India and Brexit

What-Brexit-will-mean-for-relations-between-India-and-UKWhat does the post-Brexit aftermath imply for India? Richa Sekhani poses the question for India to assess what the possible short and long term implications can be.

With Brexit decided, the British have dismantled the decision they had taken to join the common market in 1975 and have unwittingly opened a Pandora’s Box not only for the European Union but for other countries as well. As George Soros, Hungarian-American business magnate said, Brexit could just be the beginning of the end for Europe. While David Cameron, the British Prime Minister has announced his resignation, disappointments and uncertainties surround Europeans. On the one hand the Scottish government is debating the continued membership of Scotland with the EU, while Northern Ireland is advocating a referendum on Irish Unity. Amidst this uncertainty, something which is certain is that the risks have increased and global growth has gotten worse.  A lot now will depend on when the new Prime Minister, Theresa May will repeal Article 50 and renegotiate with the EU on the exit.

Brexit is sure to have serious repercussions and India is not an exception in this regard.  As RBI Governor, Raghuram Rajan warned long ago, “We are in the midst of an age of competitive devaluation and beggar-thy-neighbour policy. When elephants fight, the grass suffers[i].” However, the announcement of Brexit presents both opportunities and threat to Indian market, companies and commodities.

A UK exit can lead to a prolonged period of risk aversion and thereby an outflow of foreign portfolio investments. This can put significant downward pressure on Indian Rupee. As already seen, on Friday, after the referendum on June 23rd, the rupee slumped to 68.22 against the dollar. Similarly, Indian companies operating in UK could find it difficult to do business and therefore can witness a fall in revenue and profits. The automobile sector could face a dip.  For instance, Tata Motor Ltd. Company who sells about a third of its cars in Europe and UK witnessed an 8% fall in their shares after the Brexit announcement. Similarly, the shares of Maruti Suzuki India Ltd. fell by 2.25%. Experts have also predicted that Indian Information Technology(IT) companies like Infosys and TCS which rely on Europe for over 30 percent of their $100 billion export revenue might see a significant hit to their earnings.

However, the likely impact of Brexit is hard to assess immediately. Metal is another sector which might face the wrath of Brexit. Tata Steel, Hindalco Industries, etc. are some of the companies which are likely to be impacted. Garments exporters are also likely to feel the pinch. According to Crisil, the EU is the largest market for garment exports while the UK is the largest market for Indian garments within the EU. The weakening of the euro against the dollar would affect revenues in dollar terms[ii].

Brexit

However for some Indian companies and exporters, Brexit is an opportunity. For a silver lining, the lower crude oil prices are a positive for the Indian economy. Every $1 drop in the Brent crude’s price leads to a decline of $1 billion in India’s import bill[iii]. The aviation sector will receive the benefit from the lower crude oil prices as fuel cost account for about 38% of the operating costs. However, the sector might see losses from an estimated fall in travel demand due to a weaker currency and an economic slowdown in either UK or EU because of Brexit. For exporters, the separation of UK from EU might improve the conditions under which India trades with the UK, thereby boosting exports from India. Presently, India-UK bilateral trade is worth $14.02 billion, with India exporting $8.83 billion and importing $5.2 billion worth of goods.

Immigration to the UK is another issue that has been brought up by this referendum.  After the Euro -zone crisis there has been significant growth in immigration to the UK from many European countries, eating up employment opportunities for British citizens. As a result, with Brexit, tougher norms on migration are expected. For Indians, this is worrisome news. Indians would lose the advantages of free movement of goods and personnel, with the imposition of quotas on Indian applicants. Hence, the bilateral engagements on this front between India and UK will be essential.

Brexit offers a mixed bag for India. Slowdown in the EU and the UK will weaken the demand; commodity price will become volatile. Rupee, Euro and the pound will be exposed to depreciation and the balance sheet will be impacted on account of exposure to unhedged overseas borrowings. Brexit should lead to a rethink in India’s foreign policy towards the EU. Notwithstanding, it will also require modification in all the trade deals with EU, which might further delay the India- EU FTA. However, with accommodative policies by RBI and the judicious steps by the government, India will be in a position to maintain stability in the macro-fundamentals. For now, as Brexit happens, India should forge for an FTA with UK and remain watchful of the Yuan.

Richa Sekhani is a researcher with Indian Council for Research on International Economic Relations (ICRIER), New Delhi

[i] http://www.livemint.com/Money/iltjhLLPBTuAFyYNt3H83O/Brexits-impact-on-India-when-elephants-fight-the-grass-su.html

[ii] http://timesofindia.indiatimes.com/business/india-business/Brexit-impact-on-India-limited-says-Crisil/articleshow/52938781.cms

[iii] http://www.dailymail.co.uk/indiahome/indianews/article-3662755/PERSPECTIVE-Brexit-brouhaha-impact-India.html#ixzz4Cwhcingg

 

 

 

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