There have been various views expressed by experts about the impact of BrExit on the UK economy, Global Economy and more specifically on the Indian economy. The stock markets have provided a first day feedback which was alarming. There is every reason to believe that the down trend may resume on Monday since the immediate effect of BrExit on the balance sheet of some companies may become evident when the quarterly results keep tumbling out in the following week. Infy or TCS results are usually the first to come out and investors would keenly watch the announcements to understand how well these companies had hedged the exchange risks and how they view the forthcoming changes in the EU business.
The stock market reaction will however be more to do with the fact that the result was “unexpected” and “Not factored into the pricing” rather than the real fundamental factors.
Unless there is a “Hate driven” reaction from the other EU countries on UK, I donot see much fundamental adverse effect of BrExit on the Indian companies. There could be some temporary slow down in sales out of UK to EU and some tariff barriers to cross. But these can be managed. However, if there are multiple break outs then there will be a continued uncertainty and several rounds of changes that may slow down the activity more than what should happen if EU does not break up further.
As far as the Indian companies are concerned, I have already indicated in my previous post that RBI and SEBI should immediately review the impact and work out a formula of temporary regulatory concessions as an extraordinary measure to ensure that the stock market is not further jolted when the quarterly results are announced in the next fortnight. I am not sure if they would do anything since they are as much shocked as the Companies by being completely being unprepared for the unexpected outcome.
Leaving aside the financial packages that RBI and SEBI should work out, it is necessary to point out that the problems seems to have occurred because the EU Constitution itself was faulty and did not properly structure the Exit provisions.
We can observe that BrExit referendum indicated that 51.9 % of the persons who voted favoured the exit as against the 48.1% who were against. The response was completely skewed in different regions also making it a highly divided response. The total turnout was only 72.2% which meant that it was eventually only 37.47 % of the electorate who voted for “leave” and caused the chaos which affected not only the 100 % of the electorate but also others in EU and outside.
The root cause analysis of the problem indicates that the EU constitution that allowed such a referendum decision was itself faulty. We understand that the entry of countries into the EU was also through such a referendum by simple majority of those who voted. But having allowed entry and working within the Union for a long time, the severance cannot be considered by the same yardstick since people’s life and financial positions have been irrevocably altered by the UK joining the EU. Hence there should have been a difference between the “Entry Referendum” and “Exit Referendum”. Either both should have been based on “Change only when more than two-thirds want”. Having erred earlier, at least now the EU constitution has to be changed to making an exit referendum valid only if 67% of the total voters want the exit and not when only 37% want it.
Before the other countries think of a referendum, EU constitution needs to be amended to prevent further exodus.
However any prospective change cannot save BrExit. But a provision can be made in the changed constitution that if after a referendum by less than 67% as it happened in BrExit, another referendum holds by more than 67% of the total votes polled then a country can rejoin. This will still mean that the existing “Leave” voters of BrExit who number 37% can block the re-union unless they change their views.
The reason why “Exits” have to be made difficult is that this is like a “Plebiscite” referendum. It is always skewed towards the “Let’s separate” vote since it is a natural reaction of the population and even minor differences get blown up with a demand for independence. Referendum is a democratic process but it cannot be applied everywhere. Every pocket of influence at country level starts conducting “referendum” then the notion of a country itself will be at stake.
One way by which we need not do away with this democratic decision but recognize the “Newton’s Law” that an “External Force” needs to be injected to change the current state of a body is to introduce the need for 67% or at least 60% of the total electorate to vote for a change either to leave or join and until then the body should remain in its current state.
I therefore urge EU to immediately revise its constitution in this regard to prevent breaking up of EU.
At the same time UK needs to negotiate with the EU to ensure that the damage is limited by ensuring that an “Economic Zone” is created within London (Similar to the SEZ zones as we know in India) which will be “Special EU business zones” from which companies can operate as if no change has taken place. This will separate the contentious “Migration” issues from the not so contentious “Economic” issues of being with the EU or not.
Then the companies who fear economic damage due to the BrExit may move their headquarters to these zones or their present location can be declared as a “Special EU Economic Zones”. There can be suitable segregation of activities of these Special Economic Zones so that those who have voted to “Leave” may still live in their own world and let those who have voted to “Remain” donot get adversely affected. If required, these Special EU Zones may be made available only to existing Non British entities only and not extended to locals and new entrants.
I hope such an arrangement will be a Win-Win solution for all.
I urge Mr Narendra Modi to take up this suggestion with EU and UK so that the pain of BrExit on India is reduced.