Looking beyond Brexit: A great opportunity for India’s economic diplomacy
No more uncertainty about the UK continuing within the European Union.
Last weekend was historic for the so-called Mother of Democracy. After all, it was a victory for democratic viewpoints, though over a half-way mark in favour of the Leavers. Once again, it has proved that in a democratic setup, perceptions matter more than wisdom. Nearly 52 percent of the voters, perhaps, didn’t realise that their verdict would weaken their currency to a three-decade low even if they had a ‘couldn’t-care-less’ attitude towards the repercussion on the rest of the world.
The verdict by British citizens may lead to debate over the relevance of certain international institutional mechanisms. Ripple effect of results of the referendum in Britain have already begun spreading, with a few more countries eyeing up a similar exercise. That puts a question mark on the very survival of the Eurozone as a single market. As for India, currently 16.6 percent of exports go to the Eurozone — of which 3.4 percent go to the UK. India depends on the Eurozone for around 11 percent of total imports, while the UK exports around 1.4 percent of our requirements.
The above figure indicates significant trade relations with the European market. Looking from the macro angle, it should not have any effect on India’s trade relations as all the affected countries are members of World Trade Organisation. Hence, trade relations are bound to be conducted as per WTO guidelines. Therefore, we need not wonder whether the Eurozone crumbles or not.
On the other hand, it may open up an opportunity to India in terms of economic diplomacy.
Right from inception, the developed countries have been dictating terms to the rest of the world including India, especially, with regard to agricultural subsidy support, intellectual property rights, movement of manpower etc. Strong-arm tactics could be utilised against the developing countries mainly due to the economic strength of the US, European countries and Japan. However, the situation started moving in the reverse direction over the past decade. While the Indian economy started growing at a faster rate, others started experiencing deceleration in economic performance.
During the first NDA government, India succeeded in mobilising the developing countries and stood up to the strong-arm tactics by developed countries. No doubt, the developing countries were effective in convincing the developed countries about the necessity of amending multilateral trade norms to provide breathing space to the former. It is a different case that the agreed resolutions are yet to be implemented. Now that there are definite signs that the Eurozone is getting weakened, over and above the already weakened economy, there is a ray of hope for countries like India at multilateral trading fora like the WTO. If economic diplomacy is used shrewdly, there may be scope to win over even a few European countries and be used at the time of multilateral trade negotiations.
Prime Minister Narendra Modi has been moving around different regions starting from neighboring countries, then Japan, China, US, Russia, Germany and so on — the agenda being economic interests. That includes the recent bid to become a member of the NSG. Shrewd strategists within the PMO might not want to ignore the new opportunity falling in their laps to strengthen diplomatic strategy with an economic agenda.
However, one cannot afford to be complacent.
The advantage we see in terms of international trade diplomacy may turn opposite in terms of its effect on domestic economy unless corrective measures are initiated immediately. The government’s stand that Brexit would not have an adverse impact may be taken in the spirit of a general trying to maintain the morale of his soldiers even at not-so-hopeful condition. As on today, overall fundamentals of economy are certainly strong, especially, comfortable foreign exchange reserves at more than $350 billion. That does not mean that one should blindly watch drifting the situation.
The day the Leavers in Britain celebrated their so-called victory, major markets across the world crashed. Even the Indian market crashed by more than 1,000 points (Sensex). A fall in the index per se could be dismissed as by and large, it’s only usually rich investors who have the habit of speculating. What is worrying is the cause of the market fall and its spread effect. When a huge amount of foreign investment is withdrawn leading to market crashes, the rupee also becomes weaker. Last Friday, the Indian rupee weakened by 90 paise against the dollar. It is too early to conclude that the development is temporary. It all depends on how the battered Eurozone manages itself and equally, how the UK economy manages itself with weakened clout. It also depends on whether the UK prefers to reverse Thatcherism under the presently inward-looking political leadership.
On external developments, the government cannot do much. After all, for foreign institutional investors’, the priority is their domestic economy. However, host markets can try to minimise the withdrawal of portfolio investment. Giving a big push to economic reforms as in July 1991, is the only way to mesmerise the foreign portfolio investors and force them to have a second thought on leaving Indian markets under the compulsion of developments at home.
Perhaps, it is high time we evolve a broader political culture and approach to issues relating to external developments and national security. The government should take the Opposition into confidence on such issues and evolve a consensus approach as the political leadership in the US or UK does. Otherwise, it may not be easy to stave off the ripple effects. For instance, a weakening rupee would also mean high import costs, especially, a likely rise in the crude oil import bill and its spread effects in terms of increasing inflation. Therefore, the political leadership should go for a consensus approach on pending reforms such as GST, labour reforms, cleaning up of stressed debts with banks and fiscal discipline within the government in order to entice foreign portfolio investors.
The one major positive development due to Brexit is the postponement of the proposed hike in the federal rate. This would certainly deter foreign portfolio investors from withdrawing from the market, thereby, minimising its ripple effects, especially, the weakening of the rupee and widening trade deficit due to rising costs of importing crude oil and other necessities.
Does it mean that we should shy away from our commitments to the nation?
The author is a former member of the Prime Minister’s Economic Advisory Council and currently, professor of economics at Birla Institute of Management Technology