The United Kingdom has become the first country to leave the European Union (EU) and in that process, has plunged the world into an era of increased uncertainty. The result of the referendum held on Thursday to determine whether the UK will remain or exit the EU has stunned the world which, despite adverse opinion polls, steadfastly believed that the people of the UK may go up to the brink but would not take the plunge (by exiting the EU). Now that they have, the global economy has plunged into turmoil. The pound sterling has crashed by ten percent, the highest fall in its trading history and its lowest level since September 1985. The rupee too has depreciated (thankfully as much as other major currencies) and stock markets across the world have crashed. FTSE is down by 500 points while the Sensex is trading lower by more than 1000 points. Gold has jumped by 7 percent as it is seen as the most stable asset in these uncertain times.
“It is certainly a shock,” said Reserve Bank of India (RBI) Governor Raghuram Rajan while speaking to news channels. “Opinion polls did not reflect the real intent of the people.” He said the RBI is prepared for any eventuality and will intervene if the rupee depreciates lower than other currencies.
The Indian government too moved quickly to calm the markets. Jayant Sinha, minister of state for finance, said that the finance ministry has put in contingency plans in place to deal with this development. He assured that there will be enough liquidity in the system. “The market is adjusting to a different set of expectations… As long as the reaction is orderly, the markets should be allowed to adjust,” he said. “We do not want systemic issues.” In the long term, he said trading arrangements have to be put in place and predicted turbulent times ahead.
He also pointed out capital flows where there is stability, growth and quality of political leadership. India, he said, is an ideal place for investment today. He also said that this was the right time for India to pass the GST law and tell the world that India means business. “We are hopeful,” he added about passing the GST law in the forthcoming monsoon session of Parliament.
What has riled the world is the uncertainty that the world has been thrown into. What will happen to the value of pound sterling now? The UK, as Rajan pointed out, has a large current account deficit. How will that impact other currencies? Will this be the beginning of the end of the EU? Will more companies now exit the grouping? Will it bring to an end the post-war world order that was based on free movement of goods and people? In a way, people of the UK have taken a leap into the dark.
Indian companies which have invested a lot in the UK should be worried. Over 800-plus Indian firms have invested $2.75 billion into Britain in the last few years. The Tata Motors stock has taken a beating as the Brexit could make its Jaguar and Land Rover cars manufactured in the UK less competitive in mainland Europe. Tata Steel may now find it even more difficult to find a buyer for its steel assets in the UK. Its shares have also fallen. Same is the case with other companies such as Motherson Sumi and Bharat Forge.
In terms of overall trade with Britain, experts do not expect a major impact. Today the bilateral trade is $14.02 billion (Exports $8.83 billion and the remaining imports). A new bilateral deal needs to be put in place and considering the historic relations between the two countries, the trade is unlikely to decline. Some even say that in the absence of restrictive EU clauses, trade may well increase.
The exit vote has thrown up a much larger question. Are the governments in developed nations such as the UK or even the US doing enough to bridge the widening income disparity? The UK vote to leave the EU basically stemmed from the fear of immigrants and the likely worsening of the already-bad income inequality levels. The issue of income equality is today a larger question that even governments in developed world ponder over.