Economy
Brexit impact on India would be limited to financial markets, a few sectors
Britain's decision to opt out of the European Union-EU (Brexit) has rattled markets, currencies across the world. However, for India, its impact would be limited except for some sectors and financial markets, say research reports.
 
According to Standard Chartered Bank (StanChart), the immediate impact of the UK’s exit from the EU on India’s economy is likely to be felt via the financial-market and confidence channels. "However," it said, "India’s relatively strong fundamentals are likely to leave it less exposed than Asian peer economies. Comments from the Reserve Bank of India (RBI) and the government indicate that policy makers stand ready to act, if needed. The domestic orientation of India’s economy is likely to keep the need for monetary or fiscal support minimal, though these tools can be used if warranted."
 
 
Ratings agency CRISIL feels that Brexit has come at a time when the global economy is not in great shape and thus it (Brexit) has added to the weakness, fragility and uncertainty and roiled markets. "However, Britain’s exit from EU is likely to impact Indian companies in a multiple ways - demand weakness on account of potential slowdown in the EU and the UK, volatility in commodity prices, currency impact on account of the potential depreciation of the rupee, euro and the pound, and balance sheet impact on account of exposure to unhedged overseas borrowings. We see Auto, IT, textiles, pharma, leather and metals as the most vulnerable sectors," the ratings agency said in its research note.
 
Last week, the United Kingdom, one of the 28 countries of the EU decided through a referendum to exit from the Union. 
 
StanChart feels the medium-to long-term impact of Brexit, via trade and direct investment flows, remains uncertain and it will depend on evolving scenarios. "Should the UK remain the only country to exit the EU, repercussions for India would likely be limited. The UK accounts for less than 5% of the country’s goods and services exports, inward remittances and annual foreign direct investment (FDI) flows. If the UK and India are able to negotiate a better trade pact, which experts believe is likely, India could eventually benefit," it said.
 
 
According to CRISIL, Indian companies are likely be impacted in multiple dimensions. This includes, demand weakness on account of potential slowdown in the EU and the UK; volatility in commodity prices; currency impact due to potential depreciation of the rupee, euro and the pound; translation losses for companies with significant operations in the UK and the EU and, balance sheet impact on account of exposure to unhedged overseas borrowings.
 
 
The ratings agency says, "Companies in sectors such as automobiles, auto components, information technology services, textiles, pharmaceuticals, gems and jewellery, leather, and leather products are most vulnerable to changes in demand and currency value. Metal companies would be hurt by the likely downward pressures on prices and potential slowdown in demand, at least in the near-term. Sectors such as shipping and ports that are reliant on global trade will also have to grapple with lower growth and consequently lower freight rates and utilisation. Further, companies with unhedged overseas borrowings will be affected by volatility or temporary sentiment-driven weakness in the rupee."
 
StanChart feels, due to the higher trade volume between India and EU compared with UK on a standalone basis, the EU matters more for India than the UK. "Given that India’s trade with the UK is small, any near-term negative impact is likely to be limited. Bigger risks arise from uncertainty around the EU’s future, as it is a more important trade partner for goods and services together than the UK. A slowdown in EU economic activity due to political uncertainty would likely hit Indian exports," it said.
 
Over the medium to long term, experts have opined that Brexit could benefit India, giving it the flexibility to negotiate its own free trade agreement (FTA) with the UK with less stringent regulations than current EU regulations. "While this possibility cannot be ruled out assuming no further regional spill over from Brexit, the timeframe required to reach such an agreement is uncertain," StanChart said, adding, "historically, FTAs have taken years to negotiate, creating long periods of uncertainty. For example, the trade agreement between India and South Korea took five years to negotiate and finalise. India has been negotiating an FTA with the EU since 2007. Even if the UK tried to expedite trade negotiations, given the challenging economic environment, FTA negotiations are likely to be a multi-year process."
 
According to CRISIL, due to Brexit, compliance and administration costs are likely to rise for Indian companies. "The impact of Brexit on global growth and trade in the long-term would depend on how negotiations between the UK and the rest of the EU-member countries pan out – something that is difficult to quantify at this juncture. Companies may also, over the long-term, have to grapple with increased administrative and compliance costs, as they may have to set up base in other countries also in the EU. Currently, most companies set up their European headquarters in the UK, and use London as their gateway to the European market," it added.
 
Given the uncertainty with the Brexit process, it should not be merely viewed as an event but as a process that will gradually unfold -- with intermittent mini-frights thrown in -- as negotiations proceed. We have already seen how capital flows affect the stock and currency markets. "The good thing is that over the medium term, subdued global outlook – more so in Europe after Brexit – could divert investments to India because of stable outlook and higher-growth prospects compared with other emerging markets. It is very likely that the world will once again be awash with stimuli-driven liquidity and monetary policies will remain accommodative for even longer than previously anticipated," CRISIL concluded.

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Dilution of values: Has the wisdom lost its sanctity in economics?
“The most useful thing about a principle is that it can always be sacrificed to expediency.” -W Somerset Maugham
 
Going through life involves making choices. Some may be mundane, for instance whether to go for work or take leave to watch a movie. Other choices are more substantive, for example whether to work for a non-governmental organisation (NGO) and sacrifice monetary benefits in exchange for satisfaction derived from philanthropic work. Human beings are generally guided by certain principles and values, which they hold dear and on the basis of which they make such choices.  
 
Economics, as a discipline, starts with how human beings make economic choices – trade-offs, as economists term them – between guns and butter, consumption and future growth, short term pain and the long term health of the economy, choice of techniques of production etc.
 
In making these choices, economics offers certain guiding principles. We must save more now so that higher investments can improve our standard of living in future. Inflation must be controlled since it hurts the poor and those with fixed incomes. Borrowing is risky and must be undertaken with due care.
 
Lately, however, it appears that such ‘hand me down’ wisdom has lost its sanctity, especially in economics. We seem to be discarding an increasing number of principles held dear for a long time. It is not, however, evident to me whether sufficient thought has been given before such principles are discarded or whether it is an outcome of convenience of the moment. 
 
Let us discuss some of these.
 
A. It has been a long held belief that an economy, which saves more, will increase its investment and productive capacity and achieve a higher growth rate. People have always been exhorted to live well within their means and to save as much as they can. This principle seems to have now been turned upside down, with savings no longer being considered favourably. Higher saving reduces immediate demand and thereby the income of the country. Terms such as ‘savings glut’, ‘spending your way out of recession’ and ‘debt induced recovery’ have become a part of our daily lexicon. Countries that are prudent and save more than they invest are criticised for not doing enough to generate demand. Germany, which is probably the last major economy to continue with conservative policies, struggles to deflect criticism and fights a lone battle for sanity.
 
B. ‘Inflate your way out of debt’ is the new mantra. Governments are advised to ‘pump prime’ the economy and induce inflation to reduce the real value of debt in their books and increase demand in the economy. Countries as conservative as Japan target to increase inflation and are considered to be failure if inflation is actually below the target rate of 2%. Gone are the days of Paul Volcker, the former Governor of the Federal Reserve Bank of the US, who was revered for consistently fighting inflation and ensuring, what many consider to be, its permanent demise.
 
C. The world has not learnt the lessons of the 2008 crisis and continues its excessive reliance upon borrowing. The economy is crying out for structural changes but those are politically unpalatable. Easier alternative is to encourage greater borrowing to increase demand. McKinsey & Co has estimated that since the financial crisis in 2008, global debt has gone up by $57 trillion, which roughly equals three fourth of the annual global income. Considering the fact that the crisis was primarily debt driven and the subsequent recovery was predicated on quick deleveraging, there is cause to worry.
 
D. ‘Global financial imbalance’ is a new term coined to describe the situation over the past two decades wherein some countries have persistent excess savings and current account surplus (China and Germany, being prime examples) whereas many other countries spend merrily, financed by indiscriminate borrowing. The US, for instance, has been experiencing persistently large current account deficits (CAD) for over two decades. According to current wisdom, such an imbalance is inherently destabilizing. The onus is being placed on large savers to correct the imbalance by spending more in order to increase demand and import more. 
 
E. Large, fast growing population has always been considered to be the bane of the developing world, especially India. It has traditionally been believed that without population control, developing countries will not be able to overcome their poor levels of economic development. Such thinking has now been reversed, with demographic dividend being considered to be the most critical narrative underpinning the Indian growth story. Even that bastion of forced population control, China, has now relaxed its ‘one child’ policy. 
 
Demographic dividend is one of those convenient but untested ideas that have a habit of frequently cropping up in economic discourse. The fact that the young working population needs to be properly educated and provided employment opportunities, to be able to contribute to the economy escapes attention. The benefits of a young population are built into our calculations, without worrying about the prerequisites of such an eventuality.
 
F. We have all grown up with a value system that cherishes working hard for a living. We would expect countries that have come up the hard way would be appreciated more than those, which have become fortunately rich due to bounties of natural resources. Economists, it seems, have a different yardstick. 
 
For a long period, high commodity prices, especially oil, generated huge wealth for Saudi Arabia, Venezuela and Brazil, amongst others. Countries such as India and Japan struggled hard to cope with escalating prices of commodities so integral to their development. No tears were shed for them; in fact, they were told to institute structural reforms to overcome the impact of high prices.
 
With the inevitable reversal of cycle of commodity prices, the hard time that commodity producing countries are now facing is inviting sympathies and concern. It is feared that their plight leads to lower global growth and reduced investments. Many economists and policy makers are hoping, in fact, gunning for, higher commodity prices. Consequently, these countries escape being berated for their failure to undertake structural reforms, something that was Holy Grail advice during the previous decades
 
Again, our concern for the immediate future is clouding our judgment. Short term pain is often essential for longer term gain. Japan had long time back demonstrated the virtue of self-belief and hard work in overcoming the lack of natural resources in building a prosperous society. Such virtues do not appear to be very popular in these times of instant gratification.
 
G. Democracy, rule of law and liberal governance have always been held sacred in Western countries. Promoting representative governance and opposing sectarian, dictatorial regimes has been their stated policy. Lately however, this principle is being increasingly disregarded in favour of promoting their interests. The US’s close relationship with Saudi Arabia is predicated on its geopolitical interests and the oil resources Saudi Arabia possesses, ignoring the family based and sectarian rule in that country. Many multinational companies have happily accepted regulatory demands in China, which they would spurn in other countries.
 
Obviously, the large market of China is too big an attraction for these companies to forego at the altar of principles they usually espouse in highly moralistic undertones. China, with all its transgressions in personal freedom, faces only restrained and muted criticism by US. Even the great bastion of democratic traditions, the Great Britain, during the visit of the Chinese President Xi to UK last year, chose not to raise inconvenient human rights issues, instead preferring to benefit from mutual trade and the investment China is likely to make. Such instances where economic interests ride roughshod over opposition to sectarianism and dictatorship are too numerous to state here.
 
(This is first part of a two part series.)
Read second part:

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COMMENTS

Ramesh Poapt

8 months ago

dilution will go on, brexit is just beginning...

Is Handling Weekend Patients a Big Issue?
If a patient gets admitted to an emergency ward on a weekend in the British hospitals s/he is worse off, as senior consultants do not go for ward-rounds, to see the new admissions. So, many short-term cross-sectional studies were carried out to sort this out; but, recently, the editor of the British Medical Journal (BMJ) chose to write an editorial about the subject wherein she was non-committal in deciding which way the wind is blowing.
 
Disease is an accident and it cannot be programmed to hit only on working days. The hospitals are adequately staffed by junior doctors even on weekends. This was so even when I was an SHO (senior house officer), registrar and SR (specialty registrar) in England decades ago. Most of the work is done by the junior doctors anyway even on weekdays. The consultants were there just to guide and help when we got stuck. They were on call even during the weekends, if needed. I am told that now the consultants will have to work harder as there are fewer junior doctors. All said and done, the brunt of hospital disease management depends on the junior doctors. Under these circumstances, what is our problem during the weekends?
 
What about the impact of fewer doctors on patients? A 14-country study showed that where there were more doctors per capita in the US and Europe,  but mortality was higher, health of the population worse and longevity lower compared to countries with very few doctors per capita like in Japan. (Journal of the American Medical Association 2000; 284: 483) In addition, Japan had the best health indices with least mortality and morbidity with less healthcare costs. Japan also had one more advantage: the majority of doctors there were family physicians. 
 
If we extrapolate those data here, weekend patients must be the luckiest! When doctors went on strike in Israel a few years ago (2 BMJ 2000;320:1561), Bogota in Columbia and Saskatchewan in Canada, mortality and morbidity did fall precipitously only to climb back to normal when doctors came back to work in full strength! The five-star ICU almost next door to the War theatre in Vietnam vis-à-vis almost nil medical facility in Falklands War where the seriously injured soldiers, at times, were left on the snow for hours to be airlifted to England, showed no statistically significant difference in overall mortality with marginally better results in Falklands cases.
 
We need a good audit on what we do to patients in an emergency. Nature has in-built mechanisms to keep a person alive after severe injury like auto-transfusion, auto-infusion, autonomic system mediated redistribution of the circulation, clotting cascade and supply of extra energy through neo-glucogenesis and many other changes that we are yet to comprehend. As pointed out by Mary Tinnetti, in her article End of Disease Era, “The time has come to abandon disease as the focus of medical care. (American Journal of Medicine 2004; 116: 179) The changed spectrum of health, the complex interplay of biological and non-biological factors, the aging population, and the inter-individual variability in health priorities, render medical care that is centred on the diagnosis and treatment of individual diseases, at best, out-of-date and, at worst, harmful. A primary focus on disease may inadvertently lead to under-treatment, overtreatment, or mistreatment... Clinical decision making for all patients should be predicated on the attainment of individual goals and the identification and treatment of all modifiable biological and non-biological factors, rather than solely on the diagnosis, treatment, or prevention of individual diseases.” I couldn’t agree more. 
 
Our reductionist method of looking at weekend syndrome does not give you clear answers adding to my argument that all is not well in our knowledge base about human physiology, pathology and worse than them both our faulty management strategies. Junior doctors are, in some ways, better equipped to manage acute illness compared to specialists who are needed to think deeply about vexing problems which need many bright heads to solve. Otherwise, a specialist could complicate matters further. Let us get out of the weekend mind-set to whole week problems in disease management!

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