The United Kingdom European Union membership referendum or the Brexit referendum took place on 23 June 2016 in the UK. ‘Brexit’ is a term which describes the exit of Britain from the European Union. The Brexit process, however, would be slow as the exit will take place after two years, though the withdrawal proceedings with the European Commission shall commence under Article 50 of the Lisbon Treaty. The impact on India can be seen as a mixed tea bag.
This exit is likely to cause immediate damage to Indian economy. Soon after the Brexit, the rupee fell by 85 paisa against the dollar, which would render many existing contracts losing propositions unless they are re-negotiated. UK’s exit from EU may affect Indian companies’ investment in the U.K, especially the companies who seek access to the European market. The companies headquartered in UK could face significant headwinds and would be forced to be set up a second headquarter which would thereby increase the capital expenditure.
Tata Motors, which owns Jaguar Land Rover (JLR), the pharmaceuticals companies Wockhardt and Cipla, and the telecommunications firm Bharti Airtel, are some of the Indian companies that have a major presence in the UK. Global currency volatility will affect Indian rupee as well, and thereby hampering India’s trade. Work-related visa restrictions have already resulted in a fall in the number of Indian students in the UK and the revising of the immigration controls could negatively impact movement of students, tourists and professionals.
Britain being more an importer than exporter with big economy, it is dependent on Europe, China and India for its imports, and due to Brexit, UK has to look into other markets and might possibly tread on the path followed by Norway, by establishing bilateral trade agreements with European nations even after coming out of European Union rather than reaching an agreement with other countries. According to Nasscom, Brexit will also have a negative impact on the $108 billion Indian IT sector in the short-term. Auto components Motherson Sumi, Mahindra CIE, Bharat Forge like auto components manufacturers are going to be badly affected as the EU’s economy is expected to slow down which will lead to the decrease in auto industry sales, and hence, will be a huge blow to these companies. Rupee may depreciate further because of the double-effect of foreign fund outflow and dollar rise which may increase petrol and diesel prices as well. In that case, the government may want to reduce additional excise duty imposed on fuel when it was on a downward trajectory. This may increase fiscal deficit. Sensex and Nifty will continue to stumble. Due to fall in value of Pound sterling, Indian import companies in UK may report loss.
However, Brexit will provide certain benefits to India for example since the exit, UK would seek to build new alliances and trade pacts. India, being one of the fastest growing economies, would stand to benefit from it, and thus it could receive a good amount of investments. A new bilateral deal with Britain would not include the restrictive EU competence. India is the third largest source of FDI to the UK in terms of numbers of projects and it continues to increase, UK also is looking to attract FDI especially after the Brexit, this opens the doors for negotiation. With lower pound value, Indian companies may be able to acquire many hi-tech assets. Britain’s industry and economic growth has benefitted due to large number of immigrants it received because of EU refugee policy. Now with the exit, UK will face labour shortage which could be filled by Indian labour market.
The fact that yields in major advanced economies have fallen more means India offers greater yield differential, making bonds attractive to foreign investors in the near term. In the short run, there won’t be any significant impact to India’s exports, while over the medium term India’s exports especially in consumer oriented sectors and services, will depend on the severity of slowdown in UK and ructions in the exchange rate. Brexit would weaken global growth and lead to a decline in commodity prices, which will help the macro fundamentals, be it fiscal deficit, current account deficit or inflation. It will give the government more levers to pump up the investment cycle. With UK supporting India NSG bid, we could expect a stronger ally in the UK than EU.
RBI Governor Raghuram Rajan said the Central bank will infuse whatever liquidity is needed into the Indian market to keep it “well behaved”. SEBI and stock exchanges have beefed up their surveillance mechanism to deal with any excessive volatility.