What is Brexit?

Brexit is an abbreviation of "British exit", which refers to the June 23, 2016
referendum by British voters to exit the European Union. The referendum roiled
global markets, including currencies, causing the British pound to fall to its lowest
level in decades. Prime Minister David Cameron, who supported the UK remaining in
the EU announced he would step down in October.
The European Union - often known as the EU - is an economic and political
partnership involving 28 European countries. It has grown to become a "single
market" allowing goods and people to move around. The United Kingdom Prime
Minister, David Cameron at the time of his election had promised to hold a
referendum on whether the UK should remain in the EU? The referendum has been
held and the people of the UK have voted 52:48 in favour of an Exit.
Popular support for Brexit had varied over time, but the June 23rd vote
demonstrated that UK citizens believed that Great Britain can survive without the
economic cooperation, trade agreements and partnerships that benefitted the
country for the past several years. Brexit is tied in with Scotland's membership in
the United Kingdom. Scotland had voted to remain in the European Union, and after
the narrowly contested vote, First Minister Nicola Sturgeon said in a statement on
the Scottish National Partys website that she would explore all options to remain in
the EU.
Article 50
Mrs May has made it clear that she plans to tell the EU that Britain wants to leave
the bloc by triggering Article 50 some time next year. The use of Article 50 starts
the timer on two years of exit talks before the UK is expelled from the political bloc.
The Brexit vote has sparked calls for a second Scottish independence referendum
because of majority of Scots voted to remain in the EU during the referendum.
Spain's Government has also called for joint control of Gibraltar and Sinn Fein is
demanding a vote to unite Ireland and Northern Ireland. Jeremy Corbyn has been
forced to stand in leadership contest against MP Owen Smith after mass
resignations over to his lukewarm support for the EU. Leading Brexiteer Nigel
Farage resigned as the leader of Ukip on Monday July 4 after achieving his life
goal of getting Britain out of the EU.
Article 50 of the Lisbon treaty sets out how an EU country might voluntarily leave
the union. The wording is vague, almost as if the drafters thought it unlikely it would
ever come into play. Now, it is the subject of a dispute between EU leaders
desperate for certainty in the wake of the Brexit vote, and Brexiters in the UK
playing for time. Article 50 says: Any member state may decide to withdraw from
the union in accordance with its own constitutional requirements.
It specifies that a leaver should notify the European council of its intention,
negotiate a deal on its withdrawal and establish legal grounds for a future
relationship with the EU. On the European side, the agreement needs a qualified
majority of member states and consent of the European parliament.
The only real quantifiable detail in the article is a provision that gives negotiators
two years from the date of article 50 notification to conclude new arrangements.
Failure to do so results in the exiting state falling out of the EU with no new

provisions in place, unless every one of the remaining EU states agrees to extend
the negotiations. No country had ever invoked article 50 yet.

Why did Bexit happen?

Membership fee
Leaving the EU would result in an immediate cost saving, as the country would no
longer contribute to the EU budget, argue Brexiters. Last year, Britain paid in 13bn,
but it also received 4.5bn worth of spending, says Full Fact, "so the UK's net
contribution was 8.5bn". That's about 7 per cent of what the Government spends
on the NHS each year.
Trade
The EU is a single market in which no tariffs are imposed on imports and exports
between member states. "More than 50 per cent of our exports go to EU countries,"
says Sky News. Membership of the bloc means we have always had a say over how
trading rules are drawn up.

Britain also benefits from trade deals between the EU and other world powers. "The
EU is currently negotiating with the US to create the world's biggest free trade
area," says the BBC, "something that will be highly beneficial to British business."

Britain risks losing some of that negotiating power by leaving the EU, but it would
be free to establish its own trade agreements.

Ukip leader Nigel Farage believes Britain could follow the lead of Norway, which has
access to the single market but is not bound by EU laws on areas such as
agriculture, justice and home affairs. But others argue that an "amicable divorce"
would not be possible.
Investment
Inward investment was always predicted to slow in the run-up to the vote, due to
the uncertainty of the outcome and its consequences: that's what happened in
before the Scottish independence referendum in 2014.

In the long term, there are diverging views: pro-Europeans think the UK's status as
one of the world's biggest financial centres will be diminished if it is no longer seen
as a gateway to the EU for the likes of US banks, while Brexit campaigners suggest
that, free from EU rules a regulations, Britain could reinvent itself as a Singaporestyle supercharged economy.

Sovereignty
For Brexiters, sovereignty was seen as a simple win: few disagree that EU
membership involves giving up some control over our own affairs.
mmigration
Under EU law, Britain cannot prevent anyone from another member state coming to
live in the country while Britons benefit from an equivalent right to live and work
anywhere else in the EU. The result has been a huge increase in immigration into
Britain, particularly from eastern and southern Europe.

According to the Office for National Statistics, there are 942,000 eastern Europeans,
Romanians and Bulgarians working in the UK, along with 791,000 western
Europeans and 2.93m workers from outside the EU. China and India are the
biggest source of foreign workers in the UK.

Remainers say that, while the recent pace of immigration has led to some
difficulties with housing and service provision, the net effect has been
overwhelmingly positive. By contrast, Farage insisted immigration should be cut
dramatically, and that leaving the EU was the only way to "regain control of our
borders". Other pro-Brexit campaigners would not necessarily reduce immigration,
but said that it should be up to the British Government to set the rules.
Jobs
The effect of leaving the EU on British jobs depends on a complex interplay of the
factors above: trade, investment and immigration.

Pro-EU campaigners suggested that three million jobs could be lost if Britain goes it
alone. However, while "figures from the early 2000s suggest around three million
jobs are linked to trade with the European Union," says Full Fact, "they don't say
they are dependent on the UK being an EU member."

If trade and investment falls now the UK has voted for Brexit, then some of these
jobs would be lost but if they rose, then new jobs would be created.

A drop in immigration would, all else being equal, mean more jobs for the people
who remained, but labour shortages could also hold back the economy, reducing its
potential for growth.

Stuart Rose, former Marks & Spencer chief executive and a prominent pro-EU
campaigner, conceded recently that wages may rise if Britain leaves which would
be good for workers, but less so for their employers.

Writing for the London School of Economics, Professor Adrian Favell said limiting
freedom of movement would deter the "brightest and the best" of the continent
from coming to Britain and reduce the pool of candidates employers can choose
from.

Free movement of people across the EU also opened up job opportunities for British
workers seeking to work elsewhere in Europe.
Britain's place in the world
For Outers, leaving the EU will allow Britain to re-establish itself as a truly
independent nation with connections to the rest of the world. But Remainers fear
that Brexit will result in the country giving up its influence in Europe, turning back
the clock and retreating from the global power networks of the 21st century.

Brexit would bring some clear-cut advantages, said The Economist before the
referendum. The UK "would regain control over fishing rights around its coast", for
example. But it concluded that the most likely outcome would be that Britain would
find itself "a scratchy outsider with somewhat limited access to the single market,
almost no influence and few friends".

The UK will remain a member of Nato and the UN, but it may be regarded as a less
useful partner by its key ally, the US. The American government said it feared that
the "EU referendum is a dangerous gamble that could unravel with disastrous
consequences for the entire continent".

Security
Former work and pensions secretary Iain Duncan Smith, who was in favour of Brexit,
said we were leaving the "door open" to terrorist attacks by remaining in the EU.
"This open border does not allow us to check and control people," he said.
Factual details
United Kingdom
referendum, 2016

European

Union

membership

Choice

Votes

Leave

17,410,74

51.89

Remain

16,141,241

48.11

Valid votes

33,551,983

99.92

Invalid or blank votes

25,359

0.08

Total votes

33,577,34
2

100.0
0

Registered voters and turnout

46,500,001

72.21

Referendum results (without spoiled ballots)

Leave:
17,410,742 (51.9%)

Remain:
16,141,241 (48.1%)

General impact due to Brexit

Impact on Economy:
The Brexit victory sent economic shockwaves through global markets and UK stocks
had their worst drop since the finanical crisis.
Emergency steps are now being taken to calm the economic turmoil after the pound
fell to its lowest level since 1985. Britain has lost its top AAA credit rating.

There is ongoing uncertainty over what will happen when Britain leaves the EU
because it has to make new trade agreements with the rest of the world.
Bank of England Governor Mark Carney said: "Some market and economic volatility
can be expected as this process unfolds. But we are well prepared for this."
Supporters of Brexit argue that EU countries have every incentive keep trading with
the UK, which is a large importer of goods and services.
But Europhiles worry that foreign companies will be less likely to invest here and
could relocate their headquarters if Britain loses access to the EU's single market.
Now Britain has voted to leave the EU, it will no longer have to contribute billions of
pounds a year towards the European Union's budget.
During the referendum campaign, Eurosceptics slammed a Confederation of British
Industry report that claimed that Brexit would cause a 100billion shock to the UK
economy.
The Treasury was also accused of doom and gloom after predicting that a Brexit
would cost households 4,300 a year by 3030, leaving Britain worse off for decades.
Eurosceptics say Brexit will allow Britain to take back control of its borders in order
to curb immigration and increase security.
Impact on immigration
Britain will no longer have to accept free movement of people from Europe, which
Brexiteers say puts pressure on public services such as the NHS and schools.
Brexit campaigners have said that Britain will be free to impose an Australian-style
points system to better manage immigration and fill skill shortages here.
But the Remain campaign believes that Brexit will hit the British economy, which
relies on the free movement of EU migrant workers such as health professionals.

Impact on India & Indian economy

The UK is a small trading partner of India UK alone accounts for only 3.4% and
1.4% of Indias merchandise exports and imports, respectively, as of FY16. Even
that should not be impacted as Brexit will change the terms of trade between UK
and EU and not with India. FDI flows from UK to India stood at only US$1bn in FY15
and US$0.8bn in FY16; hence, not that significant. Brexit and Indian economy

It is hard to make a case of any meaningful impact on Indian economy of Brexit

either direct or indirect. The UK is a small trading partner of India UK alone
accounts for only 3.4% and 1.4% of Indias merchandise exports and imports,
respectively, as of FY16. Even that should not be impacted as Brexit will change the
terms of trade between UK and EU and not with India. FDI flows from UK to India
stood at only US$1bn in FY15 and US$0.8bn in FY16; hence, not that significant.
Impact on Indian Companies
Brexit can have some impact on Indian companies that have businesses in UK/ EU.
The medium term impact, if any, will be clear only post the revised terms of trade
between UK and EU are finalized. This should take 2-3 years from now.
In the interim, the GBP depreciation is an unexpected positive for companies like
Tata Steel and Tata Motors (JLR) that have manufacturing operations in the UK.
Barring these companies, the impact on other sectors like pharma, IT, banks and
agrochemicals is likely to be marginal.
Capital outflows
A pessimist may argue that Brexit will lead to FII outflows from India due to risk
aversion. While there is no meaningful link between Brexit and Indian economy,
India is in a strong position even if there are some outflows. Consensus expects
Indias CAD to remain manageable at about ~1.5% of GDP in FY17. Foreign
exchange reserves at ~US$363bn seem adequate to withstand volatility in the case
of global risk aversion. Net FDI inflows have increased to an all-time high of
US$36bn in FY16. Impact of any FII outflows even if it does happen will not be felt
by the economy, though stock markets may be impacted in the very short run.
Interest rates
Considering India's relatively stable macro situation (CAD ~1.5%, Fiscal Deficit
~3.5% and stable inflation), we do not expect any negative impact on the debt
markets. Even if there are some FII outflows, which may lead to liquidity tightening,
RBI is likely to provide additional liquidity through repos and purchase of Gsecs in
the open market operations (OMO).
Uncertainty in EU is likely to lead to USD strengthening and lower global commodity
prices. Interestingly, Brent oil prices were down ~4% today. This is likely to aid
continued low inflation and provide room for lower rates in India.The impact of
Brexit on all segments of debt markets today has been fairly muted. In the money
market (CP & CD) and corporate bond market - yields have moved higher by just 2
to 3 bps. While the yields in treasury bills and government bond market are flat to
lower as compared to the levels prevailing yesterday. The INR was stable and
depreciated marginally vs. the USD while appreciating against the Euro and the GBP.