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Impact of BREXIT on Business Studies and Entrepreneurship
Students must keep eye on the latest event of BREXIT. Why Britain separating itself from European Union and what will the impect of BREXIT on Indian market. Such questions will surely be asked in class-11 and 12 Business studies and Entrepreneurship.
- Impact of BREXIT on the Business Environment i.e.
- Economic Environment
- Social Environment
- Political Environment
- Legal Environment
- Technological Environment
- Ecological Environment
- How an Indian business firm working at international level can change the negative effect of BREXIT into business opportunity?
- What is the impact of BREXIT on the Indian Economy?
- What Financial Strategy Indian companies can form to avoid the negative effect of BREXIT.
- What steps Indian Government should take to avoid the impact of BREXIT?
Here is some basic information about BREXIT.
Brexit: why Britain left the EU
Britain voted to leave the European Union, a decision that surprised many and one whose consequences still aren’t totally clear. We don’t know quite yet what this will mean for the future of Britain’s economy, its policies, and its relations with other European countries.
There have been many twists and turns in British politics that have led to this particular moment. But you don’t necessarily need to have followed those to understand why the British want to leave the European Union, and why the EU matters in the first place.
That’s what this cartoon is all about: how the EU came to be, and how Britain came to decide not to be part of it. And this will help make sense of the biggest, looming question: What happens next?
Why does the European Union exist, anyway?
Europe is a collection of countries that used to fight a lot. For example, in World War II countries within Europe fought against one another, and it greatly hurt the continent.
So after WWII, many countries felt it was important to integrate European countries — starting with the coal and steel industries and then expanding to a broader set of trade issues.
Countries often make rules about things coming into their countries. For example, if you wanted to make a car in France and ship it to Britain, you would have to pay a tariff to Britain to do so.
Or let’s say you’re French and you wanted to live and work in Britain. You would have to go through a long immigration process to legally do so.
Western Europe has dozens of countries, each with its own trade, immigration, and economic policies. Trying to navigate these rules was very inefficient. The European Union essentially started from a question: What if each country had the same rules? What if all the barriers came down?
And that’s what the EU did.
Almost every Western European country joined the group to merge their economic rules in 1993. They did this by allowing people, goods, services, and capital to move freely between member countries. It’s kind of like how states in the US work.
The EU has helped foster long periods of economic prosperity, and it’s helped keep the region at peace.
There are challenges to cooperation. When something bad happens, it affects everyone.
The appealing part of the EU was that it made it easier for European countries to share in one another’s prosperity. But, as with any union, cooperation means weathering downturns together — and that hasn’t always been so easy.
Take, for example, the 2008 financial crisis. Many economists agree that the European Central Bank failed to respond effectively, leading to a recession that was much more severe than it needed to be. Unemployment rose, and tax revenue fell. Banks needed bailouts, and debt in a number of EU countries soared.
Seeing the EU in such crisis made some have second thoughts about being yoked to it — and increased worry among wealthy countries (like the UK) that they might have to help bail out less wealthy countries down the line.
And some Brits didn’t like that many foreigners were moving to Britain after the EU was formed
The new European Union made it much easier for citizens of one country to migrate to another. And Britain’s foreign-born population skyrocketed after it joined.
Experts see two main forces driving this trend:
- The EU expanded to include post-communist countries in the mid-2000s, and people in those countries were poorer. Many of their citizens immigrated to wealthier countries — like the United Kingdom.
- The 2008 market crash hit some European countries especially hard. When people from those countries couldn’t find a job at home, their citizens went to find jobs in other countries — like the United Kingdom.
As my colleague Zack Beauchamp writes, “The British labor market was relatively easy to break into, and lots of people across Europe speak English, so it was a natural target for these Southern Europeans.”
Tensions over immigration have risen significantly in Britain in recent years
Twenty years ago, barely anyone thought immigration or race relations was one of the country’s most important issues.
Times have changed.
In a survey conducted last year, 45 percent of Brits identified “immigration/race relations” as a top issue facing the country.
Seventy-seven percent of Brits today believe that immigration levels into the country should be reduced.
Last year, British Prime Minister David Cameron announced a referendum on whether Britain should remain in the European Union.
That’s Brexit, the vote that happened yesterday.
And by a slim margin, the British voted to leave the European Union.
This is causing a lot of chaos in Britain; nobody fully knows what will happen next.
Cameron announced his resignation because he was against leaving the EU, and he believes the country should have a leader who wants to take Britain in the direction voters have chosen. The vote doesn’t necessarily bind Britain to leaving the EU, but it likely will, because defying the will of the people would be politically bad.
Untangling from the EU would be a long, painful process
The UK and the EU have two years to figure out the terms of the exit — what rules would still apply to Britain and what privileges Britain would still get.
If there isn’t some kind of deal that softens the blow — that lets Britain continue to take advantage of at least some of the European Union cooperations the country previously enjoyed — it’ll be ugly.
Economist Jacob Funk Kirkegaard told my colleague Timothy B. Lee that right now UK carmakers can pretty safely assume they can sell their cars in any EU country, because everyone has the same standards. But if there is no agreement, selling that car across the EU could become a lot more complicated.
And this wouldn’t be just about cars — pharmaceutical products, technology, food, or anything else Britain produces could lose its easy entry into other European countries.
It will be tougher for people to move across borders
About 1.2 million Brits currently live in other EU countries. Right now they are able work in these other countries without much hassle. That would change.
There is a possible scenario in which Britain gets to keep its economic agreements in place
One idea is for the British to make a deal with the EU that lets them keep their economic privileges, kind of like Norway. But as my colleagues point out, the EU might not be in a forgiving mood, given that Britain just voted to leave. And this agreement still wouldn’t help the British get out from EU regulation.
What are the greater implications?
The EU made trade with Europe much easier for the US, and it also made it easier to ask Europe for geopolitical help. Instead of talking to dozens of different countries, American officials could go to the EU and negotiate with a large chunk of the continent.
Now Britain may not be part of that discussion.
Britain’s departure could have ripple effects throughout Europe, too.
“Poor economic performance and inconsistent handling of the migration crisis have driven majorities in many countries — including France and Spain — to say they’d like a UK-style chance to vote on quitting the EU,” my colleague Matt Yglesias wrote earlier today.
Britain’s vote is a big deal. But it could be the start of something bigger, too. This might be the first of many political expressions of discontent among EU countries, potentially causing the disintegration of Europe.
Brexit: Bad For Britain, But Potentially Good For India
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
Students must keep eye on the latest event of BREXIT. Where Britain separating itself from European Union. There are few questions which may be part of the coming examination.
Brexit impact on India: Uncertainty in IT, rupee seen at 70, softer oil prices
The decision by the UK leaving the European Union has impact on India on multiple layers. However, economists and experts are of the opinion that the country need not be overly worried about the development as the transition is going to be slow and also more details are to be expected.
Here’s a decoder by various experts on the issue:
Investment plans may be delayed:
Aditi Nayar, senior economist of rating agency ICRA, said post the Brexit, uncertainty may weigh upon the performance of merchandise and services exports and delay the concretisation of investment plans, partly moderating the expected benefit of the recent FDI reforms.
“The extent of disorderliness in global markets and risk aversion as well as political developments in the European Union would determine the level of contagion in the Indian financial markets as well as the impact on Indian economic growth, although domestic consumption would largely cushion the latter. On balance, there are modest downside risks to our forecast of an improvement in growth of India’s GVA at basic prices to 7.7% in FY2017,” she said.
Rana Kapoor, MD and CEO, YES Bank, expects some some adverse spillover on India in the very near term through financial linkages with rest of the world.
“However, I expect the dust to settle down soon as our policymakers have enough ammunition to ward off unwarranted volatility. Despite regular bouts of economic, financial, and political crises globally over the last two years, India has proved its economic mettle by boosting structural and institutional factors of growth while adequately ring fencing its vulnerabilities,” he said.
Sunil Kumar Sinha, principal economist, India Ratings & Research, said the event will have both positive and negative impact for India. “As Brexit will vitiate the already uneven and fragile global recovery, it will exert downward pressure on global commodity prices and India will benefit being a net commodity importer,” he pointed out.
File photo of a group of Brexit supporterrs. Reuters
However, he sees a number of Indian corporates having exposure to Europe/UK either through trade or in case their production units are located there getting adversely impacted.
Though India is a largely domestic-driven economy, it is no longer immune to global events as was the case in the past. Anis Chakravarty, lead economist and partner, Deloitte in India, does not see a significant impact on the India-UK bilateral immediately as it has been more or less stable in the last five years.
UK serves as a very important trade partner and also serves as the gateway to EU. In the 2016 financial year, India-UK bilateral trade was worth $14.02 billion. India exported goods and services worth $8.83 billion while imports from the UK were at $5.19 billion.
Uncertainty for the IT sector:
According to the IT lobby group Nasscom, as much as 30 percent of the industry’s $100 billion revenue comes from the European market, which is the second largest for the India’s IT-BPM sector.
Its initial analysis said in the near term a likely decline in the value of the British pound could render many existing contracts losing propositions 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,” it said
However, Sanjoy Sen, doctoral research scholar, Aston Business School, in the UK, does not see the negative impact on the IT sector to more than 1-2 years by which time alternative trade arrangements between the UK and other European countries will be put in place.
Bad for automobile sector:
Subrata Ray, senior vice-president, co-head, corporate sector ratings, ICRA, said the EU today accounts for 35-40% of auto component exports from India. He sees this getting potentially impacted by market volatility and by any slowdown in the region due to policy uncertainty.
“Apart from Auto components, OEMs (original equipment manufacturers) also export passenger vehicles from their Indian manufacturing units, which may get impacted in the event of any slowdown. Further, relative depreciation of GBP (pound) and euro may impact their margins as well,” he said.
According to a Reuters report, the British pound fell as much as 10 percent against the US dollar on Friday to levels last seen in 1985 on fears the decision could hit investment in the world’s fifth-largest economy, threaten London’s role as a global financial capital, and usher in months of political uncertainty. The euro slid 2.0 percent against the US dollar. The pound’s decline was the worst in the history.
“The overall ‘Brexit’ process however is expected to be slow – the formal process should take about two-years. While potentially manufacturing based in UK can face EU import tariffs in the future, the final outcome would depend on how the existing trade & regulatory arrangements are negotiated,” Ray of ICRA said.
Oil price may fall but stronger dollar will offset:
Kalpana Jain, Partner, Deloitte in India noted that in response to referendum, oil prices immediately declined by 5%. Terming this as an economic thumbs down to the referendum result, Jain said it is expected to be a shortlived phenomenon as core oil fundamentals remain unchanged.
“Oil prices have been range bound in the last 3 weeks above $45/bbl and a stronger demand and supply outlook has elevated prices in the last one month or so on the back of supply disruptions helping to curb inventory build-up in the US. The uncertainty surrounding the British and European economies have depressed the pound and the euro and Brexit verdict has strengthened the US dollar which in turn suppresses crude prices which are traded in dollar making it more expensive in other currencies,” she said.
According to her, the shift from an oversupplied to a balanced market – which is presently underway – may overcome the impact of slightly weaker demand due to currency effects. “Given our large import basket, for India lower crude prices help but stronger dollar offsets those gains,” she said.Ravichandran, senior vice-president and co-head, financial sector ratings, ICRA, concurs with Jain’s views but feels the net impact for the Indian refining and marketing (R&M) industry will be positive.
“Overall impact should be positive for PSU upstream companies as well, so long as oil prices are within $40/bbl-$45/ bbl, as the recent oil price rally was resulting in higher cess incidence. GoI also stands to gain through lower subsidy burden on LPG and SKO,” he said.
Rupee may hit 70 vs dollar:
Nayar of ICRA said the high foreign exchange reserves in historical terms (at $363.82 billion as of June 17) will moderate short-term external debt even after accounting for the upcoming FCNR(B) redemption. Moreover, a narrow current account deficit is expected to limit the vulnerability of India’s external account.
“If the fall in crude oil prices sustains, it would offset the impact of lower exports on the current account deficit as well as the effect of the depreciation of the INR relative to the USD on inflation. We expect the INR to remain in the range of Rs. 67.5-70.0/US$ over the course of FY2017,” she said.
Dhananjay Sinha, head of institutional research at Emkay Global Financial Services, also sees the rupee moving in the 68-70 range.
“With every 100bps change in currency the impact on CPI is 17-20bps and on WPI is expected to increase by 22-25bps,” he said.
In the current juncture, with rising concerns on diminishing structural support to external flows, the volatility of the external financial conditions would create a further pressure on the forex reserves.
“In the near term, this development could increase the probability of higher outflow from the upcoming FCNRB redemptions during Sep-Nov’ 2016, thereby adding to the expected liquidity deficit,” he said.
Article Submitted by: Dr. Vinod Kumar, Author Ultimate Book of Accountancy.