After months of intellectual meanderings, it is here finally – Brexit. Initially it looked likely that the “remain” campaigners would win, having garnered support from none other than the British Prime Minister, the Labour Party and more than 50 per cent of Tory members. As the referendum date got nearer, a different picture emerged. The voices in support of the “leave” campaign became louder. And now it has happened!
India has reached that stage of economic maturity and integration with the global economy where it can no more remain insulated from major global shifts. This note provides a quick analysis of the facts, possible implications and what could impact our sector – positively or negatively. We will continue to track this and provide regular updates as things become clearer.
- Shock vote in the UK but again many were reading exit polls that are done in cities where people who participate in exit polls do not actually vote
- People have voted more emotionally than based on economics. Intra EU migration has been a key factor behind the vote that caused people to ignore the advice of many political leaders, leading economists, intelligentsia and international luminaries. We need to understand the strength and causative factors of these emotions.
- Brexit vote makes UK first country to leave the EU; EU Emergency meeting likely soon
- Means deal negotiated by PM Cameron with the EU will not be implemented in the UK.
- GBP is down 10% and Stock markets including FTSE, DAX & CAC opening 8-10% down today which means that UK recession is likely; even the Sensex is down
- Euro is down 8% if that lasts can trigger EU recession as well
- Yen has appreciated almost 5% against dollar at around 100 = $1 which ; more and it can trigger another recession in Japan
- PM had earlier indicated that if UK voted in favour of Brexit, they would invoke Article 50 which means that UK will have 2 year to negotiate divorce thereafter; but in his statement outside 10, Downing Street after the vote, he announced that he would make way for a new leader by October who would then initiate action to invoke Article 50. Meanwhile assured stability, (though this may not calm nerves)
- Exit terms of UK will only come through after Article 50 is invoked
What it means for the UK?
- Mistake of making ‘referendum’ a binding commitment instead of mood-gauging tool
- Political changes that would ensue in the wake of the vote at leadership and key cabinet positions. PM has already indicated that he would make way for new Prime Minister in next couple of months to let new leader to negotiate severance deal. Leavers like Boris Johnson, Michael Gove, Andrea Leadsom, Chris Grayling, Priti Patel and John Whittingdale are now likely to dominate the Government, lead exit negotiations and Leavers will be in a strong position in any leadership election.
- The political career of his ally George Osborne is very cloudy. He cannot now be Cameron’s successor. Boris Johnson and Teresa May are most likely contenders, but the state of the party is so fragile and turbulent that predictions are very dangerous.
- England voted overwhelmingly for exit, Wales voted for exit, though by a small margin, Northern Ireland voted to Remain by a small margin while Scotland voted overwhelmingly to Remain. This wide variation in preferences could open up old fault lines like Scotland revisiting the decision to remain within UK.
- Downgrade of the UK by rating agencies possible
- India would likely become a more important partner for UK
What it means for the EU?
- Disintegration of EU could be triggered by one of the biggest constituents deciding to leave EU
- Other countries may follow suit or hold similar referendum leading to more uncertainty
- Biggest takeaway is – Vote is against EU and its policies from a nation that was never a whole hearted member of the EU ; this vote is also against non-inclusive growth
- EU without UK looks less attractive to India so EU – India deal could be a casualty
- EU will also struggle to sell itself with the deals that it has already negotiated and currently negotiating e.g. with Canada, Korea, TPP, TiSA
- Another Greece type of crisis could accelerate disintegration of the EU
- EU reactions to the vote would be important. Initial responses have been sober and mature and could moderate concerns of businesses
Global Issues to Watch out for in the near term
- 1. UK recession
- 2. Protectionism would gain ground as each country thinks about itself
- 3. Trump win in the US
- 4. Euro unravelling
- 5. China crash landing
Likely response from Central Bankers
– US Fed may not hike rates for long – not before Dec’16
– UK could reduce rates and add some form of QE with it
– Japan could bring out QE to pump up liquidity and cash
– India might also join and cut rates
What it means for Indian IT / India
– Every crisis presents opportunities as well
– Every such monumental move has two sides to it
- With intra EU migration controlled / addressed there would be lesser pressure on the UK policy makers to curtail non EU migration of skilled workers over a period of time
- EU Directive on Data Flows and regulations like GDPR recently released by the EU will no longer be binding on the UK which means data flows with the UK will not be an issue for Indian IT
- UK regaining its sovereignty for fast tracking deals with favoured trading partner such as India; India UK FTA deal could move quickly as India has lesser reservations with aggressive interest of UK companies than from EU companies.
- Companies that operate in UK and Europe may need to tweak systems and underlying IT layers, which may open up business opportunity for Indian IT companies. However this will be phased over the exit plan.
- Indian EU deal negotiation strategy can change as EU without UK is less attractive – whether for Indian IT or India in general
- Likely decline in the value of the British Pound, which could render many existing contracts losing proposition unless they are renegotiated.
- The uncertainty surrounding protracted negotiations on the terms of exit and/or future engagement with EU could impact decision making for large projects
- Indian IT companies may need to establish separate headquarters/ operations for EU, may lead to some disinvestment from UK.
- Skilled labour mobility across EU and UK could be impacted in the short term
- Uncertainty about the relationship UK will have with the EU after the severance, will it be like Switzerland or Norway given that UK has been taking more or less its own decisions even while staying within EU
- Disintegration of the UK and EU cannot be good for world economy and India
This is technically not a binding decision and will have to be endorsed by Parliament. There remains a slim chance that another renegotiation and second referendum might be on offer (the PM’s recent statement seems to be aimed at creating options), but it is more likely that an orderly departure will be agreed upon
The EU is likely to demand an immediate start of formal withdrawal negotiations under Article 50 of the EU Treaty.
The precise nature of relationships will not become clear for a while, but a trade agreement of some kind is essential for the UK and desirable for the EU.
Eurosceptic voices in the EU are heartened by this and the damage to the EU project more generally is immense and threatening. The likely response is for EU political elites to act together with more urgency to deflect further referendums being triggered.