After a tight and rough race, British voters have chosen to exit the European Union, in the “Brexit” referendum organised on June 23. It triggered a wave of uncertainty and volatility on the world markets, including Indian ones. The Sensex and the Indian rupee fell sharply. Indian political leaders try to be reassuring about the Brexit consequences for India but experts are worried about the impact on Indian companies, such as Tata Motors, having a strong link with Britain and the EU.
Brexit it is. In an historical referendum, Britain has voted with a 52/48 pc split to leave the European Union, according to the final results of the June 23 tight and highly contested ballot. British Prime Minister David Cameron said he would step down by October after this defeat. This result opens up a new era of uncertainty for Britain and for an EU still battling with an economic crisis, the rise of anti-European and nationalist movements.
It also happened in a globalisation context where pro-Europeans would on the contrary like to push for a more federal and unified EU, from the Eurozone monetary and fiscal policy to the foreign and defense policies, confronted with the refugee crisis from Syria or tensions with Russia.
World financial markets took a plunge after this result, announced only early morning in Britain, as the counting was a tedious process. The British Pound had its biggest one-day fall against the dollar (more than 10% dive) and hit a 31-year low against the US currency, as investors are worried that this outcome will penalise investment in Britain, and the trade of the world’s 5th largest economy, still highly dependent of the EU for its exports and imports.
The euro lost 3 pc against the dollar, since markets fear a political and economic weakening of the EU, which would turn into a 27-member Union. On the contrary, Gold attracted investors in urgent need for safe heaven assets.
Indian markets expressed the same big worries. In Mumbai Stock Exchange, the Sensex index lost nearly 1,000 points after the Brexit and the Nifty50 went below 8,000 points. Tata Motors, top Nifty looser, lost initially as much as 13.7%, Tata Tata Steel, second dropper, 8.6%. In the IT sector, Tata Consultancy Services fell by 4.2%, Tech Mahindra by as much as 5.1%.These are stocks and sectors exposed to Britain and EU markets but all Nifty stocks, except Sun Pharmaceutical, receded.
The Indian Rupee fell by 89 paise against the US dollar to 68.17 in early trade but recouped some of its loss after the Reserve Bank of India (RBI) intervened to infuse liquidity in the markets.
Political and expert reactions in India reflected these concerns in terms of volatility and political or economic uncertainties after the Brexit.
“There’s going to be market dislocation and we are going to have to focus on that”, said Jayant Sinha, Indian Finance Minister of State.
“We are well prepared to deal with short and medium-term consequences of Brexit” added Indian Finance Minister Arun Jaitley, saying that the India government was strongly committed to the macroeconomic framework with rock solid commitment to fiscal discipline, in a context where investors tend to flee markets perceived as more fragile.
“India’s trade is not going to be impacted significantly and firepower will be used judiciously”, reassured Shaktikanta Das, Indian Economic affairs Secretary.
Nearly 20 pc of India’s total trade is with Europe and approximately 800 Indian companies are operating in the UK and Britain’s exit from EU may affect their investments.
India was not in favour of a Brexit
India’s external affairs minister Sushma Swaraj had said that India prefered Britain to stay within the EU. “We have always held that, and articulated too in the past, that Britain is the gateway to the European Union”, she said.
In Britain, which had joined the Economic Community (EEC) in 1973, Brexit partisans rejoiced loudly. “Dare to dream that the dawn is breaking on an independent United Kingdom,” said Nigel Farage, leader of UK Independence Party (UKIP), the eurosceptic party, adding that the EU was a “doomed project”.
Scotland voted 62 pc in favor of remaining in the EU and could now organise a new referendum about its independence, after the 2014 one when it finally decided to stay in the UK. Northern Ireland nationalists could also push for a UK exit.
EU leaders such as German Chancellor Angela Merkel or French President Francois Hollande and world leaders such as American President Barack Obama, Chinese President Xi Jinping, had all backed a “Remain” vote, saying that Britain would be better and more powerful in the EU.
Renegotiate trade agreements
This exit will force Britain to renegotiate its access to the EU’s trade barrier-free single market but also to draft new trade agreements with other countries outside the EU. Before the vote, French Economy Minister Emmanuel Macron said: “When you’re out, you’re out”, adding that Britain should not expect a special treatment.
The Brexit supporters believed that after leaving the EU, UK will be free to enter into a free trade agreement with any country including India, China and America, while currently, Britain operates with single market mechanism under the EU. The ‘leavers’ argue that independent Britain will be free of EU regulations, control its borders, restrict immigration, save the money it pays into the EU budget and reform policies and regime for the movement of people.
While the ‘remainers’ opposed the exit as according to them, there is a risk of losing access to the huge EU market for its exports, but also of loosing concrete advantages like cheap prices in supermarkets, cheap flights to Europe and lower phone charges while travelling.