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Brexit adds to global uncertainties

Brexit adds to global uncertainties
In a historic vote on June 23, the United Kingdom narrowly decided (52 percent to 48) to exit European Union (EU). The decisive "Leave" vote throws the global financial markets into another spell of turbulence and adds to uncertainties on movements of stocks, currencies, and capital flows. Growth recovery in world trade could also suffer.

Though markets rolled all over and there could be some negative impact on trade and finance flows for several countries not excluding India, RBI Governor Dr Raghuram Rajan had already drawn attention to emerging risks in his last policy review on June 7 and cited the country's fundamentals to ride out the consequences.

In a statement within a few hours of the result, Dr Rajan said that the RBI would take all necessary steps, including liquidity support (both dollar and INR), to ensure orderly conditions in financial markets.  The Central bank has been maintaining a close vigil on market developments, both at home and abroad, in the run-up to the referendum in Britain.

Dr Rajan in his latest statement noted that markets were trying to factor the consequences of this development which had already led to sharp corrections in financial markets around the world. "The Indian economy has good fundamentals, low short-term external debt, and sizeable foreign reserves. These should stand the country in good stead in the days to come", he said.

Similarly, a statement from Finance Minister Arun Jaitley, who is abroad, said India was well prepared to deal with the short and medium term consequences of Brexit;. "Our macroeconomic fundamentals are sound with a very comfortable external position, a rock-solid commitment to fiscal discipline, and declining inflation. Our immediate and medium-term firewalls are solid too in the form of a healthy reserve position".

But the vote for "Leave" has landed Britain in a political and economic crisis, considerably weakening the position of Conservative Prime Minister Cameron, who led the campaign to "Remain", and shaking up the markets, the once-powerful Pound tumbling and damaging the image of the world's leading financial centre, London.

The UK economy had been performing reasonably well recently, among advanced nations, despite its current account deficits which peaked at -5.2 percent of GDP in 2015. IMF had projected 1.9 percent growth in 2016 and 2.2 percent for 2017 on the assumption of the country continuing as part of EU.

This will have to be revised down in the light of substantial negative factors that would result from the victory of eurosceptics. The British Government and the Bank of England would be expected to gear policies to ensure stability and reduce uncertainty, whatever the future may behold.

Britain would have to negotiate the terms of its withdrawal from EU once it determines a date even while all this would involve a considerable churning up in politics. Cameron who lost the referendum faces a rival in the leading voice of the "Leave" movement,  Boris Johnson, Conservative MP and former Mayor of London. Cameron has already offered to resign taking responsibility for the defeat of his “Remain” campaign.

The exit has also delivered a shock to EU which has to keep its pack together - especially countries within the euro zone (single-currency union of which the UK was not part). The vote has been viewed by economists as diminishing the roles of both UK and EU with its thirty odd member-countries.
Johnson making a powerful case talked of Britain taking back its "destiny" and believe in what Britain can do in global trade and finance. The other central figure in the "Leave" campaign has been Nigel Farage, UK Independence Party leader, who has built his political career on leaving the EU. He said the "war had been won". Farage, in fact, calls June 23 as the real Independence Day for Britain.

Irrespective of changes that may occur on the British political scene in the near future, the referendum has had an unsettling effect on scores of countries with a historic relationship with London. But Britain has first to gear its policies toward stability and reducing uncertainty. An IMF analysis found that the economic effects of an exit would likely be negative and substantial for the UK.

The United States had taken great interest in promoting the continuance of Britain's EU-partnership.  Indeed, the possible risks from a negative vote in Britain had led the Federal Reserve, among other factors, to go slow with its rate hikes. The coming months would reveal how Britain negotiates its withdrawal from EU and re-sets its economic and political relations with the United States and other advanced nations and the rest of the world. Detached from EU, it would have also to follow WTO rules on trade and related disputes.

Indo-UK economic relations have been solid.  India has over recent years enlarged its business ties with the UK and is now the leading investor there. For many countries including India, UK had held attraction being part of the EU facilitating access to all countries of the single market for trade and investments. This access to European markets was a key driver for Indian companies going to the UK.

Though Indo-UK bilateral trade was relatively limited - worth 14 billion dollars both ways in 2015 - it is one of the seven top countries with which India has a trade surplus.  Leading Indian business organisations feel Britain's exit from EU would create considerable uncertainty for not only Indian businessmen with possible adverse impact on investment but also for movement of professionals to that country.

 There is some concern among the large segment of the population of Indian origin - migrants - given the strident tone of campaigners for quitting EU and the fears they had evoked of Britain being flooded with illegal immigrants from the Middle East who had crossed over into EU. IPA

(The views expressed are strictly personal.)
S Sethuraman

S Sethuraman

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