EU.
  • Britain has had a troubled relationship with the EU since the beginning and has made various attempts in the past too to break away from it.


What is the European Union?

  • The EU is a political, trade and economic union founded in 1957.
  • The EU evolved over decades and reached its present model in 1992.
  • There are 51 countries in Europe, out of which 28 countries have signed a treaty to become a part of European Union.
  • So, clearly, there are countries in Europe which are not part of European Union.
  • The EU treaty provided for a European Parliament and European Council which consisted of representatives of the member-states.
  • EU members account for 16 per cent of world imports and exports.
  • It is the largest trading bloc in the world surpassing the US.
  • In 2012, the EU was awarded the Nobel Peace Prize for advancing the causes of peace, reconciliation, democracy and human rights in Europe.

What is the Euro Area?

  • The Euro Area (EA) is a subset of the EU, which is a monetary union of 19 of the 28 countries which use the common currency, Euro.
  • Not all EU members use the Euro. Britain is a EU member, it is not part of the EA. It does not use the Euro and has retained its own currency, the Pound Sterling.

Why the ‘Leave EU’ campaign?

  • 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
  • Migration from the European Union into Britain (mainly PIGS economies) is creating an imbalance in the welfare schemes of the UK government.
  • But, those who oppose the campaign say that Britain is a net gainer, if She stay in EU.

The various people campaigning for “Leave” used the following issues to stress on the need for Brexit

  • Economy and austerity measures- There was public anger in Britain towards the status quo. Ordinary Britons, hit hard by the economic crisis, feel betrayed by their political leadership. The Conservative government’s austerity policies have further alienated these sections
  • Immigration- As EU’s membership expanded, more Europeans, especially from poorer EU nations, started migrating to U.K. using the “freedom of movement” clause. The anti-immigration parties argue this puts a severe strain on national resources and add up to welfare expenditure. The pro-EU members argue that EU migrants contribute more to the national economy than they take out.
  • Security- The Remain side argues that in the era of international terrorism and criminality, cooperating with the EU will make the U.K. safer, while the other side says that the security risk will in fact increase if the U.K. does not have control over its borders.
  • Trade- On trade, the Remain side says that access to the single European market, free of tariffs and border controls, is critical for the U.K. as 45 per cent of its trade is with the EU. The Leave side says that the EU needs British markets and individual trade deals with European countries can be easily negotiated.
  • Employment- The Remain side argues that as three million jobs are tied to the EU there could be a jobs crisis if the U.K. leaves the EU; Brexiteers claim that there will be a jobs boom without the fetters that EU regulations impose.

Sequence of Events

  • In January 2013, Prime Minister Cameron announced that a Conservative government would hold an in-out referendum on EU membership before the end of 2017, on a renegotiated package, if elected in 2015
  • The Conservative Party won the 2015 general election with a majority. Soon afterwards the European Union Referendum Act 2015 was introduced into Parliament to enable the referendum. Despite being in favour of remaining in a reformed European Union himself, Cameron announced that Conservative Ministers and MPs were free to campaign in favour of remaining in the EU or leaving it, according to their conscience.
  • This decision came after mounting pressure for a free vote for ministers. In an exception to the usual rule of cabinet collective responsibility, Cameron allowed cabinet ministers to publicly campaign for EU withdrawal
  • A referendum was scheduled on June 23rd 2016. Registered voters in UK were to voice their opinions on whether the nation should ‘Remain’ in or ‘Leave’ the European Union
  • UK voted to leave the European Union. The ‘Leave’ side won decisively with 52 per cent of the vote in the high-turnout vote, which overturned opinion polls that predicted a slender margin for ‘Remain’.
  • PM David Cameroon was the architect of the referendum. He supported “Remain”. As a result of the “Leave” verdict, he will be stepping down as PM.
  • A stunned EU urged Britain to leave as “soon as possible” amid fears the devastating blow to European unity could spark a chain reaction of further referendum.

India, UK and European Union

  • India is one of the top investors in the UK.
  • There are about 800 Indian-owned companies in the country employing roughly 110,000 people. (Eg: Jaguar Land Rover is owned by the Tata group)
  • Many of these firms made the investments with the wider European market in mind.
  • Together, the UK and Europe account for over-a-quarter of the country’s IT exports, worth around $30bn.
  • The UK is the third largest source of foreign direct investment in India and India’s largest G20 investor.
  • India is the third largest source of FDI to the UK in terms of numbers of projects. India invests more in the UK than in the rest of Europe combined, emerging as the UK’s third largest FDI investor.
  • The key sectors attracting Indian investment include healthcare, agritech, food, and drink.
  • In November 2015, Prime Minister Modi has said, ”As far as India is concerned, if there is an entry point for us to the EU, that is the UK.”
  • But, UK is only India’s 12th largest trade partner, well behind other European countries such as Germany and Switzerland.
  • Interestingly, UK is also among just seven in 25 top countries with which India enjoys a trade surplus.

Brexit: How does it affect India and the World?-UPSC Mains 2016

Possible implications

For United Kingdom
  • UK is currently in a situation of deep uncertainty post-leave vote. It remains to be seen whether the propositions of how the leave would benefit UK would materialise.
  • Turmoil in currency markets- Pound dived to its lowest since 1985; Euro suffered its worst fall against the dollar
  • Second Scottish referendum likely- Scotland voted by a margin of 62 per cent to 38 per cent to remain in the EU in the referendum. Scotland sees its future in the European Union despite Britain’s vote to leave. Hence, a second Scottish independence referendum is likely.
  • Exports- 45% of UKs exports are to the Eurozone. Hence, the need to negotiate the relationship with EU is immediate.
  • Less influence in world politics- The collective bargaining benefits enjoyed by Britain as a part of EU would no longer exist.
  • Hamper Joint efforts- May hamper joint counter-terrorism, information sharing especially in context of instability in middle east
For European Union and rest of the world
  • The members of EU make monetary contributions towards EU and UK is one the largest contributors.
  • A British exit from the European Union would rock the Union — already shaken by differences over migration and the future of the Eurozone — by ripping away its second-largest economy, one of its top two military powers and by far its richest financial centre
  • Brexit would give rise more and more nations contemplating to exit the EU. Greece, last year held a referendum in which its citizens overwhelmingly rejected EU’s bailout norms.
  • World economy- World stocks saw more than $2 trillion wiped off their value as Britain’s vote to leave the European Union triggered 5-10 per cent falls across Europe’s biggest bourses and a record plunge for sterling.
  • Such a body blow to global confidence could prevent the Federal Reserve from raising interest rates as planned this year, and might even provoke a new round of emergency policy easing from all the major central banks.

Brexit: How does it affect India and the World?-UPSC Mains 2016

Negative Impacts of the Brexit referendum to India

  • India will have to adjust to a changing world order.
  • There may be foreign fund outflow and dollar rise.
  • Rupee may depreciate because of the double effect of foreign fund outflow and dollar rise.
  • This may increase petrol and diesel prices to an extent.
  • The government then may want to reduce additional excise duty imposed on fuel when it was on a downward trajectory. This may increase fiscal deficit, unless revenue increased.
  • Prices of gold, electronic goods, among others may also increase.
  • Sensex and Nifty may tumble in the short-run.
  • Falling value of the pound could render several existing contracts loss making.
  • The vote is also bad news for Indian outsourcers.
  • Foreign funds are likely to move out of the if the world outside thinks that investment in India is risky.
  • India’s Forex (currently a record 363 billion dollars) may diminish, particular if currency is stored in Euros or Pound (this comes around 20% of total forex).
  • Brexit will have a negative impact on the $108 billion Indian IT sector in the short term.
  • Many Indian companies are listed on the London Stock Exchange and many have European headquarters in London. Brexit will take away this advantage.
  • Due to fall in value of Pound sterling, Indian exports to UK will suffer. Cheaper rupee will make Indian exports, including IT and ITeS, competitive. Indian import companies operating in UK may also report loss. Also note that, India is exporting more than what it is importing from Britain.
  • Though, Finance minister Jaitley claimed that India is well-prepared to deal with the consequences of the Bexit with strong macroeconomic situation, some issues still remain.
  • Volatility in Indian markets triggered by Brexit- BSE Sensex fell by 4%
  • Indian companies in UK -There are 800 Indian companies in the UK — more than the combined number in the rest of Europe. Britain’s exit from EU may affect Indian companies’ appetite for investing in the U.K., particularly those seeking access to the European market.
  • The welfare of a nearly three-million strong diaspora of Indian-origin U.K. citizens is a major concern
  • The interests of a large number of Britain bound Indian tourists, business people, professionals, students, spouses, parents and relatives is also a concern.
  • India-EU FTA- The FTA talks with EU will have to be modified in the event of Brexit. Much will depend of the future equation between EU and UK

Brexit: How does it affect India and the World?-UPSC Mains 2016

Positive Impacts of the Brexit referendum to India

  • There are many who think a weakening British currency might be good news.
  • India being more of an importing country than an exporting nation, the overall effect may turn out positive for India (if dollar doesn’t appreciate much against rupee).
  • With lower pound value, Indian companies may be able to acquire many hi-tech assets.
  • As investors look around the world for safe havens in these turbulent times, India stands out both in terms of stability and of growth.
  • Brexit might give a boost to trade ties between India and the UK.
  • Britain will now be free to discuss a bilateral trade pact with India.
  • Due to fall in value of Pound sterling, those who import from UK will gain. Indian export companies operating in UK may also gain.
  • More Indian tourists can afford to visit Britain in coming days as the currency value has fallen.
  • More Indian students can afford to study in Britain (for higher education) as the fees may seem cheaper.
  • Britain will need a steady inflow of talented labour, and India fits the bill perfectly due to its English-speaking population.
  • The fall in the prices of commodities like crude, which will help India save a lot on its import bill(every $1 drop in crude prices leads to roughly $1 billion savings in India’s oil import bill), reducing its trade and current account deficits (CAD).
  • Brexit would weaken global growth and lead to a meaningful decline in commodity prices. This is only going to enhance both the relative and absolute appeal of India.
  • Lower commodity prices will help the macro fundamentals: be it fiscal deficit, current account deficit or inflation, which will give the government more levers to pump up the investment cycle.

Is India ready to handle the Brexit?

  • The finance ministry said that the country has sufficient foreign exchange reserves to handle any impact.
  • RBI Governor Raghuram Rajan said the central bank will infuse whatever liquidity is needed into the Indian market to keep it “well behaved”.
  • SEBI and stock exchanges have beefed up their surveillance mechanism to deal with any excessive volatility.
  • If exports to UK are costly and imports are cheaper, India can think of utilizing the import-advantage by reversing the present trade scenario.
  • Once the dust settles, India may be seen to be a net gainer and inflows would continue to gravitate towards the Indian shores.

Source- Wikipedia,The Diplomat,Clear IAS,,bbc,The Economist ,IMF etc 


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